INVESTOR RELATIONS, LIQUIDITY, AND STOCK PRICES

Although the first investor relations department was established by General Electric as long ago as 1952, the role of investor relations (IR) is one that has largely escaped scientific analysis and academic scrutiny. This article attempts to demonstrate the importance of a company's IR activities for its stock price by establishing a clear chain of causation between the following:

• (1)

   corporate IR activities and the number of stock analysts who follow the firm;

       
  
  

TWELVE WAYS TO STRENGTHEN YOUR INCENTIVE PLAN

This paper argues that most incentive compensation plans are ineffective for a variety of reasons, including:
too many performance measures and too much complexity;

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   arbitrary targets that are subject to intense lobbying by executives;
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   caps and floors that narrow the payout range and stifle incentives;
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   performance measured at a level too high to be meaningful for most managers, or too low to encourage teamwork; and
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   a failure to integrate the incentive plan into the overall compensation philosophy.
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   After examining these problems, the author offers 12 suggestions for implementing plans that support management's aspirations to create value for shareholders.

     

The Economics of Wind Energy

In the summer of 2008 the authors of this article met with Boone Pickens to discuss the centerpiece of the Pickens plan for moving the U.S. toward energy independence: the feasibility of wind power as a source for the production of electricity. That meeting, along with their survey of published sources, leads the authors to the following conclusions:

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  Wind power is an abundant and clean source of energy for the U.S. both now and in the future.
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  Wind power is now economically viable in some parts of the country, and would be viable throughout the wind-rich mid-section of the U.S. if we had a national transmission grid.

But developing such a grid faces several hurdles, including the cost of construction and the need for state-by-state approvals of interstate transmission lines. To overcome these obstacles, the authors offer the following policy recommendations:

• Federal oversight of the construction of the national transmission grid. Moving toward renewable sources of energy and reduced greenhouse gas from the use of coal changes the problem of managing electric power generation from a local to regional and national problem. This requires broader cooperation and coordination to ensure the construction and management of reliable sources of electric power.

• Identify adequate sources of financing. The positive economics of wind power suggest that wind farm development and transmission grid installation should attract sufficient private funding to fully develop the 20% wind solution. But because of the sheer size of the plan, completing it may require innovative financing structures that include the possibility of some combination of public and private funding sources.

     

VALUE AT RISK: USES AND ABUSES

Value at risk (or "VAR") is a method of measuring the financial risk of an asset, portfolio, or exposure over some specified period of time. By facilitating the consistent measurement of risk across different assets and activities, VAR allows companies to monitor, report, and control their risks in a manner that efficiently relates risk control to desired and actual economic exposures.
Nevertheless, reliance on VAR can result in serious problems when improperly used, and would-be users of VAR are advised to consider the following three pieces of advice:

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   First, VAR is a tool for firms engaged in total value risk management. Companies concerned not with the value of a stock of assets and liabilities over a specific time horizon, but rather with the volatility of a flow of funds, are often better off eschewing VAR altogether in favor of a measure of cash flow volatility.
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   Second, VAR should be applied very carefully to companies that practice "selective" risk management those firms that choose to take certain risks as a part of their primary business. When VAR is reported in such situations without estimates of corresponding expected profits, the information conveyed by the VAR estimate can be extremely misleading.
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   Third, as a number of recent derivatives disasters are used to illustrate, no form of risk measurement including VAR–is a substitute for good management. Risk management as a process encompasses much more than just risk measurement. Indeed, risk measurement (whether using VAR or some of the alternatives proposed in this article) is pointless without a well-developed organizational infrastructure and IT system capable of supporting the complex and dynamic process of risk taking and risk control.

     

The investment performance,attributes, and investment behavior of ethical equity mutual funds in the US: an empirical investigation

This paper examines the investment performance of US ethical equity mutual funds relative to the market and their traditional counterparts using a survivorship-bias-free database. We detect selectivity and market timing performance of fund managers using two models. First, we use Treynor and Mazuy’s (Harv Bus Rev 44:131–136, 1966) model to determine these performances from a quadratic regression of fund returns on market returns. Second, we use a comprehensive and integrated model derived by Bhattacharya and Pfleiderer (A note on performance evaluation. Technical Report 714, Stanford, California, Stanford University, Graduate School of Business, 1983) and Lee and Rahman (J Bus 63:261–278, 1990) to simultaneously capture stock selection and market timing skill of fund managers. This model extracts timing skill from the relationship between managers’ forecast and realized market return. In addition, the R² approach developed by Amihud and Goyenko (Rev Financ Stud 26:667–694, 2013) for evaluating selectivity is also used in this paper. Our empirical results indicate that ethical funds perform no worse than their traditional counterparts, although ethical and traditional funds do not outperform the market. We find some evidence of superior security selection and/or market timing skill among a very small number of ethical and traditional funds. It appears that matching traditional funds have slightly more abnormal (superior as well as inferior) performance than ethical funds in our sample.     

STRENGTHENING THE GLOBAL FINANCIAL SYSTEM: ASSESSING THE CRISIS AND THE POLICY RESPONSE

The financial crisis that began with Thailand's devaluation in the summer of 1997 exposed significant weaknesses both in the structure of markets in emerging countries and in the crisis-prevention and crisis-management mechanisms built into the international financial system. Since then numerous efforts have been made to assess the causes of the crisis, and official institutions such as the Group of 7, the IMF, and the World Bank have laid out an agenda for reform.
This article discusses the four cornerstones of the reform program:

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   Encouraging the development of sound, well-structured banking sectors subject to well-designed systems of bank regulation and supervision.
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   Ensuring that private institutions have the incentives, governance structures, and internal controls in place to avoid inappropriate risks.
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   Strengthening disclosure requirements to ensure that global lenders and investors have the quantity and quality of information they need to make informed judgments about risks and returns.
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   Ensuring that monetary, fiscal, and exchange rate policies are appropriate and resilient enough to permit emerging market governments to withstand a crisis.

As recommended in the article on Indonesia, the author encourages the private sector to make greater use of innovative financing arrangements to manage their risk exposures—for example, through standby lines of credit or pre-negotiated options that would allow a debtor to automatically restructure its obligations under certain conditions.     

EVA AND ITS CRITICS

This paper responds to the article by Biddle, Bowen, and Wallace (BBW) by suggesting that their study of EVA and earnings has three potential shortcomings:

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   A closer look at BBW's regression analysis suggests that investors, while apparently ignoring the cost of equity, put great weight on the cost of debt —a puzzling result in need of an explanation.
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   The attempt by BBW to "level the playing field" effectively makes the NOPAT model into a NOPAT and capital model. Thus, it is really an EVA model in disguise and offers no insight into the explanatory power of NOPAT or earnings by itself.
• (3)

   BBW's model of expectations is too simple. The ability of EVA to explain shareholder returns depends upon the accuracy of the model of expected EVA performance, and BBW make no attempt to derive a model of expected EVA improvement from the EVA valuation equation.

     

The new boundaries of the "boundaryless" company

In an economy founded on innovation and change, one of the premier challenges of management is to design more flexible organizations. For many executives, a single metaphor has come to embody this managerial challenge and to capture the kind of organization they want to create: the "corporation without boundaries." According to Larry Hirschhorn and Thomas Gilmore of the Wharton Center for Applied Research, managers are right to break down the boundaries that make organizations rigid and unresponsive. But they are wrong if they think that doing so eliminates the need for boundaries altogether. Once the traditional boundaries of hierarchy, function, and geography disappear, a new set of boundaries becomes important. These new boundaries are more psychological than organizational. They aren't drawn on a company's organizational chart but in the minds of its managers and employees. And instead of being reflected in a company's structure, they must be "enacted" over and over again in a manager's relationships with bosses, subordinates, and peers. In this article, Hirschhorn and Gilmore provide a guide to the boundaries that matter in the "boundaryless" company. They explain how these new boundaries are essential for both managers and employees in coping with the demands of flexible work. They describe the typical mistakes that managers make in their boundary relationships. And they show how executives can become effective boundary managers by paying attention to a source of data they have often overlooked in the past: their own gut feelings about work and the people with whom they do it.     

Up to code: does your company's conduct meet world-class standards?

Codes of conduct have long been a feature of corporate life. Today, they are arguably a legal necessity--at least for public companies with a presence in the United States. But the issue goes beyond U.S. legal and regulatory requirements. Sparked by corruption and excess of various types, dozens of industry, government, investor, and multisector groups worldwide have proposed codes and guidelines to govern corporate behavior. These initiatives reflect an increasingly global debate on the nature of corporate legitimacy. Given the legal, organizational, reputational, and strategic considerations, few companies will want to be without a code. But what should it say? Apart from a handful of essentials spelled out in Sarbanes-Oxley regulations and NYSE rules, authoritative guidance is sorely lacking. In search of some reference points for managers, the authors undertook a systematic analysis of a select group of codes. In this article, they present their findings in the form of a "codex," a reference source on code content. The Global Business Standards Codex contains a set of overarching principles as well as a set of conduct standards for putting those principles into practice. The GBS Codex is not intended to be adopted as is, but is meant to be used as a benchmark by those wishing to create their own world-class code. The provisions of the codex must be customized to a company's specific business and situation; individual companies' codes will include their own distinctive elements as well. What the codex provides is a starting point grounded in ethical fundamentals and aligned with an emerging global consensus on basic standards of corporate behavior.     

Change of numeraire in the two-marginals martingale transport problem

In this paper, we apply change of numeraire techniques to the optimal transport approach for computing model-free prices of derivatives in a two-period setting. In particular, we consider the optimal transport plan constructed in Hobson and Klimmek (Finance Stoch. 19:189–214, 2015) as well as the one introduced in Beiglböck and Juillet (Ann. Probab. 44:42–106, 2016) and further studied in Henry-Labordère and Touzi (Finance Stoch. 20:635–668, 2016). We show that in the case of positive martingales, a suitable change of numeraire applied to Hobson and Klimmek (Finance Stoch. 19:189–214, 2015) exchanges forward start straddles of type I and type II, so that the optimal transport plan in the subhedging problems is the same for both types of options. Moreover, for Henry-Labordère and Touzi’s (Finance Stoch. 20:635–668, 2016) construction, the right-monotone transference plan can be viewed as a mirror coupling of its left counterpart under the change of numeraire.     

REINVENTING A CORPORATION: THE "SATELLITE" STRUCTURE OF THERMO ELECTRON

Thermo Electron has created a unique–and highly productive—corporate structure by selling to the public minority equity interests in 19 of its business units over the period 1983 to 1996. Since 1983, the company has achieved extraordinary gains for stockholders, both those of the parent company and those of most of its publicly traded subsidiaries.
The company's "satellite" structure is intended to preserve the benefits enjoyed by small entrepreneurial organizations without sacrificing many of the advantages enjoyed by larger firms. Although decentralization is a key element of the organizational design, another important feature of the Thermo Electron approach is that administrative activities unrelated to the focus of the unit's operations continue to be managed at the parent level. The combination of an entrepreneurial atmosphere with the financial and administrative support of a larger organization is used extensively by the company to attract and retain management and technical talent. In fact, the company made the remarkable claim in a 1995 Forbes article that "no developer or entrepreneur has ever left Thermo Electron."
Another major contributor to the company's entrepreneurial culture is an incentive structure that is tied directly to the equity performance of both the public units and the parent. Managers of the publicly traded units are granted significant amounts of stock options, but only 40% of those options are based on the performance of their subsidiary. Of the remaining 60%, 40% are granted in the stock of the parent and the other 20% are in stock of the other subsidiaries.     

If you want honesty, break some rules

We've all heard, or perhaps even told, the "organizational lie"; We're customer centric; everyone's performance is above average; we're the darling of our industry, coming up with one innovation after another. That last one was true of Advanced Cardiovascular Systems (ACS) in the past, but not when Ginger Graham took over as CEO. From that first moment in 1993, Graham chose to tell the truth about ACS's situation--that R&D was practically at war with product development, yields were down, and customers were disgruntled. And ever since, she's seen the benefits of exploding organizational lies. Truth telling is something that's hard to argue with but difficult to do. And, indeed, ACS instituted some radical practices to create its culture of honesty. Every senior manager was assigned a coach from the ranks who regularly solicited feedback from everyone, high and low, about the executive's performance. To get the truth, though, ACS executives learned that they had to offer it up themselves--the whole truth about the company's financial state, its problems, and its triumphs. When they did, they found that, in return, they could ask their employees for help in solving the problems, and passive complainers became active partners in the company's fortunes. ACS management spreads the word about the virtues of honesty through vivid stories of corporate history and quirky rituals. Every quarter, it holds companywide meetings in which the faults of top managers are examined--to keep them honest and tough enough to go on telling the truth. In fact, in the process of openly owning up to problems and jointly fixing them with employees, the entire company grew more powerful, nimble, and tough-minded, able to respond quickly to change, both internal and external.     

The CEO as organizational architect: an interview with Xerox's Paul Allaire. Interview by Robert Howard

As chairman and CEO of the Xerox Corporation, Paul Allaire leads a company that is a microcosm of the changes transforming American business. With the introduction of the first plain-paper copier in 1959, Xerox invented a new industry and launched itself on a decade of spectacular growth. But easy growth led Xerox to neglect the fundamentals of its core business, leaving the company vulnerable to low-cost Japanese competition. Starting in the mid-1980s, Xerox embarked on a long-term effort to regain its dominant position in world copier markets and to create a new platform for future growth. Thanks to the company's Leadership through Quality program, Xerox became the first major U.S. company to win back market share from the Japanese. Allaire describes his efforts to take Xerox's corporate transformation to a new level. Since becoming CEO in 1990, he has repositioned Xerox as "the document company" at the intersection of the worlds of paper-based and electronic information. And he has guided the company through a fundamental redesign of what he calls the "organizational architecture" of Xerox's document processing business. Few CEOs have approached the process of organizational redesign as systematically and methodically as Allaire has. He has created a new corporate structure that balances independent business divisions with integrated R&D and customer operations organizations. He has redefined managerial roles and responsibilities, changed the way managers are selected and compensated, and renewed the company's senior management ranks. And he has articulated the new values and behaviors Xerox managers will need to thrive in a more competitive and fast-changing business environment.     

JOINING THE NEW ECONOMY

The decline in the costs of communicating, coordinating, and collaborating across firms in the value chain has led to the emergence of new business models—virtually integrated companies, retail "bricks and clicks" organizations, and networks like AOL and eBay—that can be used by all kinds of companies to exploit new opportunities. With these new organizations comes a need for new governance practices—practices that permit swifter decisions, best practice sharing, and more focused operations.
The author argues that improvements in governance should focus on achieving the following:

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   Organization structures that leverage external alliances while improving internal collaboration. This involves gaining acceptance of and support for a common aspiration across the company—the goal of deploying financial and human resources, complemented by technology, to build shareholder wealth.

       
  
  

The chief strategy officer

They're nominally and ultimately responsible for strategy, but today's CEOs have less and less time to devote to it. As a result, CEOs are appointing "chief strategy officers"--executives specifically tasked with creating, communicating, executing, and sustaining a company's strategic initiatives. In this article, three authors from Accenture share the results of their research on this emerging organizational role. The typical CSO or top strategy executive is not a pure strategist, conducting long-range planning in relative isolation. Most CSOs consider themselves doers first, with the mandate, credentials, and desire to act as well as advise. They are seasoned executives with a strong strategy orientation who have usually worn many operations hats before taking on the role. Strategy executives are charged with three critical jobs that together form the very definition of strategy execution. First, they must clarify the company's strategy for themselves and for every business unit and function, ensuring that all employees understand the details of the strategic plan and how their work connects to corporate goals. Second, CSOs must drive immediate change. The focus of the job almost always quickly evolves from creating shared alignment around a vision to riding herd on the ensuing change effort. Finally, a CSO must drive decision making that sustains organizational change. He or she must be that person who, in the CEO's stead, can walk into any office and test whether the decisions being made are aligned with the strategy and are creating the desired results. When decisions below the executive suite aren't being made in accordance with strategy, much of the CSO's job involves learning why and quickly determining whether to stay the course or change tack.     

Individual's Religiosity Enhances Trust: Latin American Evidence for the Puzzle

This paper explores the effect of religious observance and affiliation to the dominant religion (Catholicism) on trust in institutions and toward others, and market attitudes. The analysis is performed using a Latin American database of 20,000 respondents from 2004 by means of ordered probit models. The most interesting results are:

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  Trust toward others is positively correlated with both religious observance and Catholic affiliation (and practice ).
• (ii) 

  There is a positive correlation between trust in the government, in the police, in the armed forces, in the judiciary and in the banking system and religious practice in general. Identical positive findings are obtained for Catholic affiliation and practice , although they may be affected by a majority effect.

Moreover, there is no evidence to support the hypotheses of a negative effect of religion on social capital.     

Driving Performance Through Corporate Culture: Interviews with Four Experts

Establishing an effective link between corporate strategy and employee performance has traditionally been seen as a function of organizational structure and internal marketing—that is, of getting the right compensation systems in place to reward the desired behavior, and relentlessly communicating the strategy to all employees. But, according to the four organizational behavior experts who were interviewed for this article, there's more to it than that. Also important is a market- and customer-oriented corporate culture, which can be a highly effective tool for companies seeking to improve performance and increase value.
This article presents four distinctive, but complementary views on why and how senior executives should play a significant role in managing the cultures within their organizations. According to these experts, it is possible to both transform and harness the power of a culture by paying greater attention to succession issues; articulating and communicating an organization's core values; aligning a company's behavioral norms with employee assumptions; and offering "constructive reconciliation of cultural differences." In the last analysis, a company's culture is said to be the most effective way for executives to ensure that their employees will perform "when no one is looking."     

Do gender,educational level,religiosity, and work experience affect the ethical decision-making of U.S. accountants?

Accounting plays a key role in the social and economic progress of a nation. Ethical standards are a hallmark of the accounting profession. An important question is what factors affect the ethical choices made by accountants. Past research suggests that factors such as gender, educational level, religiosity, and work experience may be related to the development of a person's ethical standards. This study attempts to do two things. First, the study provides a short review of contemporary ethical models, including the hermeneutical model. Second, the study examines factors affecting a person's ethical perspectives. Understanding the factors which shape the ethical standards of future accountants will help educational institutions develop appropriate ethics curriculum and help firms develop appropriate ethics training for their employees. Failure to bring appropriate ethical standards to the workplace will most assuredly hamper the profession's time-honored commitment to serve the public interest. The findings suggest that there are differences in individual ethical standards based on gender, college level (graduate versus undergraduate), religiosity, and work experience.     

会计准则改革、会计利润信息与银行债务契约

本文考察了新、旧准则下合并报表净利润对银行信贷决策有用性的变化,以及新、旧准则下合并—母公司净利润差异对银行信贷决策有用性的变化。研究发现,合并报表净利润是银行信贷决策的重要依据,新准则下合并报表净利润与债务契约的相关性减弱,且公允价值变动损益高的公司更明显。论文还发现,新准则实施后,合并—母公司净利润差异与企业获得银行借款的相关性减弱,说明新准则下的合并母公司净利润差异为银行信贷决策提供了新的信息含量。     

Making Financial Goals and Reporting Policies Serve

The main. nancial goal of Progressive Insurance, the third largest underwriter of auto insurance in the U.S., has remained the same since the late 1960s. Expressed in three words, "96 and grow," the goal tells the company's managers to pursue all growth opportunities while maintaining a "combined ratio" no higher than 96, or what amounts to a minimum 4% spread between revenues (premiums) and costs (including expected losses). Thanks in part to the clarity of mission provided by this goal, the company has produced an average 15% rate of growth in revenues and earnings, along with a remarkably stable 15% return for its shareholders, since going public in 1971.
Progressive's simplicity and clarity of mission is also partly responsible for another of the company's distinctive policies: product pricing that, while disciplined, is aggressive and highly decentralized. Having invested some $500 million per year developing statistical models for pricing individual customer risks and acquisition costs, the company was among the. rst in its industry to underwrite "non-standard" risks. And aided by sophisticated pricing models, each of Progressive's 100 or so local product managers are charged with adapting those models to come up with premiums for their own regions.
To go along with its strategic and organizational innovations, Progressive also has an innovative disclosure policy. Apart from SEC reports, the company's communications seldom mention earnings or earnings per share, and the company has never provided earnings guidance. With the passage of Reg. FD in late 2000, the company brie. y considered offering guidance. But in the spring of 2001, the board decided instead to provide monthly releases of its realized combined ratio. Since adoption of this new disclosure policy, Progressive has seen a 50% drop in the volatility of its stock price.