Provisions to prevent managerial entrenchment easy ways to make good money – capital structure

Suppose a company has a weak board of directors and easy ways to make good money strong anti-takeover provisions in its corporate charter, causing senior managers to feel that there is little chance easy ways to make good money that they will be removed. In this case, management is said to be entrenched. Such a company faces a high risk of being poorly easy ways to make good money run, because entrenched managers are able to act in their own easy ways to make good money interests rather than in those of shareholders. For example, they can spend company money on such perquisites as lavish easy ways to make good money offices, memberships at country clubs, and corporate jets. Because these perks are not actually cash payments to the easy ways to make good money managers, they are called nonpecuniary benefits.

Also, entrenched managers are often reluctant to reduce fixed costs by easy ways to make good money closing or selling off redundant plants, laying off employees whose services are no longer needed, and abandoning projects that show little promise of future profits. Managers often hate to admit mistakes, and they are also reluctant to lay off people, especially old friends and colleagues, even when these actions really should be taken. Entrenchment also enables managers to acquire other companies at too easy ways to make good money high a price, as well as to accept projects that make the company easy ways to make good money larger but that have negative mvas. These actions occur because managerial prestige and salary are associated easy ways to make good money with larger size, and they result in things that are bad for stockholders easy ways to make good money but good for the senior executives. Note, though, that if a firm has a strong board, dominated by shareholder-oriented people such as warren buffett, or if its charter does not make it too difficult easy ways to make good money for an outside group to seize control and oust a easy ways to make good money poorly performing management, then such value-destroying actions are minimized.

Barriers to hostile takeovers hostile takeovers usually occur when managers easy ways to make good money have not been willing or able to maximize the profit easy ways to make good money potential of the resources under their control. In such a situation, another company can acquire the poorly performing firm, replace its managers, increase free cash flow, and improve MVA. The following paragraphs describe some provisions that can be included easy ways to make good money in a corporate charter to make it harder for poorly easy ways to make good money performing managers to remain in control.6

A shareholder-friendly charter should ban targeted share repurchases, also known as greenmail. For example, suppose a company’s stock is selling for $20 per share. Now a hostile bidder, who plans to replace management if the takeover is successful, buys 5 percent of the company’s stock at the $20 price.7 the raider then makes an offer to purchase the easy ways to make good money remainder of the stock for $30 per share. The company might offer to buy back the bidder’s stock at a price of say $35 per share. This is called a targeted share repurchase, since the stock will be purchased only from the bidder easy ways to make good money and not from any other shareholders. Because the bidder paid only $20 per share for the stock, he or she would be making a quick profit of easy ways to make good money $15 per share, which could easily total several hundred million dollars. As a part of the deal, the raider would sign a document promising not to attempt easy ways to make good money to take over the company for a specified number of easy ways to make good money years, hence the buyback also is called greenmail. Greenmail

6Some states have laws that go further than others to easy ways to make good money protect management. This is one reason that many companies are incorporated in easy ways to make good money delaware. Some companies have even shifted their state of incorporation to easy ways to make good money delaware because their managers felt that a hostile takeover attempt easy ways to make good money was likely. Note that a "shareholder-friendly charter" could and would waive the company’s rights to strong anti-takeover protection, even if the state allows it.

7Someone can, under the law, acquire up to five percent of a firm’s stock without announcing the acquisition. Once the five-percent limit has been hit, the acquirer must "announce" the acquisition by filing a report with the SEC, and the report must list not only the acquirer’s position but also his or her intentions, e.G., a passive investment or a takeover. These reports are monitored closely, so as soon as one is filed, management is alerted to the imminent danger of a takeover.

Managers who buy back stock in targeted repurchases typically argue easy ways to make good money that their firms are worth more than the raiders offered, and that in time the "true value" will be revealed in the form of a much higher easy ways to make good money stock price. This situation might be true if a company were in easy ways to make good money the process of restructuring itself, or if new products with high potential were in the easy ways to make good money pipeline. But if the old management had been in power for easy ways to make good money a long time, and if it had a history of making empty promises, then one should question whether the true purpose of the easy ways to make good money buyback was to protect stockholders or management.

Another aspect of a stockholder-friendly charter is that it does not contain a shareholder easy ways to make good money rights provision, better described as a poison pill. These provisions give the shareholders of target firms the right easy ways to make good money to buy a specified number of shares in the company easy ways to make good money at a very low price if an outside group or easy ways to make good money firm acquires a specified percentage of the firm’s stock. Therefore, if a potential acquirer tries to take over a company, its other shareholders will be entitled to purchase additional shares easy ways to make good money of stock at a bargain price, thus seriously diluting the holdings of the raider. For this reason, these clauses are called poison pills, because if they are in the charter, the acquirer will end up swallowing a poison pill if easy ways to make good money the acquisition is successful. Obviously, the existence of a poison pill makes a takeover more easy ways to make good money difficult, and this helps to entrench management.

Effective monitoring by a strong board of directors high compensation easy ways to make good money and prestige go with a position on the board of easy ways to make good money a major company, so board seats are prized possessions. Board members typically want to retain their positions, and they are grateful to whoever helped get them on easy ways to make good money the board. This situation has important implications for corporate governance as it easy ways to make good money affects stockholders. First, note that 30 years ago a firm’s CEO was in all likelihood also the chairman of easy ways to make good money its board. Moreover, many of the other board members were "insiders," that is, people who held managerial positions within the company, such as the CFO. The CEO, who could remove them from their inside position if they easy ways to make good money raised objections to his policies, generally nominated them to the board. Even outside board members usually had strong connections with the easy ways to make good money CEO through personal friendships, consulting or other fee-generating activities, or interlocking boards of directors, where company A’s CEO sits on company B’s board and B’s CEO sits on A’s board. In these situations, even the outside directors are not truly independent and impartial.

Under an "old boy network" board as described above, the CEO had a much more protected position than is easy ways to make good money typical today. Now most boards are comprised primarily of outsiders who are easy ways to make good money not beholden to the CEO, which makes it much more likely that an ineffective CEO easy ways to make good money will be removed. Also, in the earlier period board members were compensated in the easy ways to make good money form of salary, whereas today directors are generally given stock or options, so an ineffective management team costs the directors money. The changes in director compensation, together with directors’ greater independence, have done much to improve the way boards monitor managerial easy ways to make good money performance and react to poor results.8

Why have these changes occurred? The primary reason has to do with a shift in easy ways to make good money the ownership of common stocks. Prior to the 1960s, most stock was owned by a large number of individual easy ways to make good money investors, each of whom owned a diversified portfolio of stocks. Because these individuals had just a small amount of any easy ways to make good money given company’s stock, they could do little to influence its operations. Also, with just a small investment, it was not cost effective for them to monitor companies easy ways to make good money closely. Indeed, if a stockholder was dissatisfied, he or she would typically just "vote with his feet," that is, sell his or her stock. This situation began to change as institutional investors such as easy ways to make good money pension and mutual funds gained control of a larger and easy ways to make good money larger share of investment capital, and as they then acquired a larger and larger percentage easy ways to make good money of all outstanding stock. Given their large holdings, it makes sense for institutional investors to monitor management, and they have the clout to influence the board. In some cases, they have actually elected their own representatives to the board. For example, when TIAA-CREF, a huge private pension fund, became frustrated with the performance and leadership of furr’s/ bishop, a cafeteria chain, the fund led a fight that ousted the entire board easy ways to make good money and then elected a new board, which consisted only of outsiders.

In general, activist investors with large stakes in companies have been good easy ways to make good money for all shareholders. They have searched for firms with poor profitability, then replaced management with new teams that are well-versed in value-based management techniques, and thereby improved profitability. Not surprisingly, stock prices usually rise when the news comes out that easy ways to make good money a well-known activist investor has taken a major position in an easy ways to make good money underperforming company.

Note that activist investors can improve performance even if they easy ways to make good money don’t go so far as to take over a firm. More often, they get a few people on the board, those people point out the firm’s problems, and then the other board members change their attitudes and easy ways to make good money become less tolerant when they realize that the management team easy ways to make good money is not following the dictates of value-based management. Moreover, the firm’s top managers recognize what will happen if they don’t whip the company into shape, and they go about doing just that.

As power has shifted from ceos to boards as a easy ways to make good money whole, there has been a tendency to replace insiders with strong, independent outsiders. Today, the typical board has about one-third insiders and two-thirds outsiders, and most outsiders are truly independent. Moreover, they are compensated primarily with stock rather than a straight easy ways to make good money salary. All of this has clearly decreased the patience of boards easy ways to make good money with poorly performing ceos, and within the past several years the ceos of procter easy ways to make good money & gamble, coca-cola,

8Note that boards can be elected by either cumulative or easy ways to make good money noncumulative voting. Under cumulative voting, each shareholder is given a number of votes equal to easy ways to make good money his or her shares times the number of board seats easy ways to make good money up for election. For example, the holder of 100 shares of stock will receive 1,000 votes if 10 seats are to be filled. Then, the shareholder can distribute his or her votes however he easy ways to make good money or she sees fit. One hundred votes could be cast for each of 10 easy ways to make good money candidates, or all 1,000 votes could be cast for one candidate. If noncumulative voting is used, our illustrative stockholder cannot concentrate his or her votes—no more than 100 votes can be cast for any easy ways to make good money one candidate.

Note also that bylaws specify whether the entire board is easy ways to make good money to be elected annually or if directors are to have easy ways to make good money staggered terms, with, say, one-third of the seats to be filled each year and easy ways to make good money directors to serve three-year terms. With staggered terms, fewer seats come up each year, making it harder for dissidents to gain representation on the easy ways to make good money board.

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