CH11 - Responsible Ownership and Governance

Question 1

credit union def

Answer 1

def = not-for-profit financial institution that accepts deposits, make loans, and provides a wide array of other financial services and products.

Question 2

different types of shares + the rights they give to shareholders (3)

Answer 2

1) Dual-class stock: more than one type of share / stock with different voting rights and dividend payments is issued by a single corporation

2) non-voting shares: common shares without voting privileges

3) restricted shares: some limit on voting; sometimes called uncommon shares

Question 3

active vs passive shareholders

Answer 3

passive -> those who do not attempt to influence the affaires of the corporation even though they have a legal right to do so
active -> those who participate in the governance to the full extent allowed by the law

Question 4

worker capitalism def

Answer 4

def = employee ownership as workers are turned into capitalists though stock ownership (employees own shares)

Question 5

employee ownership pros

Answer 5

• increases morale
• increases company loyalty
• motivates employees = higher productivity
• sometimes can save failing firms
• worker capitalism

Question 6

employee ownership cons

Answer 6

• jobs and often savings and pensions depend on fate of firm
• employees seldom have majority ownership
• management may still not relinquish control to employees

Question 7

issues of ownership (ethical and responsibility)

Answer 7

1- actions of other stakeholders (e.g. governments, other corps, self-regulation orgs) influence the owner stakeholder
2- investor owners have limited influence in making the corp more socially responsible
3- mutual funds can be purchased that incest in corps considered to have a social, ethical and environmental focus or objective
4- some pension plans have revised their investment strategy to acquire stock of socially responsible orgs
5- cooperatives have been leaders in institutionalizing ethics and responsibilities
6- accountability for economic, social and environmental responsibilities have become common among publicly traded corps

Question 8

“accountability dilemma” for corps owned by the government

Answer 8

1. gov-owned corps may be in conflict with social objectives in the national interest
2. consequences of evaluating performance based on commercial criteria (that is, profits)
3. degree of autonomy that should be granted the corporations and their managements
4. techniques for controlling and evaluating the commercial corps

Question 9

responsible investment (RI) def

Answer 9

def = approach to investing that aims to incorporate environmental, social and governance (ESF) factors into investment decisions, to better manage risk and generate sustainable, long-term returns

Question 10

3 possible approaches to RI decisions

Answer 10

1- positive screening: investing in corporations with good social and environmental records
2- negative screening: identifying objectionable corps
3- best-of-sector: compares and ranks corporations within an industry

Question 11

organization promoting RI in Canada

Answer 11

Responsible Investment Association

Question 12

(some) activities considered socially irresponsible/unethical

Answer 12

• poor employee/labour relations
• involvement in the nuclear industry
• use of fossil fuels (esp. coal)
• the conducting of business in repressive regimes
• violation of human rights

Question 13

challenges to ascertaining a socially responsible investment

Answer 13

• data relied upon are sketchy / research is selective
• ratings not completely objective
• screenings are tainted by anachronistic, contradictory, idiosyncratic and ideologically constructed notions of social responsibility
• claims of the growing financial impact are questionable
• no coherent case has been made for why the criteria used for social resp. are better at effecting social change
• general approach of social investment advocates is one of vindication of the true believer, not investigation

Question 14

shareholder democracy def

Answer 14

def = exercise of power of owners to ensure they are treated fairly and enjoy equally the privileges and duties of ownership

Question 15

basic shareholder rights

Answer 15

• voting power of major decisions
• transfer to ownership when desired
• entitlement to dividends
• accessibility to accurate and timely financial information

Question 16

stakeholders attempt /actors to ensure shareholder rights (3)

Answer 16

1- governments (e.g. Canada Business Corporations Act)
2- Self-Regulatory Agencies and Organizations (e.g. stock exchanges, securities exchange commissions)
3- shareholder activists
(e.g. small investor protection association)

Question 17

corporate governance def

Answer 17

def = processes, structures, and relationships through which the shareholders, as represented by a board of directors, oversee the activities of the corporation
=> concerned with the intrinsic nature, purpose, integrity, and identity of the institution, with a primary focus on the entity’s relevance, continuity, and fiduciary aspects

Question 18

board of directors def and role

Answer 18

def = group of individuals elected by shareholders to govern or oversee the corporation’s affairs
-> monitor the corp’s activities and performance
-> power to select, evaluate and terminate CEO/top managers
-> provide shareholders with financial and other statements
-> planning for longer term (strategic planning)
-> evaluating and approving major transactions and ventures

Question 19

fiduciary duties def

Answer 19

def = obligations owed by directors to shareholders that are prescribed by law or regulations

Question 20

independent (unrelated) director

Answer 20

def = director who is free from any interest and any business or other relationship with could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the corporation

Question 21

board diversity

Answer 21

recruitment of women and minorities is receiving increased attention
-> 2014: Canadian Securities Administrators (CSA) issued the Disclosure of Corporate Governance Practice rule; required corporation to disclose
- corporate governance practices including the number of women on boards of directors and in executive officer positions
- policies relating to the identification and nomination of women directors
- targets for women on boards and in executive officer positions
-> institutional investors and organizations advocating for gender representation on boards have set a 30% goal by 2022

Question 22

stats about the board of directors (minorities and women)

Answer 22

2016
-> 1/5 executives were women
-> 1/5 women executives were immigrants
-> 1/10 women executives belonged to a visible minority group
-> 1/100 women executives were indigenous

Question 23

issues regarding compensation of executives (why increasing attention)

Answer 23

• importance of disclosure and transparency
• securities regulation requires disclosure of executive compensation in publicly traded corporations

Question 24

say-on-pay

Answer 24

ability of shareholders to vote on the remuneration of executives

Question 25

“CEO pay ratio”

Answer 25

ratio of the compensation of the corp’s CEO to the median compensation of the corp’s employees

Question 26

2022 CEO-worker pay gap stat

Answer 26

603 to 1 (average of the 100 lowest-wage major US companies)

Question 27

Audit committee

Answer 27

def = oversees the internal and external accounting auditing function to ensure that financial statements accurately and appropriately represent the condition of the corporation and that regulated disclosures are made

Question 28

evaluation of the board performance

Answer 28

one of the most challenging governance reforms to implement
includes:
- board composition and diversity
- independence of directors and management
- board evaluation and director assessment
- committee structure
- shareholder engagement
- compensation of CEO and directors

Question 29

Disclosure of “Ethical Business Conduct”

Answer 29

National Instrument 58-101, clause 5; requires that corps disclose the following in relation to ethical business conduct:
- whether the board has adopted a written code
- describe steps the board takes to ensure directors exercise independent judgment
- describe steps board takes to encourage and promote a culture of ethical business conduct

Question 30

questions about the corps ethical management directors are encourages to ask

Answer 30

• what is the strategy to manage ethics?
• who is responsible for ethics in our corp
• are ppl in our firm equipped to recognize and resolve moral dilemmas?
• are ppl in our firm provided with a safe opportunity to discuss ethical issues of concern?
• do we reward or punish ethical integrity and moral courage if it has a negative effect on the bottom line?