Book 2_Corp_CORPORATE GOVERNANCE: CONFLICTS, MECHANISMS, RISKS, AND BENEFITS Flashcards
The principal-agent relationship
- Refers to owners employing agents to act in their interests.
- Conflicts can arise because the agent’s incentives may not align with those of the owner
Corporate governance
- internal controls
- procedures of a company that delineate the rights and responsibilities of various groups
- how conflicts of interest among the various groups are to be resolved
The shareholder mechanism
Proxy voting
dual-class structure
different classes of common stock outstanding, some with more voting power than others
Activist shareholders
may engage in proxy fights or hostile takeovers
Creditor mechanisms
bond indentures and creditor committees
Employee mechanisms
labor laws and unions
the primary mechanism for customers and suppliers
Contracts
Governments mechanisms
Governments may enact regulations or appoint regulatory agencies
Stakeholder management
- the management of company relations with stakeholders
- and is based on having a good understanding of stakeholder interests
- and maintaining effective communication with stakeholders
Duties of a board of directors
Selecting senior management
Setting the strategic direction
Approving capital structure changes, significant acquisitions, and large investment
Reviewing company performance
Continuity of management and the succession of the CEO
Firm’s internal controls and risk management
The quality of the firm’s financial reporting and internal audit
The risks of poor governance
weak control systems, poor decision-making, legal risk, reputational risk, and default risk
Good corporate governance
improve operational efficiency and performance, reduce default risk, reduce the cost of debt, improve financial performance, and increase firm value.
