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The US Corporate Governance System

Question 1:

Please evaluate the state of US corporate governance. Are we where we need to be? Why or why not? Are there other countries we should be modeling? Are there "shining stars" of corporate governance out there?

Question 2:

Please discuss the corporate governance rating schemes and the methodologies for rating corporate governance. Do they work? Why or why not?

Solution Preview

According to Kaplan (2003) to the casual observer, the US corporate governance system must seem to be in terrible shape; the business press has focused relentlessly on the corporate board and governance failures of Enron, WorldCom, Tyco, Global Crossing, and others. In addition, according to this author, these failures and concerns, have served as catalysts for legislative change-in the form of the Sarbanes-Oxley Act of 2002-and regulatory change, including new governance guidelines from the NYSE and NASDAQ. According to Kaplan, given the volume and intensity of criticism of US corporate governance, and although the US stock market has had negative returns over the last several years, it has performed well relative to other stock markets, both recently and over the longer term; in fact the US market has generated returns at least as high as those of the European and Pacific (Japan & Taiwan) market during each of the five time periods considered, since 1997, since 1992, since 1987, and since 1982.

According to Kaplan (2003) corporate governance in the US has changed dramatically since 1980; as a number of business and finance scholars have pointed out, the corporate governance structures in place before the 1980s gave the managers of large public US corporations little reason to make shareholder interests their primary focus. According to this author, partly in response to the neglect of shareholders the 1980s ushered in a large wave of corporate takeover and restructuring activity; this activity was distinguished by its use of hostility and aggressive leverage; nearly half of all major US corporations received a takeover offer in the 1980s. According to Kaplan, in the 1990s the pattern of corporate governance activity changed again; after a steep but brief drop in merger activity around 1990, takeovers rebounded to the levels of the 1980s; at the same time, other corporate governance mechanisms began to play a larger role, particularly executive stock options and the greater involvement of boards of directors and shareholders.

According to Kaplan (2003) during the 1990s US managers, boards, ...

Solution Summary

According to Kaplan (2003) the corporate governance system in the US has changed dramatically since 1980 in that prior to the 1980s corporate governance structures gave the managers of large public US corporations little reason to make shareholder interests their primary focus. However, during the 1990s, with an increase in hostile takeovers of corporations, US managers, boards, and with the implicit assent of institutional investors substantially increased the use of stock option plans that allowed managers to share in the value created by restructuring of their own companies.