Shareholders' defensive security shares
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Dan Palmon received his PhD in Business Administration, with specialisation in Accounting and Finance, from New York University’s Graduate School of Business Administration in 1974. He is the Chair of the Accounting, Business Ethics, and Information Systems Department at the Business School of Rutgers University. Prior to joining Rutgers, he was on the faculties of Columbia University and New York University. His research interests include financial reporting, taxation and stock prices, and insider trading. His publications appear in leading accounting and finance journals such as The Accounting Review, Journal of Accounting Research, The Journal of Business, and the Journal of Banking and Finance. He has served as a member of the Board of Directors and as the Chair of the Audit Committee for several corporations including: E-II, Faberge/Elizabeth Arden, McCrory Corporation, and Rapid-American Corporation. In addition, he served as a member of the Investment Policy Committee of McCrory Stores Pension Plan and Schenley Industries Pension Plan. Fred Sudit is Professor of Accounting, Business Ethics, and Information Systems at the Rutgers Business School. He has been consulting and conducting research in the fields of corporate governance, business ethics, insurance of financial disclosures, continuous auditing and reporting, public utility regulation, cost and quality management and productivity analysis.
ABSTRACT KEYWORDS: executive compensation, executive pay, Sarbanes–Oxley, defensive securities, shareholders, corporate governance The purpose of this paper is to explore the possibilities and merits of offering shareholders an equity instrument
© 2007 Palgrave Macmillan Ltd. 1741-3591 $30.00
(new class of common shares) designed to protect their investments from managerial opportunism. To this end, we propose a special class of shares, the Shareholders’ Defensive Security Shares (SDSS), which would oblige Boards of Directors to declare a pre-specified extra dividend whenever executive pay exceeds a contractually pre-determined threshold. SDSS could be extended into a larger class of Defensive Security Instruments (DSI) that includes regular bonds, convertible bonds, and preferred stocks. We argue that this defensive equity, the Shareholders’ Defensive Security, or SDSS, could be beneficial to managers as well as shareholders. What’s more, the use of SDSS is completely voluntary and requires no additional regulation.
International Journal of Disclosure and Governance (2007) 4, 195–203. doi:10.1057/palgrave.jdg.2050061 INTRODUCTION
We are motivated to propose a new type of security which we suggest to name: ‘Shareholders’ Defensive Security Shares’ in an effort to mitigate the precarious position of shareholders in modern capitalism. Shareholders are officially the owners of corporations, and the managers whom they ‘hire’ are supposed to be their agents. In practice, boards of directors hire managers. The presumed power of shareholders to change or replace boards has sustained a lame and misleading notion of the moder
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