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MGST 451 > Chapter 13-14 > Flashcards

Chapter 13-14 Flashcards

1
Q

Alternative viewpoint to shareholder primacy

A

an organization should not exist only to increase value for shareholders but to also address the needs of other stakeholders

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2
Q

What are some labels used to describe corporate and investor efforts to address stakeholder needs

A

SRI: Socially responsible investing
CSR: corporate social responsibility
ESG: Environmental, Social and Governance

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3
Q

What are some pressures from multiple factors?

A

a) money flowing into ESG investment funds
1995: 1 trillion, 2018: 12 trillion
b) ESG related to proxy proposals: consideration for ESG in proposals have increased
c) Institutional investors: the big 3 index funds have engaged in ESG advocacy campaigns
d) employee activism: employees in big companies like google, and amazon have become more socially aware

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4
Q

BCE Case

A

In Canada, stakeholder interest was prioritized through the BCE case. Directors may look at interests outside of the stakeholders

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5
Q

Bill C-97

A

passed in 2019, that pushes directors to look at the interest of shareholders and stakeholders when acting in the best interest of the corporation

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6
Q

Delaware Law (US)

A

is a director-friendly law that allows directors to act solely in the shareholder welfare and other interests are taken into account to promote shareholder welfare

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7
Q

Skadden Arp’s opinion

A

allows for shareholders to take in to account social issues as long as it does not hinder value maximization

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8
Q

what are some ESG metrics?

A

Sustainability Reports: link strategy and sustainable results

Human capital reports: diversity

Climate change impact report: potential impact on the firm from climate change risk

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9
Q

External ESG assesment

A
  • Bloomberg gender equality index
  • corporate responsibility magazine
  • Ethisphere Institute: most ethical companies
  • Newsweek green environment performance
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10
Q

why do shareholders and stakeholders have external assessments?

A

to better understand ESG metrics of a company

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11
Q

HIP Human Impact + Profit ESG Rating

A

assess 32 environmental and social factors. CEO pay ration, carbon emission, gender diversity, and lobbying expenses

6 pillars: management, health, wealth, equality and trust and scored on a scale of 10

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12
Q

TruValue Labs

A

assess companies in 26 dimensions across 6 categories: environmental, social, capital, human capital, business model, leadership and governance

data is sold to institutional investors for long and short-term trading strategies

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13
Q

Sustainalytics: Morning Star

A
  1. risk rating based on three categories: corporate governance risk, material ESG issue risk (identified by the company), and idiosyncratic ESG issue risk (unpredictable)
  2. identified by company exposure and second by how well managed the company is at handling risk
  3. used to evaluate stock portfolios
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14
Q

Issues with ESG ratings

A
  • lack of uniformity
  • no clear relationship between ratings and rankings and stock performance
  • different methodologies, no clear understanding of which one is the best (mainly qualitative)
  • no auditing of results
  • a movement to tie this to executive pay
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15
Q

CGQ Institutional Shareholder Services (ISS)

A

A type of governance rating that was developed in 2002 called the Corporate governance Quotient (CGQ)

65 variables based on best practices in 8 categories

  • board of directors, charter and by-laws, auditors, state incorporation, executive, and director compensation, qualitative factors, equity ownership management and board and director education
  • each company gets to score out of 100
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16
Q

MSCI governance metrics

A

collects data on 96 dimensions 4 pillars

boards
compensation
ownership and control
accounting

17
Q

MSCI ESG AGR model

A

financial model rating through audit integrity

AGR (accounting and governance risk) based on detailed financial reporting

scored as very aggressive, aggressive, average, conservative

18
Q

CEO Activism

A

CEO activism has increased and is between 4-12% and concentrated in the US large companies

public believe they should support the environment, healthcare, poverty and taxes

Less contentious issues like gun control, abortion and religion

19
Q

What are the three important corporate system devices that are created by debt?

A

a) disciplinary mechanism
b) monitoring through institutional lenders
c) monitoring through debt agencies and ratings

20
Q

Explain debt as a disciplining mechanism.

A
  • managers with big cash flows and little debt are protected from their mistakes
  • lazy managers usually tend to run firms that are all equity
  • can lead to complacency and inefficiency and investing in poor projects. Managers bear little cost
  • fixed interest payments act as an obligation to the firm and impose discipline on management
  • discourage superfluous spending by management
  • debt has a covenant and if management breaks the covenant then the principal needs to be paid immediately
  • debt provides more protection to investors than equity through explicit creditor right
  • stops managers from value-enhancing capital expenditures when opportunities arise
21
Q

Institutional lenders as corporate monitors

A
  • banks will monitor
  • forces firms to disclose private information
  • the firm has to agree to covenants
22
Q

Creditors play is debt

A
  • risk-taking, and interest payment so excessive can not be made, in this case, creditors can force the firm into bankruptcy to recover at least some of their investment
23
Q

Two function variable

A

direct cost: legal and other deadweight cost
indirect cost: cost arising because people perceive you to be in financial trouble

24
Q

Probability of bankruptcy cost

A

as you borrow more, you increase the probability of bankruptcy and hence the expected bankruptcy cost

25
Q

Agency cost of debt

A

creditors are lending money to the stockholders so they are on opposite sides of the credit claim. Thus they do not necessarily have the same objectives for the firm

when you lend money you are interested in getting it back

stockholders are interested in maximizing the wealth you give them

26
Q

consequences of agency cost

A
  • can lead to investing in riskier projects
  • paying large dividends when the rather have the money in business
27
Q

how does agency cost show up?

A

bondholders believe that stock holder actions might make them worse off and thus, demand higher rates of bond

28
Q

how do bondholders protect themselves?

A

direct cost: detailed monitoring of restrictive covenants

Indirect costs: cost of lost investments, change in payouts, limited financing and increased cost due to restrictive bonds

29
Q

Credit Rating Agency?

A

assess financial strength of companies and goverment entities

assess their ability to meet principal payment son their debts

shows level of confidence that the borrower will honour the payment

independent research and in-depth analysis

30
Q

credit rating in corporate governance

A
  • useful for investors to make well informed decisions and ignore irrelevant information
  • provides investors with rating reports, analytical judgement on issuer’s business and financial risk
  • decision calibrated on its own risk-return preferences
  • monitoring role by tracking performance of the transaction and impact of the riskiness of te instruments
31
Q

Letter based scores

A

investment grade: AAA, AA, A, BBB
speculative grade: BB, B, CCC, CC, C

32
Q

Ownership structure and influence

A

transparency of ownership
the concentration of influence of ownership

33
Q

Financial stakeholder rights

A
  • voting and shareholder meeting procedure
    -ownership and financial rights
    -takeover defence
34
Q

financial transparency and information disclosure

A
  • the timing of and access to public disclosure
  • independence and integrity of the audit process
    -independence and integrity of the audit process
35
Q

Board structure and process

A
  • board structure and composition
  • role and effectiveness of board
  • role and independence of outside directors
  • director and executive compensation, evaluation and succession policies
36
Q

Equity Analysts

A

looks at the firm’s operating and financial conditions. long-term prospects and effectiveness of its management team and general outlook of the industry

base their buy, hold, and sell reco from

  • financial statements
    -business news

MGST 451 (9 decks)

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