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Corporate Governance
- 8. Manager and Shareholder Risk and Diversification Risk Diversification Dominant Business Unrelated Businesses Related Constrained Related Linked Managerial (employment) risk profile Shareholder (business) risk profile B S A M
Hinweis der Redaktion
- How to increase product diversification and how to intensify effort to innovate without increased agency problems? Firms undertake a variety of actions to reduce risk through diversification, including entering diverse lines of business, joining alliances, taking on temporary partners, and outsource risky projects, including R&D. The challenge, as explained in the book, is that shareholders do not directly benefit from risk-reducing diversification strategies when they can replicate this diversification on their own. Diversification, therefore, is often seen as managers’ opportunistic pursuit of their own self-interests at the expense of the shareholders who can, if they so desire, diversify their individual portfolios simply by buying shares in other companies. While this view reflects the influence of agency theory, recently such views have been challenged by stewardship theory (Donaldson, 1990a; Donaldson & Davis, 1991), a framework presuming that managers are actually seeking to maximize organizational performance. For instance, one reason for diversifying would be to enhance company profit and growth prospects by reducing dependence on static or declining products, markets, and even industries. In the parlance of the I/O model discussed in Chapter 1, such motive might lead companies to increase diversification into technologies or industries where profit rates are increasing most and to those where the competitive dynamism is relatively more stable. Managers might also opt to diversify for earnings stability and economies of scale. In short, diversification strategies might represent opportunism, but it might also reflect management rational and genuine response to financial adversity and/or the need for improved financial performance for their company.
- Continued from previous page Interestingly, over the past decade the world’s leading private equity firms consistently have delivered internal rates of return twice as large as the S&P 500’s. They’ve achieved this is by adding value to the underlying operations (Rogers, Holland, & Haas, 2002). For example, private equity firms: a) clearly define their investment thesis and its time frame to fruition; b) hire managers who act like owners; c) focus on a few measures of success that all employees understand d) make capital work hard or otherwise re-deploy under-performing assets quickly e) make the center an active shareholder. Can institutional owners understand and act like managers of private equity firms?
- Continued from previous page Interestingly, over the past decade the world’s leading private equity firms consistently have delivered internal rates of return twice as large as the S&P 500’s. They’ve achieved this is by adding value to the underlying operations (Rogers, Holland, & Haas, 2002). For example, private equity firms: a) clearly define their investment thesis and its time frame to fruition; b) hire managers who act like owners; c) focus on a few measures of success that all employees understand d) make capital work hard or otherwise re-deploy under-performing assets quickly e) make the center an active shareholder. Can institutional owners understand and act like managers of private equity firms?
- Continued from previous page Recently, Phan and his colleagues (2002) explained the relationships between corporate governance and innovation—R&D expenditures, patents, and new products—in 86 publicly listed pharmaceutical firms. Consistent with agency theory, they found that the presence of large block private and institutional shareholders—controlling for firm size and performance—positively influenced innovation. They demonstrated that CEO duality was positively related to R&D expenditures, and that boards with more insiders were positively associated with the number of new products. In short, in the highly turbulent pharmaceutical industry, where risky decisions have to be made under substantial uncertainty, active ownership, unitary command structures, and strategically involved boards provide superior explanatory power for the governance—innovation link. Table 11.3 The Best and Worst Boards of Directors In 2002 http://www.businessweek.com/pdfs/boards.pdf Business Week’s special report on corporate governance: The best and the worst boards http://www.businessweek.com/1997/49/b3556001.htm