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CHAPTER 13
SHAREHOLDER RIGHTS AND
CORPORATE GOVERNANCE
INTRODUCTION
Shareholders occupy a position of central importance in the corporation because they
own shares of the company’s stock. As owners, they pursue both financial and
nonfinancial goals. How can shareholders’ rights best be protected? What are the
appropriate roles of top managers and boards of directors in the governance of the
corporation? How can their incentives be aligned with the purposes of the firm,
including the interests of the company’s shareholders? And how can government
regulators best protect the rights of investors and promote good corporate governance?
PREVIEW CASE
The Bailout of AIG International
In 2008, the U.S. government bailed out AIG International, one of the world’s largest
insurance companies, as the firm teetered on the brink of collapse. AIG has written large
numbers of insurance contracts, called credit default swaps, on complex financial
instruments. Why did the board of directors and top executives fail to manage the
apparently excessive risk taken on by the firm? Why didn’t government regulators do a
better job of protecting shareholders’ interests? Why didn’t investors themselves figure
out what was going on and sell their shares before it was too late? And did the
government harm them once more by charging the company onerous interest rates on its
bailout loans?
CHAPTER OUTLINE
I. SHAREHOLDERS AROUND THE WORLD
A. Who Are Shareholders?
B. Objectives of Stock Ownership
C. Shareholders’ Legal Rights and Safeguards
Teaching Tip: Preview Case Video
“Inside the Meltdown,” a one-hour documentary produced by
Frontline, includes a segment on the bailout of AIG. It is available for
purchase at www.pbs.org. It may be used to introduce Chapter 13.
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II. CORPORATE GOVERNANCE
A. The Board of Directors
B. Principles of Good Governance
III. SPECIAL ISSUE: EXECUTIVE COMPENSATION
IV. SHAREHOLDER ACTIVISM
A. The Rise of Institutional Investors
B. Social Investment
Stock screening
Social responsibility shareholder resolutions
C. Shareholder Lawsuits
V. GOVERNMENT PROTECTION OF SHAREHOLDER INTERESTS
A. Securities and Exchange Commission
B. Information Transparency and Disclosure
Teaching Tip: Shareholder Rights
Students may be interested to find the latest data on stock market
capitalization by country at http://data.worldbank.org.
Teaching Tip: Director Compensation
Students may be interested to find the latest data on director
compensation at www.towerswatson.com.
Teaching Tip: Executive Compensation
The New York Times, Fortune, and The Wall Street Journal generally
publish annual executive compensation data around the second week of
April, before tax filing day. These may be used to update figures given
in this section. Executive compensation makes a good topic for a
student debate, since compelling arguments can be made on both sides.
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C. Insider Trading
VI. SHAREHOLDERS AND THE CORPORATION
GETTING STARTED
KEY LEARNING OBJECTIVES
LO 13-1: Identifying different kinds of shareholders and understanding their
objectives and legal rights.
LO 13-2: Knowing how corporations are governed and explaining the role of the
board of directors in protecting the interests of investors and other stakeholders.
LO 13-3: Analyzing the function of executive compensation and debating if top
managers are paid too much.
commitment.
Teaching Tip: Insider Trading
Students may be asked to locate a recent example of insider trading,
through an Internet search or review of the business press. They may
then be asked to analyze the case to determine if it met the elements of
insider trading established by the Supreme Court in U.S. vs. O’Hagen,
described in the text. One possible case is that of Mathew Martoma,
who was convicted of insider trading in 2014.
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LO 13-4: Evaluating various ways shareholders can promote their economic and
social objectives.
focused on issues of social responsibility.
LO 13-5: Understanding how the government protects against stock market
abuses, such as fraudulent accounting and insider trading.
Recent enforcement efforts by the Securities and Exchange Commission have focused
KEY TERMS
board of directors
corporate governance
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INTERNET RESOURCES
DISCUSSION CASE
WHOLE FOODS ADOPTS EGALITARIAN COMPENSATION POLICIES – BUT
FIGHTS BACK ON BOARD ELECTIONS
Discussion Questions
1. If you owned shares of stock in Whole Foods, would you support McRitchie’s 3–
and-3 proposal or the company’s 5-and-5 proposal? Why?
owning at least three percent of the company for at least three years to nominate
candidates for the board. Whole Foods’ competing 5-and-5 proposal would give
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2. How does Whole Food’s executive compensation practices compare with those of
other firms, as described in this chapter? Do you think Whole Foods’ approach
is better or worse than that of most other companies, and why?
one.
and mission-driven founder, John Mackie.
3. Some companies described in the case have voluntarily supported greater proxy
access for shareholders. What do you think has motivated them to do so?
4. Several business support groups mentioned in the case have opposed greater
proxy access for shareholders. What do you think has motivated them to do so?
5. Do you believe Whole Food’s opposition to expanded proxy access is consistent
or inconsistent with other aspects of the company’s culture and policies?
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This is a challenging question that requires higher-order thinking. On its face, Whole
Foods’ opposition to expanded proxy access seems inconsistent with other aspects of