CHAPTER THIRTY-FOUR CONTROL , GOVERNANCE, AND FINANCIAL ARCHITECTURE Corporate control means the power to make investment and financing decisions. A hostile takeover bid is an attempt to force a change in corporate control. In popular usage, corporate governance refers to the role of the board | Brealey-Meyers Principles of Corporate Finance Seventh Edition X. Mergers Corporate Control and Governance 34. Control Governance and Financial Architecture The McGraw-Hill Companies 2003 CHAPTER THIRTY-FOUR CON R O L GOVERNANCE AN ARCHITE 962 Brealey-Meyers Principles of Corporate Finance Seventh Edition X. Mergers Corporate Control and Governance 34. Control Governance and Financial Architecture The McGraw-Hill Companies 2003 FIRST SOME DEFINITIONS. Corporate control means the power to make investment and financing decisions. A hostile takeover bid is an attempt to force a change in corporate control. In popular usage corporate governance refers to the role of the board of directors shareholder voting proxy fights and to other actions taken by shareholders to influence corporate decisions. In the last chapter we saw a striking example Pressure from institutional shareholders helped force AMP Corporation to abandon its legal defenses and accept a takeover. Economists use the term governance more generally to cover all the mechanisms by which managers are led to act in the interests of the corporation s owners. A perfect system of corporate governance would give managers all the right incentives to make value-maximizing investment and financing decisions. It would assure that cash is paid out to investors when the company runs out of positive-NPV investment opportunities. It would give managers and employees fair compensation but prevent excessive perks and other private benefits. This chapter considers control and governance in the United States and other industrialized countries. It picks up where the last chapter left off mergers and acquisitions are after all changes in corporate control. We will cover other mechanisms for changing or exercising control including leveraged buyouts LBOs spin-offs and carve-outs and conglomerates versus private equity partnerships. The first section starts with yet another famous takeover battle the leveraged buyout of RJR .
