F

Corporate Governance
FSS 2014
Dr. Inga van den Bongard
Dr. Erik Fernau
Organization of the course
University of Mannheim, Chair of Finance
FSS 2014
Lecturer
Email: ivdb@uni-mannheim.de
Office: L 9, 1-2, Room 401
Office hours: on appointment
Dr. Erik Fernau

Email: fernau@uni-mannheim.de
Office: L 9, 1-2, Room 401
Office hours: on appointment
Lecturer changes a few times during the semester.
FSS 2014
Chair of Finance
Chair of Finance:
L9,1-2
Address & website:

L 9, 1-2
http://finanzierung.bwl.uni-mannheim.de/en/home/
Research & teaching at the Chair of Finance
Market Microstructure
Corporate Finance
Empirical Asset Pricing
FSS 2014
Time & location

Lectures & exercises
Monday 12.00 01.30 pm (O 151)
Tuesday 03.30 05.00 pm (O 151)
Exercises accompany the lectures at irregular intervals.
The course is worth 6 ECTS.
Therefore the course will only take place on the dates

depicted on the following slide.
FSS 2014
Time schedule
Monday
Tuesday
Lecture
10.02.2014
11.02.2014
17.02.2014
18.02.2014
No lecture
24.02.2014
25.02.2014
03.03.2014
04.03.2014
10.03.2014
11.03.2014
17.03.2014
18.03.2014
24.03.2014
25.03.2014
31.03.2014
01.04.2014
07.04.2014
08.04.2014
14.04.2014
15.04.2014
21.04.2014
22.04.2014
28.04.2014
29.04.2014
05.05.2014
06.05.2014
12.05.2014
13.05.2014
19.05.2014
20.05.2014
26.05.2014*
27.05.2014
Easter break
* Question time
FSS 2014
Registration period & course material

Registration period
Tuesday, February 11 Monday, February 24

The number of participants is limited to 100 students.
No first come, first served if number of applicants>100.
A manual regarding the registration for the course and the

E-learning group is provided on our website:
http://finanzierung.bwl.uni-mannheim.de/de/lehre/bachelor_bsc/corpgov/
Course materials (including this lecture) can be downloaded at:

https://portal.uni-mannheim.de/ (.LRN Plus)
Lecture:
FIN 350 Corporate Governance (FSS 2014)
Password: CorpGFSS2014
FSS 2014
Exam
Student evaluation is based on a written exam
(60 minutes, closed book)
The exam will take place between

Monday, June 2, 2014, and Saturday, June 14, 2014
Preparation for the exam
The exam may cover all materials discussed in the lecture.
The course material is meant to accompany the course. It is not
intended to provide a substitute for attendance in class.
In order to prepare for the exam it is highly recommended to
attend both the lecture and the exercise sessions.
FSS 2014
Target group & prerequisites

For whom is the course intended?
Exchange students BSc
6 ECTS
Prerequisites
Introductory course in corporate finance on the level of
Brealey/Myers/Allen is strongly recommended.
Brealey, R.A., Myers, C.S. and F. Allen, 2008, Principles of
corporate finance, 9th edition, Mcgraw-Hill Higher Education.
Focus of the course
The course covers both theoretical concepts and empirical
studies in the field of corporate governance.
FSS 2014
Contents (preliminary schedule)

1. Introduction
2. Principal-Agent Problem
3. Financing under Asymmetric Information
4. Internal Corporate Governance Mechanisms
4.1. Ownership & Control

4.2. Board of Directors
4.3. Manager Compensation
FSS 2014
Contents (preliminary schedule)

4.4. Leverage & Payout
5. Regulation
6. Corporate Governance Systems
7. Valuation Effect/ Problems in Empirical Research
8. (Corporate Social Responsibility)

9. Behavioral Corporate Governance
FSS 2014
Learning outcomes
By the end of this course, students should be able to:
1. Contrast the different definitions of corporate governance
2. Critically review the principal-agent model
3. Describe differences in corporate control across the world
4. Explain the reasons why control may be different from
ownership
5. Compare the main classifications of corporate governance
systems
6. Assess the effectiveness of the different corporate governance
mechanisms, such as for example the board of directors
7. Critically assess the empirical evidence on the importance and
effectiveness of various corporate governance mechanisms
FSS 2014
Recommended reading
Goergen, M., 2012, International Corporate Governance, Prentice
Hall.
Shleifer, A., and R. Vishny, 1997, A survey of corporate
governance, Journal of Finance 52, 737-784.
References (required and supplementary) will be provided at the

end of each set of lecture notes.
FSS 2014
FSS 2014
Dr. Erik Fernau
FSS 2014
An Example for Misaligned Interests

Tyco International Ltd.
Tycos former CEO, Dennis Kozlowski lived a lavish lifestyle
$29 million vacation home in Boca Raton, Florida
$15 million rare 1930s-vintage yacht
$18.5 million Fifth Avenue apartment in Manhattan
$6,000 gold-and-burgundy, floral-patterned shower curtain
What is wrong with that?
Even though Kozlowksi was one of America's best-paid corporate
executives, he didn't reach into his own pocket to finance his life of
opulent luxury. Instead, everything was paid for by the company
In September 2002, Kozlowski and Swartz (CFO) were indicted on
charges for stealing more than $600 million from Tyco
FSS 2014
Background
1946: Kozlowski was born in New Jersey
1960: Tyco is founded as a research laboratory doing experimental
work for the government.
1962: change focus to high-tech products for the commerical sector
Went public in 1964
Between 1970 and 1980: growth through acquisitions/ market
leadership across a range of electronics, fire & safety products and
packaging
1974: Tyco stock is listed on the NYSE
1975: Dennis Kozlowski joined Tyco as an assistent controller
1992: Appointment of Kozlowski as CEO
FSS 2014
It was the appointment of Kozlowski as CEO in 1992 that the

company grew excessively. Between 1994 and 2002 Tyco spent
$63 billions for acquisitions.
Kozlowski was the most prolific corporate acquirer ever -> at the
height of his hyperactivity, he accumulated 200 companies a year!
Tycos problems emerge

1999: when rumours of accounting irregularities started to resurface
concerning Tycos acquisitions, the SEC initiated an investigation in
Dec 1999 till July 2000
July 2000: the SEC sent a letter informing Tyco that it was not taking
action, because it was not able to find anything illegal
FSS 2014
2001: Business Week named him one of the top 25 managers to

watch
And wrote in 2000, Kozlowski came charging back. In July the
SEC, in effect, gave the company a clean bill of health by ending its
inquiry. And since then, Kozlowski has kicked his dealmaking
machine back into full throttle, snapping up some 40 companies in
2000 for a total of $9 billion, while profits have soared.
This Midas touch in deal after deal has transformed Tyco from an
obscure manufacturer into a powerhouse worth 50 times more than
when Kozlowski took charge eight years ago. It's an achievement
that has led some to compare Kozlowski with General Electric Co.'s
Jack Welch.
FSS 2014
The scandal begins

In June 2002, Kozlowski was indicted by Manhattans District
Attorney Robert Morgenthau for evading over $1 million in sales
taxes
Morgenthau claims that between August 2001 and June 2002,
Kozlowski purchased paintings for roughly $13 million for his Fifth
Avenue apartment in Manhattan while Tyco was paying for the
fine art.
They were bought in New York, but shipped to Exeter, N.H.,
where Tyco's operational headquarters were located.
By shipping out of state, Kozlowski got around paying New York
sales tax on the art.
However, the paintings were returned to his apartment
FSS 2014
Kozlowski resigned on June 2, 2002

The scandal broadens
Morgenthau widened his investigation to check whether Tyco had
been paying for Kozlowskis personal expenses
On September 12, 2002, Kozlowski and the former CFO Swartz
were indicted for looting $600 million from the company
According to the SEC, they granted themselves hundreds of
millions of dollars in secret low interest and interest-free loans from
the company that they used for personal expenses
In some cases, loans were never repaid. Kozlowski and Swartz
caused Tyco to forgive tens of millions of dollars they owed the
company, again without disclosure to investors
FSS 2014
They treated Tyco as their private bank, taking out hundreds of

millions of dollars of loans and compensation without ever telling
investors," said Stephen M. Cutler, the SEC's Director of
Enforcement. "Defendants put their own interests above those of
Tyco's shareholders. Those shareholders deserved better than to be
betrayed by the management of the company they owned.
FSS 2014
Those funds allowed Kozlowski to purchase:

$29 million vacation home in Boca Raton, Florida
$15 million rare 1930s-vintage yacht
Jewelry from Tiffanys and Harry Winston
(e.g. a $5million diamond ring)
Kozlowski also misappropriated funds to make philanthropic
contributions in his own name (in total: $43 million); e.g. he gave $5
million to Seton Hall, which named the building of its new businessschool Kozlowski Hall
$18.5 million Fifth Avenue apartment in Manhatten
The apartment had needed furnishing and refurbishment:
the famous $6000 shower curtain
$2200 wastebasket
FSS 2014
$15000 dog-umbrella stand

$17000 antique traveling toilet box
$ 6300 antique sewing basket
two sets of sheets on sale for $ 5960
pincushion for $445
In total, Tyco spent $30million to buy and decorate the apartment for
Kozlowski. This included the cost of the paintings on which sales tax
was not paid. His lawyers contended that Tyco properly paid for the
apartment and furnishings because Kozlowski used it for business.
He needed the apartment to impress other executives with whom he
was negotiating multibillion acquisitions for Tyco
And dont forget the birthday party for his wife, Karen
FSS 2014
In June 2001, Kozlowski wanted to throw an unforgettable party for

his wife Karens 40th birthday:
He invited seventy-five of his dearest and closest friends to
celebrate the birthday on the Mediterranean island of Sardinia
Singer Jimmy Buffet was imported for their entertainment at a
cost of $250000
The party included paid models dressed in Roman togas and ice
sculpture of Michelangelos David urinating Stolichnaya vodka
Half of the $2.1 million cost of the birthday party was billed
directly to Tyco on the theory that the guests included employees
and there should have been also a board meeting. The board
meeting, however, was largely attended by phone because many
board members were not on the island.
FSS 2014
The Party:
FSS 2014
The Party:
FSS 2014
The Outcome:
On September 19, 2005 he was sentenced to serve 8.33 years to 25 years

in prison for his role in the scandal
FSS 2014
Eric M. Pillmore served as Senior Vice President of Corporate

Governance of Tyco International Ltd. From August 2002 to 2007.
He was charged with revamping a broken corporate governance
system. During an interview he was asked:
How come nobody figured this out before the SEC finally looked at
it?
This is one scandal that really didnt have a whistle-blower. []
I think the tone clearly set by the CEO (Kozlowski) created a very
intimidating culture where people were very unwilling to speak up.
He grow up in the company, he started actually as an internal
auditor and became CEO about 10 years before the problem
actually surfaced. I believe that he thought that the company were
his
(Turning around Tyco: How corporate governance saved the day,
INSEAD Knowledge, March 2010)
FSS 2014
And what is Corporate Governance?

Corporate Governance deals with conflicts of interests between
the providers of finance and the managers;
the shareholders and the stakeholders;
different types of shareholders (mainly the large shareholder and
the minority shareholders)
and the prevention or mitigation of these conflicts of interests.
FSS 2014
The idea is not new and the fundamental insight dates back at least
as far as 1776
A much quoted comment by Adam Smith shows that he understood
the issue of corporate governance (even though he did not know the
phrase):
The directors of companies, being managers of other peoples
money than their own, it cannot well be expected that they should
watch over it with the same anxious vigilance with which the
partners in a private copartnery frequently watch over their own.
(Smith, 1776, The wealth of nations)
However, the phrase corporate governance was scarcely used
until the 1980s
FSS 2014
Definition(s)
There exist several definitions of CG in the academic literature (and
elsewhere):
Corporate governance deals with the ways in which suppliers
of finance to corporations assure themselves of getting a
return on their investment (Shleifer and Vishny, 1997, JF)
Denis (2001) describes corporate governance as the set of
institutional and market mechanisms that induce selfinterested managers (controllers) to maximize the value of the
residual cash flows of the firm on behalf of its shareholders
(the owners) (Denis, 2001, RFE)
Shareholder perspective: Maximization of shareholder value!
What about other stakeholders?
Creditors, employees, customers, suppliers, etc.
FSS 2014
Definition(s)
stakeholder society, e.g. Tirole (2001):
Corporate governance explicitly mentions stakeholder
maximization
The traditional shareholder value approach is too narrow a view
for an economic analysis of corporate governance. I will, perhaps
unconventionally for an economist, define corporate governance
as the design of institutions that induce or force management to
internalize the welfare of stakeholders. The provision of
managerial incentives and the design of a control structure must
account for their impact on the utilities of all stakeholders [] in
order to, respectively, induce or force internalization.
FSS 2014
What is Corporate Governance?
FSS 2014
Suggested readings
Goergen, M., 2012, International corporate governance, 1st edition,
Chapters 1.
Shleifer, A., and R. Vishny, 1997, A survey of corporate
governance, Journal of Finance 52, 737-784.
FSS 2014

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Corporate Governance

Organization of the course

University of Mannheim, Chair of Finance

Dr. Erik Fernau

Address & website:

Empirical Asset Pricing

University of Mannheim, Chair of Finance

Time & location

Therefore the course will only take place on the dates

University of Mannheim, Chair of Finance

Registration period & course material

Tuesday, February 11 Monday, February 24

A manual regarding the registration for the course and the

Course materials (including this lecture) can be downloaded at:

FIN 350 Corporate Governance (FSS 2014)

The exam will take place between

Target group & prerequisites

Contents (preliminary schedule)

4.1. Ownership & Control

University of Mannheim, Chair of Finance

Contents (preliminary schedule)

8. (Corporate Social Responsibility)

University of Mannheim, Chair of Finance

References (required and supplementary) will be provided at the

University of Mannheim, Chair of Finance

University of Mannheim, Chair of Finance

An Example for Misaligned Interests

University of Mannheim, Chair of Finance

It was the appointment of Kozlowski as CEO in 1992 that the

Tycos problems emerge

2001: Business Week named him one of the top 25 managers to

University of Mannheim, Chair of Finance

The scandal begins

Kozlowski resigned on June 2, 2002

They treated Tyco as their private bank, taking out hundreds of

University of Mannheim, Chair of Finance

Those funds allowed Kozlowski to purchase:

$15000 dog-umbrella stand

In June 2001, Kozlowski wanted to throw an unforgettable party for

University of Mannheim, Chair of Finance

University of Mannheim, Chair of Finance

University of Mannheim, Chair of Finance

On September 19, 2005 he was sentenced to serve 8.33 years to 25 years

Eric M. Pillmore served as Senior Vice President of Corporate

And what is Corporate Governance?

and the prevention or mitigation of these conflicts of interests.

University of Mannheim, Chair of Finance

University of Mannheim, Chair of Finance

University of Mannheim, Chair of Finance

What is Corporate Governance?

University of Mannheim, Chair of Finance

University of Mannheim, Chair of Finance

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