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Chapter 18: Corporate Governance
CEO PAY IN PUBLIC AND PRIVATE FIRMS
Discussion Question Answers:
1. Several factors potentially explain the higher pay packages for private company CEOs. First,
the private equity firm might just be investing in more talented managers who are better able to
produce more value for their private shareholders. Second, private firm CEOs generally receive
more incentive compensation. Also they likely bear greater risk of termination. The private
equity owners have more “skin in the game,” and private company shareholders are likely to
monitor their CEOs more closely than public boards. These deals are very highly levered. So
2. Recently, we have witnessed substantial volume of private equity activity. Such deals
generally occur with the support of the firm’s CEO. CEOs who have done these deals are
unlikely to have chosen to go private and in some cases work for private equity investors if they
were actually overpaid as CEOs of public companies. Moreover in hiring the CEOs at higher
pay, it is unlikely that the private equity investors felt the CEOs were overpaid. The private
SOTHEBY’S HOLDING, THE STING OF THE “KILLER B” STOCKS
Discussion Question Answer:
First, Taubman had a substantial financial interest in the firm. So even though there was a
potential conflict between minority shareholders and Taubman (due to his concern about
personal liability), he still had at least some incentives to care about the value of the shares.
STOCK MARKET REACTIONS TO 13D FILINGS
Discussion Question Answer:
1. The potential benefits of outside blockholders include improved monitoring of managers.
Small shareholders have incentives to free ride on the monitoring efforts of others. Large
shareholders internalize more of the benefits of their monitoring. Blockholders might also work
2. You cannot conclude from the 13-D filings that the benefits are larger than the costs for the
