Corporate Governance: the balance of power between stockholders and management

I examined 5 companies: IBM, Compaq, Unisys, HP and Oracle.

IBM, Compaq, Unisys, HP, and Oracle all pay attention to their stockholders. The board of directors of both Compaq and IBM are ranked as the 3^rd and 5^th best boards in the US respectively. In these companies, management power is stressed by the fact that there are only a few insider directors and the companies have established a record of good corporate governance.

Compaq was recognized for excellence by the Wharton School of the University of Pennsylvania. Only two of the ten directors of the board are insiders, and the others appear to be independent of the company. The Compaq Corporate Governance Committee has also played an important role in keeping the good relationship between the management and the stockholders. It is clear Compaq’s management is responsive to its stockholders.

When we turn our eyes to the CEOs’ compensations for our companies, the top managers have been compensated extraordinarily well over the past several years. In fact, it may appear at first glance that management neglected the stockholders to line their own pockets through misappropriating stockholders’ money. However, such compensations clearly come from the recent growth in earnings of the computer industry.

In the case of Hewlett Packard and Oracle, the balance is a little off. The management has strong power compared to the other companies. HP is a family owned company, while the CEO of Oracle is a cofounder of the company. It is doubtful that their corporate governances work as comparatively well here.

On the other hand, only with Hitachi, the largest electrical company in Japan, we see management and ownership that are very clearly separated. The board of directors consists of only insiders. The incumbent management is often observed in Japan, because Japanese companies usually hold their stocks only in each others’ companies. This is known as “keiretsu” where management cares only about how their own companies are run. Like other Japanese companies, Hitachi’s management appears not to be attentive to its stockholders.

From this analysis, there are some general characteristics we can draw from examination of the computer industry. Firstly, the larger the company, the more attentive it is to its stockholders. Secondly, in a fast growing company such as Oracle, it is usual to find that the CEO is generally the founder of the company. This kind of company gradually moves to the position of the larger firms such as IBM and Compaq, which become more attentive to the stockholders as they mature.

It is concluded that from our examples, the power between stockholders and managers are relatively balanced, with the one exception being Hitachi.