1-7 of 7 Results  for:

Clear all

Article

Corporate governance is a recent concept that encompasses the costs caused by managerial misbehavior. It is concerned with how organizations in general, and corporations in particular, produce value and how that value is distributed among the members of the corporation, its stakeholders. The interrelation of value production and value distribution links the ubiquitous technological aspect (the production of value) with the moral and ethical dimension (the distribution of value). Corporate governance is concerned with this link in general, but more specifically with the moral and ethical dimensions of distributing the generated value among the stakeholders. Value in firms is created by firm-specific investments, and the motivation and coordination of value-enhancing activities and investment is protected by the power concentrated at the pyramidal top of the organization. In modern companies, it is the CEO and the top management who decide how to create value and how to distribute it among the relevant stakeholders. Due to asymmetric information and the imperfect nature of markets and contracts, adverse selection and moral hazard problems occur, where delegated (selected) managers could act in their own interest at the costs of other relevant stakeholders. Corporate governance can be understood as a two-tailed concept. The first aspect is about identifying the (most) relevant stakeholder(s), separating theory and practice into two different and conflicting streams: the stakeholder value approach and the shareholder value approach. The second aspect of the concept is about providing and analyzing different mechanisms, reducing the costs induced by moral hazard and adverse selection effects, and balancing out the motivation and coordination problems of the relevant stakeholders. Corporate governance is an interdisciplinary concept encompassing academic fields such as finance, economics, accounting, law, taxation, and psychology, among others. As countries differ according to their institutions (i.e., legal and political systems, norms, and rules), firms differ according to their size, age, dominant shareholders, or industries. Thus, concepts in corporate governance differ along these dimensions as well. And while the underlying characteristics vary in time, continuously or as a result of an exogenous shock, concepts in corporate governance are dynamic and static, offering a challenging field of interest for academics, policymakers, and firm managers.

Article

Wayne F. Cascio

Corporate restructuring occurs when a company makes significant changes to its financial or operational structure, for example, by changing its complement of employees or assets through downsizing or upsizing. A common set of factors drives decisions to restructure, including decisions to divest or to acquire employees, assets, or both. In order of priority, these factors comprise current and prior company performance, managerial foresight, economic conditions, political uncertainty, industry, and technology. Companies typically downsize employees to stop eroding profitability and to increase the likelihood of future profitability. The economic rationale that drives it is straightforward: companies become profitable when revenues exceed costs, an outcome obtained by increasing revenues, decreasing costs, or both. Because future revenues are less predictable and controllable than future costs, decreasing costs is compelling. Managers often do that by reducing the size of the workforce and its associated labor costs. Employee downsizing makes sense when it is a reaction to an emergency, such as the COVID-19 pandemic. Employee downsizing can also be part of a broader workforce strategy designed to adjust workforce competencies to align more closely with the overall strategy of a business. Organizations typically use one or more of four broad methods to downsize their workforces. The simplest is natural attrition. Alternatively, firms may offer buyouts—to individual employees (voluntary severance), to entire business units (corporate restructuring), even to the entire organization. A third strategy is involuntary layoffs—termination—with no choice by the departing employees. Businesses large and small that were hard hit by the pandemic had little or no choice but to use this strategy. A final strategy is early retirement offers, often part of a broader buyout scheme. From an organizational view, early retirement has the advantage of opening up promotion opportunities for younger workers. When firms downsize employees, they incur direct as well as indirect costs. While almost all the direct costs, such as severance pay and accrued vacation, are short-term (realized in the year they are incurred), indirect costs, such as decreased productivity, reduced morale, and aversion to risk among survivors, begin to accrue immediately and may continue for longer periods. When considering alternatives to downsizing employees, decision-makers must first assess if the downturn in business is permanent or temporary. If permanent, the only alternative to layoffs is to upskill, reskill, or retrain employees to develop new lines of business. If temporary, then there are numerous alternative ways to cut costs besides laying off workers. These range from reducing work hours to redeploying workers. A central issue for many stakeholders is the financial consequences of corporate restructuring. Regarding acquisitions, there is little evidence of a net beneficial effect on the performance of the acquirer, as measured by profitability. Rather, such actions often yield a lower rate of return than growth through internal investment. With respect to divestiture of assets, meta-analysis reveals a mixed picture of subsequent performance. Evidence does indicate, however, that different performance effects can be attributed to different conditions of the macroeconomy. With respect to within-company changes in employees, assets, or both, large-scale research reveals that corporate restructuring undertaken during difficult financial conditions, on average, outperforms corporate restructuring undertaken under more benign conditions. An important lesson for managers is to avoid downsizing as a quick fix to restore or enhance profitability. Layoffs are the most frequently employed method of downsizing but provide the smallest payoff. When faced with deteriorating results, it might be more prudent to be patient and to undertake the more demanding and comprehensive downsizing of employees and assets. As for upsizing employees, assets, or both, high-profitability upsizing does not automatically lead to better stock market performance. It tends to yield better results when the company’s performance needs improvement.

Article

Vincenzo Butticè and Massimo G. Colombo

Fundraising has proved difficult for many entrepreneurs and ventures in the early stages of their businesses because of significant information asymmetries with investors and a lack of collateral. In an attempt to overcome such difficulties, since the early 2010s, some entrepreneurs have come to rely on the Internet in order to directly seek funding from the general public, or the “crowd.” The practice of collecting small amounts of capital from the “crowd” of Internet users is called crowdfunding. Crowdfunding research is a relative newcomer to the discipline of entrepreneurial finance. However, the availability of easy-to-access data, the diffusion of this funding channel among entrepreneurs, and increasing policy attention have made crowdfunding one of the most investigated areas of research in entrepreneurial finance. The literature has discussed crowdfunding as more than a simple mean of financing. Crowdfunding also allows entrepreneurs to develop a virtual community of followers, which provides a valuable source of information with which to test and improve early versions of innovative products. Moreover, crowdfunding represents a method of gaining information about market response to a given product and the size of demand for that product, and is a powerful marketing instrument that can be used to increase brand awareness and to promote the arts, social initiatives, and financial inclusion. However, crowdfunding also entails a number of pitfalls for entrepreneurs. In order to collect financial resources from the crowd, entrepreneurs are required to share sensitive information online. This includes information about the entrepreneurial initiative, the team, and the business model they are using. The provision of this information may facilitate product counterfeiting, or the appropriation of the value of the idea by other firms or entrepreneurs. Moreover, crowdfunding entails the risk of social stigma if the funding campaign results in a failure, because information about the performance of the crowdfunding campaign usually remains accessible online. Finally, crowdfunding entails additional challenges related to the management of the crowd of backers after the campaign, since several backers will be active providers of feedback and will interact with the entrepreneurs through direct communication. Despite these disadvantages crowdfunding has become a widely used funding source for entrepreneurs looking for financing for sustainable projects, creative initiatives, and innovative ideas.

Article

Felice B. Klein, Kevin McSweeney, Cynthia E. Devers, Gerry McNamara, and Spenser Blosser

Scholars have devoted significant attention to understanding the determinants and consequences of executive compensation. Yet, one form of compensation, executive severance agreements, has flown under the radar. Severance agreements specify the expected payments and benefits promised executives, upon voluntary or involuntary termination. Although these agreements are popular among executives, critics continually question their worth. Yet severance agreements potentially offer three important (but less readily recognized) strategic benefits. First, severance agreements are viewed as a means of mitigating the potential risks associated with job changes; thus, they can serve as a recruitment tool to attract top executive talent. Second, because severance agreements guarantee executives previously specified compensation in the event of termination, they can help limit the downside risk naturally risk-averse executives face, facilitating executive-shareholder interest alignment. Third, severance agreements can aid in firm exit, as executives and directors are likely to be more open to termination, in the presence of adequate protection against the downside. Severance agreements can contain provisions for ten possible termination events. Three events refer to change in control (CIC), which occurs under a change in ownership. These are (1) CIC without termination, (2) CIC with termination without cause, and (3) CIC with termination for cause. Cause is generally defined by events such as felony, fraud, embezzlement, neglect of duties, or violation of noncompete provisions. Additional events include (4) voluntary retirement, (5) resignation without good reason, (6) voluntary termination for good reason, (7) involuntary termination without cause, (8) involuntary termination with cause, (9) death, and (10) disability. Voluntary retirement and resignation without good reason occurs when CEOs either retire or leave under their own volition, and voluntary termination with good reason occurs in response to changes in employment terms (e.g., relocation of headquarters). Involuntary termination refers to termination due to any reason not listed above and is often triggered by unsatisfactory performance. Although some prior work has addressed the antecedents, consequences, and moderators of severance, the findings from this literature remain unclear, as many of the results are mixed. Future severance scholars have the opportunity to further clarify these relationships by addressing how severance agreements can help firms attract, align the interests of, and facilitate the exit of executives.

Article

Corporate governance is a central issue in business and economics. However, governance in financial institutions is more complicated than in other fields because of the nature of financial services and instruments. Financial organizations are similar to other businesses in terms of their purposes of establishment, but confidence in management and complex risk structures are more important in financial organizations than in other businesses. In financial institutions, there are various areas in which problems arise that are related to corporate governance, including the agency problem and stakeholder protection. The importance of good governance for sound performance of financial institutions was reconfirmed during the 2008 financial crisis, raising the need to understand the agency problems and the efficiency of various corporate governance mechanisms in mitigating them. International organizations, such as the Organisation for Economic Co-operation and Development, the Basel Committee, the International Finance Corporation, and the International Organization of Securities Commissions, have been working with regulators and policy makers to improve corporate governance practices both in nonfinancial and financial institutions. Corporate governance, especially in financial institutions, is essential in guaranteeing a sound financial system, capital markets, and sustainable economic growth. Governance weaknesses at financial institutions can result in the transmission of problems across the finance sector and the economy. Consequently, the effectiveness of governance mechanisms of financial institutions and capital markets after financial crises had significant importance in a period that witnessed an intensive discussion of corporate governance issues with new regulations and the related academic works.

Article

Niels Viggo Haueter

The function of reinsurance is to absorb the risks of the direct insurance industry. This has two main purposes: (i) reinsurance capital allows direct insurers to write more business, and (ii) it protects them against balance sheet fluctuations caused by large and unexpected losses. The reinsurance market is served by a relatively small group of some 200 professional reinsurers. However, throughout history a variety of alternative forms appeared that could be used to distribute risks beyond one insurer. Co-insurance, for example, was one of the main forms of secondary risk spread in the marine community for centuries. It dominated the London market and was, to a large degree, responsible for the late and restricted development of reinsurance companies in Anglo-Saxon markets. The emergence of ever-larger risks in the 20th century forced the industry to focus increasingly on dealing with large losses and capping the maximum exposures of insurers. This made the business more financial, a trend which received a new boost with the advent of insurance-linked securities (ILSs) in the 1990s. Since then, the market for alternative risk transfer (ART) has grown, not least with the advent of new investors such as different investment funds that provide alternative risk capital. However, towards the 2020s, professional reinsurers started gaining ground again after a series of large natural catastrophes and with the continuous rise of Asian economies. Since the 2010s, growth opportunities for reinsurance are sought mostly in emerging markets and by making more risks insurable. Emerging market growth, however, is challenging and the gap between insured and insurable economic losses is still widening. Since the turn of the millennium, the industry has invested in finding solutions to close this so-called protection gap. Professional reinsurers are also seeking to develop new markets by making emerging risks such as cybercrime insurable. Yet such dynamic risks are fundamentally different from older static risks. Solutions are sought in applying methods that already made natural catastrophes insurable, modelling techniques, and ART products.

Article

Niels Viggo Haueter

Reinsurance is perceived to have a stabilizing effect on the direct insurance industry and thereby on the economy overall. Yet, research into how exactly reinsurance impacts various areas is scarce. Traditionally, studying the impact of reinsurance used to be in the domain of actuaries; since the 1960s, they have tried to assess how different contract elements can provide what came to be called “optimal reinsurance.” In the 2010s, such research was intensified in developing countries with the aim to deploy reinsurance to support economic growth and security. Interest in reinsurance increased when the industry became more visible in the 1990s as the impact of natural catastrophes started being linked to a changing climate. Reinsurers emerged as spokespeople for climate-related issues, and the industry took a lead role in arguing in favor of implementing measures to reduce environmental deterioration. Reinsurers, it was argued, have a vested interest in managing the impact of natural catastrophes. This triggered discussions about the role of reinsurance overall and about how to assess its impact. In the wake of the financial crisis of 2007 and 2008, interest in reinsurance again surged, this time due to perceived systemic impacts.