Social Force at Work
The Collapse of an American
Corporation
New Economic
• The world economy change by
internet revolution
• One of notorious rise and fall was
that of Enron.
• In 2000 Enron’s market capitalization
was more than $60 billion
• 2001 the firm field for bankruptcy.
Corporate Board
• Corporation is a legal entity separated
from its founders or owners
• No corporation is truly immortal
– It limit the ability of a state to interfere with
the business of a corporation
• Corporate have external and internal
constrain.
• External force in US is the Securities and Exchange
Commission
Benfits of Corporate Board
• Advise and counsel executive and
provide discipline to manager.
• It is often difficult to monitor managers
directly.
• Most board are combinations of insider
and outsider
– Inside directors are manager or executive
of company.
– Outside directors are not employees
Outside Directors
• After the corporate scandals of recent
year, policy ensuring that board have
majority of outside directors has been
advocated.
• Relationship between board
composition and firm performance is
challenging because independence in
fundamentally unobservable.
It’s a Small World
• Corporate boards should have majority
of outside director
• However, outside directors sometime
seem to disregard the interest of the
firm’s owners.
• The world of corporate directors is even
smaller.
• Many of them are interlocked there
are overlapping board membership
Directors, Compensation, and
Self-Interest
• The small world corporate directors means
that managerial innovations can be spread
rapidly.
• The most important decision a corporate
board makes is the CEO’s compensation.
• Some expressed concern that top executive’s earning
are going through the roof and reducing the
shareholder welfare.
• In some cases, it may be that directors who
put their interest ahead of shareholder are
purely self-interested.
Directors and Loyalty
• It’s possible that directors are prone to
misplaced loyalty.
• People will sometimes disregard their
conscience when a person of authority
call for action.
• Loyalty may have important
consequences in the boardroom if
directors are prone to blindly follow
the CEO.
Analysts
• Professional security analysts
– Information intermediaries
– Consider information from financial statements,
trade show, the press, conversation with
corporate executive, and other insider.
• Types of professional analysts
– Sell-side analysis; employed by brokers, dealers,
and investment bank.
– Buy-side analysts; employed by large money
management firm, including mutual and hedge
funds and insurance company.
– Independent analysts; not associated with any
large investment or money management firm.
• Performance Security Analysts
– The analysts are too optimistic
– Focus on sell-side because buy-side
analysts not available to public.
– Clear conflict of interest provides likely
source of sell-side analysts.
• Do Analyst Herd
– Conflict of interest just describe,
analysts’ decision may be affected by
social forces.
– Herding, or convergence in behavior,
among investors is often proposed as an
explanation for large swings in market
prices.
ENRON
• Formed in 1985 by Kenneth through the
merger of natural gas pipeline.
• In 2000, Enron stock trade at $90.75 per share
• In end 2001 the firm’s totally bankrupt.
• Directors of Enron seem to rubber-stamp
anything management brought before them
• Their compensation was highest in the US
• 15 external directors served among them.
• We do not sure that they truly independent.
The Analysts
• During bankruptcy, they continued to
be optimistic about the firm.
• They recommended buy or 1.9,
where 1= strong buy and 5= strong
sell.
• They optimistic because of the large
investment banking fess generated
by Enron
Other Player in Enron’s
Downfall
• The mania of the dot-com run-up in
stock prices.
• Investors seemed to focus entirely on
short-term gain.
• Enron’s Auditor, Arthur Anderson, too
readily accepted Enron’s business
model and method of accounting.
• 2002 Anderson official were found
guilty of obstructing justice.
Organization Culture and
Personal Identity
• Everyone love Enron.
– Many analysts and investors remained optimistic
about the firm.
• The firm have a unique culture.
– The employees were loyal to the firm
– They though that the firm was invincible
– However, loyalty to an organization can be even
more dangerous than loyalty to a person.
• The lesson by the fall of Enron is that it is
important to any person in any organization to
keep separate identity.
