Class 12 - VC activism and compensation Flashcards
what is governance
“ways in which the suppliers of finance to corporations assure themselves of getting a return on their investment.”
thats what governance is all about, ensuring you get the return on your investment. you want to maximize the change you get the fair return you are entitlted to
takes the shareholders perspective. he does not discuss the morality of business management
in order to solve the agency problem, you can insight the management to do what you want them to do, incentivize them (options), or control them with board
but you can also imply that good management would be good for them because its the right thing to do : but thats the not the way he tackles the problem
what is the fundamental issue
Lack of transparency
if the investors had full access to how its managed, there woulnd be agency problem pcq il verrait comme cest géré
le probleme cest quil y a de lasymétrie dinformation, les managers savent des choses et peuvent agir en fonction de ces informations
2 types of solutions
Incentives
Monitoring
with the right incentives, the mgnt will have the same interests of the investors : allignment of interests
if you can get involve, you will have a say and thus will be able to monitor the company (not able for public companies)
incentives
- Monetary incentives
if shareholders want the stock price to go up, if managers are payed with optinosn, they will also have that interests.
Do stock options encourage undue risk-taking?
par contre incite a prendre plus de risque pcq on un upside et pas de downside
value is greater when there a lot of vol
Is it better for executives to own stocks rather than stock options?
not obvious
its better to own stocks than options pcq that way they are exposed to the downside.
- Dismissal
the managers dont want to be dismissed! so they have an incentive to keep the investors interests in mind - Takeovers
- Bankruptcy
What is the importance of stock option plans, and other forms of compensation in companies funded by VCs?
the management of companies that vc funds invest in have a lot portion of the equity of the company so they are exposed to the upside and the downside, and highly motivated so its different than stock options
but small innovative companies ressemble to stock options
but theres an allignement of interests because they have a large portion of equity, and therefore work with the interests of the investors in mind
monitoring
the thighter the financial constraints (difficulté davoir du financemnet), they will accept concessions and give a lot of rights to the vc investors
Does the relationship between the tight control VCs exert and the concessions that corporate executives are willing to make hold true?
oui, on besoin de financement donc vont vonner aux investisseurs plein de clauses quils aiment
types of monitoring
active :
Prospective information (forward looking)
Participate in the value creation effort (the management of the firm)
for providers of capital that have a say in the company. they have access to the information
they willl have an active role in the management of the firm
speculative :
the invesotrs will only be able to look backward, they wont have access to the forecast numbers. they wont have access to the inside information (any invesotr of the stock market is in that position)
they are speculating as to how will the company look in the future
passive form of controle
role of C.A
The center of attention for governance enthusiasts!
The problem with the board members
→ Independence of directors
considered as to representing the shareholders of the company
the board is not a perfect solution beucause some are not indepent.
board decisions cant be reviewed by a court of law
if the board makes a wrong decision that has an impact on the value of the firm, they cant be sued for a wrong decision. some decisions are bad but that does not give the right to be sued. the board is on its own to the mangement of the company
What kind of control do VCs exercise?
active monitoring : they have to seek control, require some sort of control over the company
vc managers are active. they will give themselves rights that consolidate their management of the company. they give themselve a level of control
Position of the management of the firms
To constrain investor activism
they dont want the investors to involved, they want activism restricted
fund managers are agents , they have to monitor, but they also monitor vc fund managers.
Are VC fund managers themselves subject to control by investors entrusting them with capital?
yes, lp agreement has different types of controls
Distinction between legal traditions
the better the country is organized to facilitate raising capital, the better the investors will be
designed to protect property rights and investments
they want to make sure that investors will get their investment return
other jurisdiction is more based on commercial banking thinking
vc funds will rather be in jurisdiction that control property rights
common law is defined on principles rather than specific norms
civil norm : explicit norms estalished in the civil code
common law contries protect more invesotsr and attract more investors
in the us, shareholding is spread out, generelly the control is spread out
presence of institutionnal presence, provide adequate level of protection
Do the characteristics of the legal system in which the VCs find themselves matter?
yes, studies show gains done in ivnestment in common law countries
“Formal control is enjoyed by (…) a venture capitalist with explicit control rights over a start-up company”
(p. 36)
Question
What formal control mechanisms do VCs have? Examples?
vc give themselve explicit control rights
