Ch 2, 11, 13, 14 Flashcards
what is the alternative viewpoint to shareholder primacy
A corporation should exist not only to increase value for shareholders but also to address
the needs of other stakeholders
what are three names used to address the ideas that promote stakeholder primacy
- SRI – Socially Responsible Investing
- CSR – Corporate Social Responsibility
- ESG – Environmental, Social and Governance
what are hte 5 pressures that have contirbuted to the development and incorporation of ESG
- money flowing into sustainable/ESG investment funds
- ESG related shareholder proposals
- Big institutional investrors such as blackrock have advocated for it
- ESG metrics are being used to rate corporation and stakeholder interaction
- Employee activism
related to the business round table, what was said in relation to the purpose of a corporation (5)
- deliver value to customer
- invest in our emloyees
- deal fairly and ethically with our suppliers
- support communities in which we work
- generate long-term value for shareholders
in what case were stakeholders’ interests addressed in canada
addressed in hte BCE case which created a binding legal precedent
what was considered in the BCE case when a conlcusion was made
the directors should conider the interests of hareholders, employees, creditors, consumers, governments and the environment to inform their decisions
bill c-97 was passed in canada and stated that directors are not limited to acting only in the best intersts of _______ but should also consider the intersts of _________
shareholders, stakeholders
a legal implication in hte US was the delaware law, what was the main idea in this?
directors must make shareholder
welfare their sole end, and that other interests may be taken into account
only as a means of promoting shareholder welfare
what was the opinion of skadden arp, a big US law firm on the Delaware law
the shareholder primacy path does not stop a for profit company in taking interest in social issues as song as those social issues come second to shareholder value maximization
do erliable metrics exist in assessing stakeholder innitiatives and their effectiveness
no
what is the greatest challenge directors face in reporting over ESG
lack of uniform disclosure standards
what are some additional disclosures taht companies prepare for esg at a lack of uniform standards
- sustainability reports
- human capital reports - diversity
- climate chage impact reports
who else might provide stakeholders and shareholders with information or rankings on company’s ESG?
aggregators such as
- bloomberg
- corporate responsibility mag
- ethisphere institute
- furtune
- newsweek
what are three companies that issue esg ratings
- HIP human impact + profit
- TruValue Labs
- Sustainalytics
what does the HIP human impact + profit analyze
32 esg factors such as CEO pay, emissions, gender diversity
what does truvalue tabs analyze
evaluates on 26 dimensions through AI technology
what does sustainaltics analyze
corporate governance risk, material ESG issue risks, and idiosyncratic ESG issue risk
what are 8 issues with ESG ranking and ratings
- no uniform standards
- information is volunteered by companies, not uniformly disclosed
- how is weighting of importance determined
- no clear relationship between ratings and stock perfromcne
- different methodologies of rankinng
- making qualitative factors, quantitative
- no audits
- tying it to executive compensation makes it more of an issue
what are 3 governance ratings methodologies
- institution of shareholder sevices
- MSCI ESG Gov metrics
- MSCI ESG AGR model
what does the institution of shareholder sevices do
scores companies out of 100 on 65 variable put into 8 categories of
- Board of Directors,
- audit, charter and bylaws,
- state in incorporation,
- executive and director compensation,
- qualitative factors,
- equity ownership by management
- Board and director education
what is the MSCI ESG Gov metrics
scores companies on 96 dimensions which are placed into 4 pillars of:
- board
- compensation
- ownership and control
- accounting
what is the MSCI ESG AGR model
the Accounting and Governance Risk model is a rating system based on financial reporting methodolgy and audit integrity whcih measures variation in reporting
scores companies as very aggressive, aggressive, average or conservative
has ceo activism increased in recent years and on which companies is it concenntraed
yes and it is concentrated among the largest US companies
what is the issue with CEO activism
it is a double edged sword depending on what the CEO is advocating for
what does the public beleve the CEO should advoate for
- environment
- health
- pverty
- taxes
what does the public beleve the CEO should NOT advoate for
- gun control
- abortion
- politics
- religion
corporate debt creates what?
ways in which corporates are monitored
what 3 types of monitoring come from corporate debt
- disciplinary mechanism
- monitoring by institutional lenders
- monitoring and debt rating from credit agencies
Managers of firms with substantial cash flows and little debt have less or more consequences over their mistakes?
less
describe how debt is a disciplinary mechanism
- having no debt makes you complacent, and forcing a firm to take on debt battles this
- having debt means a firm has to make periodic interest payments. this fixed obligation imposes disclipline on the managemtn
- interest payments also discourage excessive expenditure to that is to the discreeion of managemnt
- the creditor can use the court system if payments are not made
- debt contracts require collaterals by the borrowers
- debt contracts have covenants that if broken require the firm repay the principal immediately
which offers better protection to investors, equity or debt?
defenitely debt
how can debt be negative for a firm
it restricts managemnt from being flexible to spend when an opportunity suddenly arises
lists 2 ways institutional lenders such as banks are corporate monitors
- firm will get favorable interst rates when it discloses private information
- firm will agree tto numerous covenants to get favorable loan
what 2 variable is the expected cost of bankruptcy based on
- the actual cost of going bankrupt
- the probability of bankruptcy, which will depend upon how uncertain you are
about future cash flows
what are the direct and indirect costs of going bankrupt
- direct - legal and other deadweight costs
- indirect - costs arising because peple believe you will go bankrupt
cresitros might be seen as investeors into the company, but htey are actually not - why is that and what does taht mean regarding their intersts
they are not investors, they are technically lending money to hte stockholders that are owners ot teh company - thus they have different objectives for hte firm
what 2 differing objective cause the agency cost of debt between stockholders and creditors
- You (as lender) are interested in getting your money back
- Stockholders are interested in maximizing your wealth
stockholders want to invest in _______ projects, and pay themselves _______
risky and dividends
how do agency costs show up
if bondholders expect shareholders to act in self serving ways they will take into consideration and increase the price of the bonds in hte market
covenants written in protect bondholders, but cause the 2 follwoing underlying costs
- direct cost of coventants increases as they become more restrictive
- indirect cost of lost investment aht would have been taken on were it not for costly debt
what is a credit rating agency
a company that assesses the financial
strength of companies and government entities, especially their
ability to meet principal and interest payments on their debts.
what do teh raitings assigned from agencies show
an agency’s level of
confidence that the borrower will honor its debt obligations as
agreed.
what role do credit agencies play in corporate governance
- help investors sift through a lot of infomation
- provide detailed reports that highlight risks
- play a monitoring role in tracking the performance of compnies
- outlining hte risk involved with lendign to a specific place
what are investment grade bond lettering
- AAA down to BBB
what are specualtive grade bond lettering
- BB down to C
what is a junk bond
debt that has been given a low credit rating by a ratings agency, below investment grade.
junk bonds are also called ____ yield bonds because
beause they are such high risk, the investors are compensated with higher interest rates
S&P, Fitch and moody’s provide what for bonds
ratings
what 4 components doe the s&P provide governance scores on
- Ownership structure and influence
- Financial stakeholder rights
- Financial transparency and information disclosure
- Board structure and process
how are equity analysts an additional external governence mechanism
look at a firm’s operating and financial conditions, the firm’s
immediate and long-term future prospects, the effectiveness of its
management team, and the general outlook of the industry and give their recomnedations
what 5 factors affect the busubninss environemtn in different countries
- Efficiency of local capital markets
- Protections afforded by legal system enforcement
- Reliability of accounting standards
- Enforcement of regulations
- Societal and cultural values
When capital markets are efficient, prices (labor, capital, and natural resources) are what and what does this improve
they are “correct” thus improvign decision making
how do efficient markets discipline corporations (4)
- Poor decisions are punished.
- Stock prices decline.
- Cost of capital increases.
- Risk of bankruptcy or being taken over increases
efficient markets protect against 2 specified things
adverse selection and moral hazard
based on a Cosset, Some, and Valery (2016), the impact on efficient markets on corporate governance is what and why
firms competing in highly competitive industries have
higher corporate governance ratings than those in less competitive
industries
because competition heightens the need for companies to
demonstrate governance quality in order to obtain external financing
if a country lacks efficeint markets what 4 things might take its place and do they also discipline?
- Wealthy families
- Large banking institutions
- Other companies
- Governments
they also discipline to protect their investments
what sort of business groups are prevelent in weaker capital markets
family business groups
what positives does a legal system offer to businesses
- Protection of property against expropriation.
- Predictability of how claims will be resolved.
- Enforceability of contracts.
- Efficiency and honesty of judiciary.
is a stron legal system able to mitigate agency costs?
yes
what happens to the stock of firms that operate in coutniees that protect minority interests in sotkc
they are higher
if a legal system is corrupt, what can be disciplinary methods
- enforcing contracts through threats
- having directors on suppliers or customrs board
what do accounitng standards give to investors
confidence that financial reports
are correct and can be relied upon to evaluate risk and reward
inaccurate information and low levels of transparency can lead to what in capital markets
poor decision making and reduce the efficiency of capital markets
Regulatory enforcement signals what when it comes to mangers
management is being
monitored, which contributes to investor confidence that their
interests will be protected
in high enforcement of regulation, companies apply more leninet or conservative accounting practices ?
conservative
Executives in a country that values “individualism” may be more likely to what and why
ake self-interested actions than executives in a country that values “collectivism,” because they will not face the same level of societal scorn
in US investors interst are protected by
Securities and Exchange
Commission
in US governance tandards are established by
- Exchange listings (NYSE, NASDAQ).
- Legislation (Sarbanes Oxley, Dodd Frank)
is US share or stake holder centric
shareholder
is UK share or stake holder centric
shareholder
what are 6 government standards reccomended in UK by “UK Governance Code”?
- Separation of chairman and CEO roles
- Senior independent director
- Independent board and committees.
- Board, directors, and committees subject to an annual review.
- Emphasis on transparency of procedures and decisions.
- Maintain sound internal controls.
companies in UK abide by a comply or ______ expalin
explain
germany has what kind of board
2 tier board
Under the German Corporate Governance Code, a
company that has at least 500 and at least 2000 employees must allocate how much labour/employee representaitves on its supervisory board
- at least 500 = 1/3
- at least 2000 = 1/2
the 2 tiered borad in germany is composed of 2 boards, what are they and what doe htey do
- Management board: “runs the company”
- Supervisory board: “oversees the company”
what is co-determination
having 50% labour representatives on the supervisory board
A system that balances employee and shareholder interests
who appoints mebers to the managemnt board in germany
the supervisory baord
who are some memebrs included in a supervisory board
founding family members, financial institutions, retired
management,
banks in germany excercise how much power
they can excercise significcant power
in germany shareholder voting rights are _______
limited
whp traditionally has significant ownership and influence in german companies
founidng family mmebers and german financial instituteions
in WW2 era germnay used rely heavily on bank financing and allow owenrhsip in business as collateral. rescently this trend has
gone down
japan is share or stake centric?
stakeholder centric
Keiretsu in japan represented what
strong interconnections betweeen customers, suppliers, affiliates, and financiers
in 2002 japan adopted a law that shifted its government which way and and allowed what
- more wester style of governance
- allowed the firms to chose if htey wanted to follow Keiretsu
china has a partial trnasiton from what to what
communism to capitalism
how much foreign ownership does china have
very little
who are the shares issued by chinese companies held by
- the state
- the founders and employees
- the public
what are the trhee types of shares held by hte public in chinese companies
- A shares - domestic investors in domestic currecny
- B shares - domestic investors in foreign currency
- H shares - foreign investors in HK dollars
individual shareholder in china have what ssize of ownership and how much voting power
minor in both
what is the chaebol in Korea
a “financial house” that has groups of affiliated companies controlled by a powerful group of chairmen taht essentially make authorittive decisions on all investment and activities
since the 1977 asian financial crisis the Korean government
- elimated the practice of transferring funds between Chaebol
- boosted board independence
- granted greater minority shareholder rights
t/f, historically india has had a nationalised financed sector
T
in 1998 the cofederation of indian industries created a
corporate governance code
what did clause 49 do in india
set governance standards for
all companies listed on the Indian Stock Exchange
what are hte clause 49 requiraments in india
a majority of nonexecutive directors,
- Chair requirements, directors can serve on no more than 10 board committees,
- audit committee required,
- CEO and CFO certify financials
- restrictions on related party transactions and disclosure requirements
what are the remaining negatives in indias economy
inefficient capital markets
- restrictions on foreign investment,
- wealthy families dominate the economy owning
approximately 45% of the equity value of all Indian Companies
brazil has what levels of transparency and disclosure
low
brazil have only what percentage of indipendant directors
20%
the disclosure rule prevents what from being known in brazli
the idenpendence of directors
what 2 types of shares do brazilian firms issue
- common shares with voting rights
- preferred shares with no voting rights
what 3 equity excahnges does brazil have and what does the last one have
- nivel 1
- nivel 2
- nuovo mercado - has most stringent listing requiraments
nuovo mercado stocks _______ stocks in Nivel 1 and 2
outperform
russian boards contin mostly
insiders
legal protection for shareholders and capital markets in russia are
weak and inneficient
the russian govenrent does what to promote its own intersets
intervene in private business
what is the market for corporate contro;l
a market of owners seeking to acquire undervalued firms and earn above-average returns on their investments
Need (for external mechanisms) exists to
- address weak internal corporate governance
- correct suboptimal performance relative to competitors, and
- discipline ineffective or opportunistic managers
according to Henry manne, the lower the stock price than it should be
he more attractive the takeover becomes to
those who believe that they can manage the company more
efficiently
what 5 types of sales are there in markets for corporate control
- Merger
- Friendly/Negotiated Takeovers (BofD is open to offers)
- Hostile Takeovers (BofD resists acquisition)
- Leveraged Buyouts (LBOs)
- Management Buy Out (MBOs)
what are the 6 strateguc reasons for an acqusiition
Financial synergies
Diversification
Change in ownership
Economies of Scale
Economies of Scope
Human Capital or Intellectual Property
what is the financial synergy strategy
acquiring firm believes it can increase profits
through revenue improvements, cost reduction, or vertical
integration.
what is the change in ownership strategy
New owner group might have superior access
to capital, managerial expertise, technology or other resources. This
is the logic behind a private equity buyer
what is the economies of scope strategy
Savings from utilizing the marketing and
distribution capabilities for a broader product offering.
what are 4 non-strategic acquisiton reasons
Empire building
Hubris
Herding behavior
Compensation incentives
what is the hubris non-strategic reason
Overconfidence on the part of management that it can more
efficiently manage a target than current owners can
what is teh herding behaviour non-strategic reason
The senior management of one company pursues
an acquisition because its competitors have recently completed
acquisitions.
what are hte 3 takeover processes in canada
- Merger
- Solicited Takeover (Negotiated/Friendly)
- Unsolicited Takeover (Hostile) – BofD resists the deal
does the acquiror or the target have a more complex process
the target
what is the 3 steps in acquiror process
- board approval
- valuation work
- fairness opinion from investment bank
describe the takeover process for a merger
Negotiated by both management teams
4. Supported by both Board of Directors, with fairness opinions in
order to fulfil the respective Boards fiduciary responsibilities
5. Approval by shareholders via a proxy vote
6. Shareholders of merged companies offered equivalent holdings
(shares) in new company
7. Small to no premium versus prior market price
8. Management teams usually combined
9. Existing shares delisted and replaced with new shares in the
combined company
what is the process for a solicited takeover
- Target (Seller) requests bids through a broad or narrow auction
process, run by an investment bank - Auction fulfils the Board’s fiduciary duty (looking for the best offer)
- Management negotiates with one or more Bidders/Acquirors
- Target Management receives compensation (Golden Parachutes)
- Board accepts and recommends the bid providing the greatest
shareholder value – mails Board Circular - Shareholders vote to accept or not
what is the process for an unsoclicited takeover
- Bidder makes offer directly to shareholders against the wishes of the
Target’s management or Board. - Target management and Board usually rejects bid after evaluating it and
may deploy Takeover Defenses – White Knight search, Poison Pills etc. - Target must legally supply Bidder with shareholder list so that Bidder can
mail offer directly to shareholders. - If successful Bidder takes over corporation – delist stock, corporation
usually becomes a wholly owned subsidiary, fires management and
replaces the Board. - If it appears the bid will be unsuccessful the Bidder can raise its offer
and/or negotiate a higher price and terms in order to turn the deal
Friendly
in canada the BCE case establlished prescedent regarding a boards duty in a take over, the 3 points being
- The director’s fiduciary duty is owed to the corporation as a whole rather than interests of any particular shareholder
- Directors have a duty to understand other stakeholders and their interests
- The case affirmed the “Business Judgment Rule” as it applies to directors
In the U.S. Boards must respond to judicial scrutiny, commonly
referred to as the “Revlon duties” and the “Unocal case”, what are they
- Revlon duties - if a change of control is going to occur then directors must seek highest value for shareholders
- Unocal case - when a board takes defensive actions, the actions cannot be coercive or designed to preclude a deal
when would a hostile takeover be considered hostile
- if the board rejects it and the bidder continues to pursue it
- if the bidder makes an offer wihout first informing the baord
what is a major issue for the acquiror in a hostile takeover
lack of inside information thus lack of capability of valuation
why might management resits takeover bids
- Increase the purchase price (Shareholders’ Interests Theory)
- Ensure their longevity with the firm (Management Entrenchment Theory)
can a takever reduce agency costs?
yes
what are typical characterists of a target firm
- Weak financial performance
- a stock that has significantly under performed the peer group over the previous 2 years
- managers who hold little or no stock in the firm
- Underutilized assets that are not readily apparent
- Low debt levels
- In an industry with heightened merger activity
in other words, the best defense against takeover is to run your firm well and earn goo returns for your investors
why are hostile takeovers less common now
- damage reputation
- hostiles are more expensive due to premium
- too many effective defenses
- initial bidder usually loses th battle to a white knight bidder found by the Target
- post deal integration is a problem
- lack of internal information makes it riskier for acquiror
markets expect the incremental value of an acquisition to flow to the ______ rather than to the ______.
target, acquirer
the target receives double-digit takeover premium offer in what kind of transaction
friendly
the target receives greater return in what deal rather than friendly and by how much
hostile, which jumps from 20% friently to 30-35 hostile
do all cash deals experinece greater returns for the target?
yes
does the acquiror experince any excess returns afte the bid
no, might even range from a bit positive to negatie
what returns does the acquiror shares experience in hostile takeover
negative excess returns
what returns does the acquiror shares experience in equity-financed takeover
even more negative than hostile
does the acquiror realize less value than expected after a merger/takeover
yes
what negative effects happen to the acquiror after hte takeover
- Underperforms peers on a 1-3yr basis.
- Performs worse if acquisition is financed with equity.
- Decreases investment in working capital and cap ex.
why are acqusitions hihgly disruptive (2)
- require significant management attention.
- They lead to elevated turnover rates for up to 10 years following
consummation of the deal
anti-takeover defense are designed to
- give comapny time to persue value creation
- enhance bargaining power to secure a higher bid
- raise the overall cost of the takeover to the Acquirer’s shareholders
- Increase the time required for the Acquirer to complete the transaction to
give the Target additional time to develop an anti-takeover strategy.
describe the poison pill defense
grants holders of the company’s shares the right to acquire additional shares at a deep discount to market (e.g., $0.01 per share). this will flood the market and make it too expensive for hte acquiror
in dual class shares, the differnce between the economic interest and voting interest is know as the ______
wedge
comapnies with dual class shares are more likely to have _______ goernance quality
lower
what is a White Knight
Search for a “friendlier company” to acquire the Target
what is a White Squire
Passive investor(s) purchase blocks of stock to frustrate bid
what is the recapitilization defense mechanism
Change of the capital structure, usually with debt to make the deal unattractive
what is the golden parachute defense mechanism and what size companies does it usually work for
Extremely lucrative severance packages for CEo – only works for small companies
what is the regulatory defense mechiansm and what industries does it work in
Fight the deal at the regulatory level
works in regulated industries
what are features of a leveraged buyout
- small group of investors that usually includes management purchase a public stock and take it public
- purchase is funded through high yield debt
- might be taken public after if investors want to cash out
