Business Studies

Question 1

What are agency problems? And why are they different around the world?

Question 2

Does a unified corporate governance practice fit to all economies? Why ? Please provide a minimum of 2 arguments to support your position.

Question 3

Familial Capitalism and State Capitalism are capitalist systems largely present in the Middle East and North Africa. Describe these two capitalist systems. How does each of these systems impact the relationship between governance practices and firm performance within the MENA institutional context? More specifically, how do you expect power distance in the region to impact the relationship between governance practices and firm performance?

Question 4

Imagine the following: You get a new job as a CEO of a “family firm”. The firm is still fully owned by the family; and before you entered it was also managed by a family member. Please describe how you would work differently in this family firm as compared to your previous job (CEO of a non-family firm)

Question 5 (A & B)

CEO pay (note: the question contains three parts – A, B and C)

Abigail Disney has received a tremendous amount of media attention for calling out the pay disparity between Walt Disney Co. CEO Bob Iger and the rank-and-file employees at the company that bears her grandfather’s name. Iger made over 1,000 times more than the median Disney employee in 2018. Iger earned $66 million last year. The median salary of a Disney employee is $46,127, the company reported.

“A full 90% of Mr. Iger’s compensation is performance-based,” the company said in a statement. “Mr. Iger’s results-driven compensation reflects the exceptional value he has created for the company, its shareholders and employees.”

Abigail Disney has frequently spoken out about Iger’s salary. In April, she tweeted, “by any objective measure, a pay ratio over a thousand is insane.”

• A) What are the components of CEO pay?
• B) Do you think Mr. Iger is overpaid? If yes, please suggest a specific governance remedy. If not, explain why.

Question 5 C

The SEC recently adopted a new rule requiring companies to disclose, starting in 2017, how much their median employees are compensated compared to their CEOs and provide that number as a pay ratio.

The Gap: 3,566:1

Gap CEO Arthur Peck was granted 3,566 times more pay last year than the company’s median employee was. His pay package was worth $20.8 million in 2018, compared to the median employee who made $5,831

Gap told CNN Business in a statement that the pay ratio reflects the company’s employee composition. It estimates that out of 135,000 employees, about 100,000 are sales associates, 97% of whom are part-time.

Align Technology: 3,168: 1

Align Technology, the maker of Invisalign braces, lands itself on the list because of a pay ratio of 3,168 to 1. CEO Joseph Hogan’s pay package was worth $41.8 million while the median employee earned $13,180.

The median worker was an associate engineer in Align’s manufacturing facility in Mexico. Align noted in a proxy statement that it was “competitive pay” for such a position in Mexico. The company noted that excluding a one-time equity award, Hogan’s total compensation in 2018 was $14 million, putting the pay ratio at 1,076 to 1.    C) Do you think this ratio index is objective to reflect CEO overpay? Why? If not, do you have better ideas?

Question 6

Star Print – a traditional publishing house at its turning point

The company and its history

Peter Ward is 60 years old. He is married to Andrea Ward (55). The couple has 2 children, Nadja (27, physician) and John (32, teacher). Over the last 35 years, Peter has been working for „Star Print“, a St.Gallen-based publishing house. After taking over from his father in 1990, he has been the sole owner and manager of the company. He has always been very proud of “his family firm” and the well-being of his employees was particularly important for him.

Star Print was founded in 1890 as a “producer of high quality books and magazines” by Edward Ward, Peter’s great-grand father. After some turbulent times in the first half of the 20^th century, Star Print has established itself as a renowned publisher of books and magazines on the topics of “nature”, “biology” and “gardening”. Typical customers include students, professors, as well as ordinary people with interests in those topics. Star Print owns its own building in St.Gallen, where the 25 long-tenured employees work. Moreover in 1960, Peter’s father Henry bought a printing plant (5 additional employees), which has since then been fully owned by Star Print.

While the period between 1950 and 2000 had been quite fruitful for the company, including decent revenues and profit margins, Star Print has recently started to face stagnation in revenues (at an average of 8 million CHF per year). Peter has long fought against this downward trend. But now he feels tired. He sits down and starts thinking: “I am 60 years old. It’s time for retirement. But what shall I do with the firm?”

Peter clearly wants to stop being the owner manager of his firm within the next years. What do his “exit options” look like? Please name 4 options and give at least 1 advantage and 1 disadvantage of each option

ANSWER

Corporate Governance

Question 1

Agency problems are common in the corporate world between relationships, where one party is expected to serve the other party’s best interest (ElKelish, 2018). For instance, a manager, who is also a stakeholder, may decide to pass certain motions that help maximize the profits of the shareholders. In this case, he not only benefits as a shareholder but also has an advantage as a manager to ensure that the profits are maximized for his own interest. However, agency problems are different depending on the incentive and presence of discretion in the task at hand. A carpenter may choose to ask for triple the money by suggesting other repairs needed that were not originally a cause for concern when hired in the first place. In this case, the carpenter’s main aim is to benefit more from the employer’s interest.

Question 2

A unified corporate governance is a good fit for all economies. Corporate governance is a set of rules, guidelines, and responsibilities that companies use to showcase accountability and transparency (ElKelish, 2018). With good corporate governance, many economies, especially developing countries, can benefit from such companies economically, as they present hiring and growth opportunities within such economies. It is also essential for developed nations that constantly need more investment to sustain their economy at the top level. Good corporate governance ensures that the company yields good results, and the company share is favorable to attract investments.

Question 3

Familial capitalism, largely used in the Middle East, is a form of corporate governance and economic control determined by the ruling family. Such families rule in a hereditary manner, and the wealth is generally centered on the family, with economic implications set to benefit the wealthy. On the other hand, state capitalism is an economic system largely controlled by the state, where every major economic means of production is controlled by the state (Alami et al., 2021). The two forms of capitalism affect governance practices and a firm’s performance in that state capitalism achieves socialism by reinvesting the accumulated capital back into society and ensuring that forms receive favorable political and economic conditions to boost their performance.

Question 4

As the new CEO of a family firm, it is essential to understand first the perception of the family members about the ownership of the business. They believe that they are indispensable, and it is their efforts as a family that created the company. However, the change would be necessary within the company, especially at the managerial level. As a CEO, I would slowly propose a change of power to be given to managers who have no conflict of interest. I would advise the family members to hold shares and participate in board meetings and decisions, but not the operations of the company. A family-owned business tends to have numerous interferences from the family, which may negatively affect the performance of the business.

Question 5 A & B

The components of a CEO’s pay include the expected and stipulated salary, restricted stocks, share performance depending on the marketing fluctuations, and other stock options (Gox & Hemmer, 2020). In the case of Bob Eger, the CEO of Disney, earning a median salary of $66 million annually is being overpaid. According to a study conducted by a 2019 Institute for Policy Studies, CEOs make 100 times the salary of a median worker. In Eger’s case, earning 1000 times more than his median workers is not only unfathomable but unethical. The average pay for CEO in the top 350 firms in America make an average salary of $25 million.

Question 6

References

Alami, I., Dixon, A. D., & Mawdsley, E. (2021). State capitalism and the new global D/development regime. Antipode, 53(5), 1294-1318.

ElKelish, W. W. (2018). Corporate governance risk and the agency problem. Corporate Governance: The International Journal of Business in Society.

Göx, R. F., & Hemmer, T. (2020). On the relation between managerial power and CEO pay. Journal of Accounting and Economics, 69(2-3), 101300.