Legislation - E-Commerce - Lecture Slides, Slides of Fundamentals of E-Commerce

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Eisner’s exit… and a new age dawns? Disney’s

board in 2008

57

What about legislaKon?

58

¨ Every corporate scandal creates impetus for a

legislaKve response. The scandals at Enron and

WorldCom laid the groundwork for Sarbanes-­‐Oxley.

¨ You cannot legislate good corporate governance.

¤ The costs of meeKng legal requirements o\en exceed the

benefits

¤ Laws always have unintended consequences

¤ In general, laws tend to be blunderbusses that penalize

good companies more than they punish the bad

companies.

The Bondholders’ Defense Against Stockholder

Excesses

60 ¨ More restricKve covenants on investment, financing and dividend policy have been incorporated into both private lending agreements and into bond issues, to prevent future “Nabiscos”. ¨ New types of bonds have been created to explicitly protect bondholders against sudden increases in leverage or other acKons that increase lender risk substanKally. Two examples of such bonds ¤ PuCable Bonds, where the bondholder can put the bond back to the firm and get face value, if the firm takes acKons that hurt bondholders ¤ RaKngs SensiKve Notes, where the interest rate on the notes adjusts to that appropriate for the raKng of the firm ¨ More hybrid bonds (with an equity component, usually in the form of a conversion opKon or warrant) have been used. This allows bondholders to become equity investors, if they feel it is in their best interests to do so.

The Financial Market Response

61

¨ While analysts are more likely sKll to issue buy rather

than sell recommendaKons, the payoff to uncovering

negaKve news about a firm is large enough that such

news is eagerly sought and quickly revealed (at least to a

limited group of investors).

¨ As investor access to informaKon improves, it is

becoming much more difficult for firms to control when

and how informaKon gets out to markets.

¨ As opKon trading has become more common, it has

become much easier to trade on bad news. In the

process, it is revealed to the rest of the market.

¨ When firms mislead markets, the punishment is not only

quick but it is savage.

The Counter ReacKon

63 STOCKHOLDERS Managers of poorly run firms are put on notice.

1. More activist investors
2. Hostile takeovers BONDHOLDERS Protect themselves
3. Covenants
4. New Types FINANCIAL MARKETS

Managers^ SOCIETY

Firms are punished for misleading markets Investors and analysts become more skeptical Corporate Good Citizen Constraints

1. More laws
2. Investor/Customer Backlash

So what do you think?

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¨ At this point in Kme, the following statement best describes

where I stand in terms of the right objecKve funcKon for

decision making in a business

¤ Maximize stock price, with no constraints

¤ Maximize stock price, with constraints on being a good social ciKzen.

¤ Maximize stockholder wealth, with good ciKzen constraints, and hope/

pray that the market catches up with you.

¤ Maximize profits or profitability

¤ Maximize earnings growth

¤ Maximize market share

¤ Maximize revenues

¤ Maximize social good

¤ None of the above