Risk Management,Corporate Governance,and the Search for Long-Term Investors

This discussion explores a number of ways that more effective risk management, corporate governance, and communication with investors can help companies increase their effciency and long-run value. According to one of the panelists, recent surveys of corporate directors suggest that companies should devote more time and attention to three issues—strategy, risk management, and succession planning—and that strategy and risk are the “flipsides of the same coin.” As the panelist argues, “You can't talk about strategy without talking about what risks you're going to take—and what risks you decide to take has to depend on the core competencies that drive the corporate strategy.” In addition to making risk management a critical part of corporate strategy, another notable recommendation is to communicate a company's strategy and business plan as clearly as possible to investors, with the aim of attracting more sophisticated, long-term shareholders. Contrary to popular belief, such a group may well include some hedge funds and other activist shareholders. According to a newly released report on shareholder activism (produced and cited by another panelist), corporate boards should work harder to identify and engage the “largest 10 shareholders in the organization,” with the ultimate goal of cultivating a shareholder base that buys into the company's strategy.     

Dynamic inefficiency in an overlapping generations economy with production

Reichlin [Equilibrium cycles in an overlapping generations economy with production, J. Econ. Theory 40 (1986) 89-102] has shown in an OLG model with productive capital that whenever the steady state is locally indeterminate and undergoes a Hopf bifurcation, it is Pareto-optimal. While these results were established under the assumption of Leontief technology, the author has partially extended them to show that the Hopf bifurcation is robust with respect to the introduction of capital-labor substitution. In this note, we prove that the Pareto-optimality of the steady state does not extend to technologies with capital-labor substitution. When the steady state is a sink or undergoes a Hopf bifurcation, it is characterized by over-accumulation with respect to the Golden Rule—the interest rate is negative—hence not Pareto-optimal. Most importantly, it follows that stabilization policies targeting the steady state leave room for welfare losses associated with productive inefficiency, apart from the very special case of Leontief technology.     

Professor Caldwell on Ludwig von Mises' methodology

The Review of Austrian Economics -     

Can Voluntary Workplace Partnership Deliver Sustainable Mutual Gains?

This article draws on two Irish case studies to examine the nature and outcomes of voluntary workplace partnership (WP), and the conditions affecting its durability. We found that WP delivered mutual gains for all stakeholders at Aughinish Alumina (AAL), which were quite equally divided. While WP delivered most gains for management at Waterford Crystal (WC), and some for the union, worker gains were less. The WC partnership broke down after 10 years, but the AAL partnership continues. Voluntarist mutual gains partnership is feasible, but success and durability depends on specific clusters of contextual conditions, notably management support, a quality‐focused competitive strategy, insulation from market pressures, union postures, vertically aligned bundles of mutual gains practices, institutional supports, emphasis on fairness, all party commitment to performance enhancement and capital‐intensive technology. Conditions supporting WP were stronger at AAL than WC. More generally, as supports for WP in Ireland are weaker than retardants, we conclude that few mutual gains partnerships will take root, and even fewer will endure.     

THE BALANCED CAPITAL STRUCTURE

At leading companies, financial executives are becoming business partners rather than just scorekeepers. In this environment, capital structure can be a source of competitive advantage, and financial strategy issues are critical: Should your company buy back shares or issue stock, grow internally or join the M & A boom, issue fixed-rate debt or stay floating? These decisions must be addressed one company at a time, balancing the competing priorities of cost, risk, and flexibility. The most important issue, target leverage, depends on the company's desired risk profile, growth plans, and debt cost considerations. But market conditions are also very important: Can the company access the equity market? How will a repurchase announcement be interpreted? Market conditions also affect the raising of debt capital. Rather than maintaining a constant mix of fixed- to floating-rate debt, companies should shift the mix during high- or low-yield environments. Many other financing issues will effectively be decided by market convention. For example, meeting a company's needs with respect to seniority, maturity structure, call flexibility, and financial covenants is often accomplished simply by choosing the market that most closely matches the firm's cost and risk preferences.     

The impact of state legislation on the organisation of trade unions: The case of the Botswana Federation of Trade Unions (BFTU) in Botswana

Labour legislation is the unique device governments use to lay down standards and conventions in the workplace and to control industrial relations. Using focused interviews with unionists, government officials, employers and other relevant parties, this field study investigated the way in which labour legislation in Botswana affects the organisation of the country's federation of unions. The findings indicate that the BFTU's organisation is affected by the Trade Union and Employers Organisation Act. In particular, the restric‐ tions in this Act separate policy and administration in the BFTU and this has had negative implications for the union's effectiveness. The fact that its policymaking body is part‐time negatively affects coordination, communication and cooperation processes in the BFTU. According to the Act, public sector workers are not technically employees and therefore cannot belong to unions. This gives the impression that the state is not particularly convinced about the benefits of unionisation. This may create a difficult environment in which the BFTU and other unions must operate.