WSJ
WSJ
1. Under what conditions is holding a lot of cash necessary? When is it not?
The average ratio of cash to assets increases with time (Bates, Kahle, & Stulz, 2009). In the United States, the ratio doubled between 1980 and 2006. Holding large stash of cash enables firms to deal with its debt obligations using its cash holdings. The reason why firms increase cash holdings is that cash flows are becoming unpredictable, and, hence, riskier with the complexities that come with time and competition. In addition, corporations change. In the current scenario, they hold fewer receivables and inventories and have become research and development (R&D) intensive. Cash holding is a precautionary motive and is the reason that explains the increasing cash ratios witnessed in firms.
Business institutions hold cash to buffer themselves against adverse effects of shocks coming from cash flows. The European crises emphasize the need for cash holding. The economic crisis affected and continues to create shocks in cash flows of principle institutions. These institutions do not have cash reserves. This explains the bailouts as witnessed in the United States, in 2009 (James, 2009). It is essential to hold colossal cash reserves because of uncertainty and increasing risks. Other reasons are tax motive and transaction motive i.e. to offset the unexpected impact of tax and costs, respectively.
However, there are circumstances that do not warrant increasing cash reserves. An underperforming economy, unemployment, and other social problems require organizations and governments to increase spending.
2. Should at least 40% of board representation be women? Why? Should organizations be forced to appoint more women directors? Why?
Ms. Reding is a pioneer of the bill that requires 40% women representation of boards in European companies (Castle, 2012). According to her, European companies are unable to self-regulate because of the male domination. In the moment scenario, 3.2% of corporations have women as presidents and chairmen. Women occupy 13.7 % of the seats of various boards. This view is difficult to justify and needs time to analyze and achieve a fair female participation in corporate decision making on organization boards.
However, it is essential to create a platform that facilitates fair competition between women and men. It is unfair to rush appointment of persons into positions in the competitive business environment. People should gain positions on the basis of qualification and track record. Appointing persons without a fair formula into positions might jeopardize the company’s performance. It is a justified discussion, which requires adequate time to lay down the foundation for fair implementation. Women are dominant in middle level management positions and with time will gradually ascend to the top of the management pyramid. The crucial agenda is laying down the platform for equal participation in decision making and dealing with the barriers that prevent a balanced ascendance to power between men and women. It is not fair to impose sanctions because several countries cannot meet the threshold of 40% as it stands. There is a need for a gradual approach so that these countries can effectively cope with the expectations. It is vital to consider the future because it is an expectation that the gender ratio will shift to favor women.
3. How should the Chief Executive Officer compensation be measured? Why does it matter? To whom does it matter exactly?
Alignment of incentives of corporate executives with the interest of shareholders is a key mechanism for corporate governance. In addition to salaries, compensation awarded to the chief executives is in the form of bonuses, option grants, restricted stock grants, and other forms of cash compensation. In addition, executive managers receive additional incentives in the form of equity holdings. The basis for measuring the compensation awarded to the chief executive officers include the size of the corporation, the relative risk of the sector under which the corporation falls. In addition, the performance of the organization in the stock market is another essential element of measurement.
Others include the capital and debt ratio, and corporate social responsibility performance. It is necessary to measure the chief executive officer’s compensation against performance. This ensures that the executive receives pay commensurate with the market expectation. In this case, it acts as a motivational factor for the executive and so drives performance. Measuring the chief executive officer’s compensation is vital to the shareholders, particularly, the investors. This is because the shareholders expect that managers utilize their investments prudently so that the company gets the high value of their investment, in the form of improved market performance and financial returns.
References
Bates, T., Kahle, K., & Stulz, R. (2009). “Why Do U.S. Firms Hold So Much More Cash Than They Used To? The Journal of Finance, LXIV (5): 1985-2020.
Castle, S. (2012). “European Plan to Put More Women on Boards Runs Into Opposition”. The New York Times, September 17, 2012.
James, H. (2012). “Europe’s plan A for a Monetary Union may hold the answer to the euro crisis”. Wall Street Journal, November 12, 2012.
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