(34) Corporate Governance and ESG: An Introduction Flashcards
LOS 34. a: Describe corporate governance.
Corporate governance refers to the internal controls and procedures of a company that delineate the rights and responsibilities of various groups and how conflicts of interest among the various groups are to be resolved.
LOS 34. b: Describe a company’s stakeholder groups and compare interest of stakeholder groups.
The primary stakeholders of a corporation include shareholders, the board of directors, senior management, employees, creditors, and suppliers.
LOS 34. c: Describe principal-agent and other relationships in corporate governance and the conflicts that may arise in these relationships.
The principal-agent relationship refers to owners employing agents to act in their interests. Conflicts can arise because agent’s incentives may not align with those of the owner or, more generally, because the interests of one group within a corporation are not the same as those of other groups.
LOS 34. d: Describe stakeholder management.
Stakeholder management refers to the management of the company relations with stakeholders and is based on having a good understanding of stakeholder interests and maintaining effective communications with stakeholders.
LOS 34. e: Describe mechanisms to manage stakeholder relationships and mitigate associated risks.
The management of stakeholder relationships is based on a company legal, contractual, organization, and government infrastructures.
LOS 34. f: Describe functions and responsibilities of a company’s board of directors and its committees.
The duties of a board of directors include:
- Selecting senior management, setting their compensation, and evaluating their performance.
- Setting the strategic direction for the company.
- Approving capital structure changes, significant acquisitions, and large investment expenditures.
- Reviewing company performance and implementing any necessary corrective steps.
- Planning for continuity of management and the succession of the CEO.
- Establishing, monitoring, and overseeing the firm’s internal controls and risk management.
- Ensuring the quality of the firm’s financial reporting and internal audit.
LOS 34. g: Describe market and non-market factors that can affect stakeholder relationships and corporate governance.
Factors that can affect stakeholder relationships and corporate governance include:
- Communication and engagement with shareholders
- Shareholder activism
- Threat of hostile takeover and existence of anti-takeover provisions.
- Company’s legal environment.
- Growth of firms that advise funds on proxy voting and rate companies’ corporate governance.
LOS 34. h: Identify potential risks of poor corporate governance and stakeholder management and identify benefits from effective corporate governance and stakeholder management.
The risks of poor governance include weak control systems, poor decision making, legal risk, reputational risk, and default risk.
LOS 34. h: Identify potential risks of poor corporate governance and stakeholder management and identify benefits from effective corporate governance and stakeholder management.
Good corporate governance can improve operational efficiency and performance, reduce default risk, reduce the cost of debt, improve financial performance, and increase firm value.
LOS 34. i: Describe factors relevant to the analysis of corporate governance and stakeholder management.
Elements of corporate governance that analysts have found to be relevant include ownership and voting structures, board composition, management remuneration, the composition of shareholders, strength of shareholder rights, and management of long-term risks.
LOS 34. j: Describe environmental and social considerations in investment analysis.
The use of environmental, social, and governance factors in making investment decisions is referred to as ESG integration or ESG investing. Many issues can be considered in this context, including harm or potential harm to the environment, risk of loss due to environmental accidents, and changing demographics of the workforce, and changing worker preferences.
LOS 34. k: Describe how environmental, social, and governance factors may be used in investment analysis.
Methods of integrating ESG concerns into portfolio construction are negative screening, positive screening, impact investing, and thematic investing.
LOS 34. k: Describe how environmental, social, and governance factors may be used in investment analysis. Negative screening
Negative screening is when certain companies and certain sectors are excluded from portfolios.
LOS 34. k: Describe how environmental, social, and governance factors may be used in investment analysis. Positive screening
Positive screening is when no specific sectors are excluded from portfolios, but investors attempt to identify the companies with the best practices across environmental sustainability, employee rights and safety, and overall governance practices.
LOS 34. k: Describe how environmental, social, and governance factors may be used in investment analysis. Impact investing
Impact investing refers to investing in order to promote specific social or environmental goals. This can be an investment in a specific company or project. Investors seek to make a profit while, at the same time, have a positive impact on society or the environment.
