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Guest speaker Andrew Shapiro discusses the importance of corporate governance and shareholder activism

News + Events : Guest speaker Andrew Shapiro discusses the importance of corporate governance and shareholder activism

11/17/2011

Business Ethics Week continued as Andrew Shapiro, founder and president of Lawndale Capital Management, spoke to students at the SF State Downtown Campus on November 1 about the importance of corporate governance through shareholder diligence.

He was joined by student panelists from the Financial Analysts and Management Education organization (FAME). Andrew began the talk with a brief review of the accounting scandals of the past decade, involving the now infamous Enron, WorldCom, Tyco, and others that illuminated the need for massive reform in the way public companies report to their shareholders. These reforms culminated in the Sarbanes-Oxley Act.

Conditions leading to conflicts of interest

Andrew’s job is to manage small and micro-cap activist hedge funds, and work with boards of directors and management teams to prevent conflicts of interest that could lead to accounting abuse.

He explained that boards are supposed to act as the agents of company shareholders, tasking executives to increase the value of their companies. Abuses can occur when a CEO has the power to select who serves on the board, essentially giving a CEO the ability to choose friends and acquaintances to be their boss.

Such situations allow boards to approve disproportionately large compensation to executives, even when companies perform poorly under their leadership. They can also give rise to “imperial CEOs,” who seek to acquire other companies and build an empire to increase total revenue on paper, even if it doesn’t make financial sense to do so.

Best practices

To prevent abuse, Andrew stressed the importance of active participation by members of a board of directors. Directors need to be engaged in their company’s day-to-day operations, and impartial to the company’s executives in order to recognize and manage financial problems effectively.

Executive compensation should always be tied to the performance of the company itself, in order to align the interests of shareholders with those of the managers that run the company. The board should also have a successor to the CEO in mind at all times, as this helps remind executives that they serve the board and can be replaced if necessary.

Finally, boards should be comprised of members with both competencies and characteristics relevant to the companies they serve. For example, a women’s apparel company should have not only experts in the apparel industry serving on its board, but women as well.

Students in the audience recognized Andrew’s talk as a real-world example affirming the themes covered in their Political, Social, and Legal Environment of Business class, a required course for SF State graduate business students.


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