Corporate Finance (34-36) Flashcards
Corporate Govenance
• The system by which companies are directed and controlled.
3 Attributes Corporate governance promotes
Corporate fairness,
Transparency,
Accountability.
Two main Corporate Govenance theory
Stakeholder theory
Shareholder theory
What are Stakeholders
Individuals or groups with an interest, of stake, in a firm. The provide the firm with resources while expecting some benefit in return.
Corporate governance structure
specifies the distribution of rights and responsibilities among stakeholders
What spells out the rules and procedures for making decisions on corporate affairs.
Corporate governance structure
Firms relationship with Shareholders
Provide funds and expect returns. They are legal owners of the firm and their wealth is directly related to the value of the company
Shareholders focus
Typically focus on the growth in company profitability
Risk Capital
The Money provided by stockholders, because the stockholder is making a risky investment in the firm with no guarantee of returns or even preservation of the original investment
7 Majore Stakeholders
Shareholders Creditors Board fo Directors Employees Suppliers Customers Government
Firms relationship with Creditors
Creditors provide funds with the expectation of repayment and interest.
Typically don’t have much control of the firm
Who elects the Board of Directors
Shareholders
Three main functions of the Board of Directors
Protect shareholder interests
Provide strategic direction,
Monitor company and management performance
Firms relationship with Customers
Customers provide sales revenue and expect products and services that provide value for money.
Firms relationship with Suppliers
Suppliers provide inputs and expect revenues and dependable buyers.
Firms relationship with Government/ Regulators
Governments provide regulations and expect companies to adhere to the rules
Firms relationship with Managers and employees
Managers and employees provide labor skills and ideas and expect income, Job satisfaction and security, and good working conditions
The Principle
The person delegating authority,
The Agent
The person whom the authority is delegated
Agency Problem
The agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another’s best interest.
Agency Problem between managers and shareholders
Diffrent Goals
Different attitudes towards risk
