Chapter 4 Flashcards
It can be defined as the economic, legal, and institutional framework in which corporate control and cash flow rights are distributed among shareholders, managers, and other stakeholders of the company.
Corporate governance.
What are the stakeholders of a company?
Shareholders, managers, workers, creditors, banks, institutional investors, and even the government.
Corporation which is jointly owned by a multitude of shareholders protected by limited liability, is a major organizational innovation with powerful economic consequences.
The public corporation.
Name some of the issues with public corporations.
The conflicts of interest between managers and shareholders. The separation of the company’s ownership and control.
In the United States, managers are legally bound by the _________ to shareholders.
“Duty of loyalty”.
What happens with diffused ownership of the company in countries other than U.S. and U.K.?
These large shareholders (often including founding families of the company) effectively control managers and may run the company for their own interests, expropriating outside shareholders in one way or another.
On what does the degree of legal protection of investors depends on?
On the “legal origin” of countries.
They provide the strongest protection for investors.
English common law countries.
Name examples of English common law countries.
Canada, the United States, and the United Kingdom.
These countries rovide the weakest protection for investors.
French civil law countries.
Name examples of French civil law countries.
Belgium, Italy, and Mexico.
What is Residual control right?
When the manager and the investors will have to allocate the rights (control) to make decisions under those contingencies that are not specifically covered by the contract.
They represent a firm’s internally generated funds in excess of the amount needed to undertake all profitable investment projects, that is, those with positive net present values (NPVs).
Free cash flows.
What are some incentives of managers to retain cash flow?
- Cash reserves provide corporate managers with a measure of independence from the capital markets
- Growing the size of the company via retention of cash tends to have the effect of raising managerial compensation.
- Senior executives can boost their social and political power and prestige by increasing the size of their company.
What is the heart of the agency problem?
The conflicts of interest between managers and the outside investors over the disposition of free cash flows.
What are the mechanisms that exists in order to control the agency problem?
- Board of directors
- Incentive contracts
- Concentrated ownership
- Accounting transparency
- Debt
- Overseas stock listings
- Market for corporate control.
It is legally charged with representing the interests of shareholders.
Board of directors.
How does the board of directors differs in Germany and U.S.?
In Germany, for instance, the corporate board is not legally charged with representing the interests of shareholders. Rather, it is charged with looking after the interests of stake- holders (e.g., workers, creditors, etc.) in general, not just shareholders.
Considering that managers may not be very interested in the maximization of shareholder wealth, many companies provide managers with…
Incentive contracts.
What benefits do incentive contracts have for managers?
Stocks and stock options.
Explain concentrated ownership.
If one or a few large investors own significant portions of the company, they will have a strong incentive to monitor management.
Give examples of concentrated ownership around the world.
In Gennany, for example, commercial banks, insurance companies, other companies, and families often own significant blocks of company stock.
Also in France, cross-holdings and “core” investors are common.
In Asia and Latin America, many companies are controlled by founders or their family members.
In China, the government is often the controlling shareholder for public companies.
