1. Nature and Significance Flashcards
What is Corporate Governance - what happens in a modern corporation?
- In modern corporations (PLC), senior executives manage firms on behalf of shareholders.
- Must consider if they serve shareholder interests or their own interests - Principal-Agent problem
What is corporate governance - Shareholder Interests
- Assumed the single objective of shareholders is to maximise shareholder value.
- Senior execs might use firm resources to benefit themselves, not maximise shareholder value.
What is corporate governance - literature
- Adam Smith: Wealth of Nations 1766
- Managers not expected to be as vigilant in their stewardship of the firm if they have no ownership interest.
- Negligence and profusion prevail in the management of the joint stock firm.
Corporate Governance - Where does modern interest stem from?
- Berle and Means 1932
Corporate Governance - What does Berle and Means 1932 say about CG?
- Corporate law separates ownership and control.
- Should we assume those who control joint stock firms will operate them in shareholders’ interests?
- Disperse ownership structure means shareholders lack financial incentive to monitor managers.
- Owners of joint stock companies provide how a managerial elite exercises power.
Corporate Governance - Joint Stock Company Definition
- Company who’s stock is owned jointly by the shareholders.
Corporate Governance - Picture before 1990s
- Debate emerged concerning the weakness of the Anglo-American corporate form.
- Shareholders are considered to have weak incentives to monitor management.
Corporate Governance - Definition
- Formal system of accountability of senior management to firms’ shareholders.
- Executive Compensation
- Board of Directors
Executive Compensation - CEO Pay in FTSE 100 Firms Trends
- Mean pay is returning towards Pre-Covid levels.
- Median pay higher than the previous high level in 2018.
- Median CEO to employee pay 2nd highest level in 2022 to 2018.
Executive Compensation - Questions on Executive Pay
- Do executive pay motivate managers to maximise firm value
- Do senior executives earn their pay
- Should we focus on structure, not level of pay.
Board of Directors - What are their jobs?
- At the apex of the firm’s internal control system.
- Directors have a fiduciary duty to shareholders and the firm.
- Hire and fire senior executives.
- Monitor senior executives performance.
- Set executive pay
- Do board characteristics impact on the board effectiveness and firm performance.
Corporate Restructuring - Definition (Def 1)
- Hoskisson and Turk 1990
- Defined as a major chance in the composition of a firm’s assets combined with major changes in its corporate strategy.
Corporate Restructuring - Definition 2
- Thompson and Wright 1995
- Involves simultaneous changes in the ownership, financial structure and incentive systems of the firm.
Nature of Corporate Restructuring - 3 Categories of Restructuring
- Portfolio restructuring
- Financial restructuring
- Organisation restructuring
Portfolio Restructuring - Definition
- Changes in the mix of assets or lines of business.
Portfolio Restructuring - Types
- M&A/Takeover
- Divestment
- Do shareholders benefit from M&A?
- Drivers of M&A and divestment?
Financial Restructuring - Definition
- Changes the capital structure of a firm.
- LBO
- Leveraged Recapitalisation
- Causes and consequences of Leveraged Buyouts? (LBO)
- Motives?
Organisational Restructuring - Definition
- Changes the organisation structure.
- ## Divisional Design & Downsizing
Organisation Restructuring - Motives?
- Align company structure with strategy
- Change the incentive structure within an organisation.
Global M&A - Trends
- Number of M&A’s at their lowest point since 2013 in 2022.
- Value of M&A’s at their lowest level since pre-covid
M&A Activity - Big Deals
- Largest ever deal: Vodafone M&A of Mannesmann, $202.7b in 1999
- Largest deal in 2022: Microsoft Acquisition of Activision $68.7b - Competition issues
Oliver Hart Shareholder Primacy - Thoughts on Shareholder Primacy Critique
- Challenges traditional focus on shareholder interests.
- Argues for a more balanced approach, considering all stakeholders.
Oliver Hart Shareholder Primacy: Thoughts on Stakeholder Inclusion
- Advocates for inclusion of employees, customers and community.
- Stresses importance of balancing stakeholder interests.
Oliver Hart Shareholder Primacy: Long-term Perspective
- Emphasises need fro long-term view over short-term profits.
- Believes in benefits for sustained value creation.
Oliver Hart Shareholder Primacy: Corporate Purpose
- Notes a shift towards socially responsible corporate purpose.
Oliver Hart Shareholder Primacy: Legal and Regulatory Changes
- Highlights the role of legal changes in supporting inclusive governance.
- Advocates for regulations fostering societal impact consideration.
Oliver Hart Shareholder Primacy: Adaptation to Modern Challenges
- Encourages adaptation to modern challenges
- Acknowledges environmental, social, and technological concerns.
