Corporate Finance - R22 - Corp Gov and ESG Flashcards
a. describe global variations in ownership structures and the possible effects of these variations on corporate governance policies and practices
Shareholder ownership is usually categorized as concentrated, dispersed, or a hybrid.
Dispersed ownership indicates that none of the many shareholders has control over the corporation.
Concentrated corporate ownership means that controlling shareholders (i.e., an individual or group) can exercise control over the company. The controlling shareholders can be either minority or majority shareholders.
Vertical (also known as pyramid) ownership refers to a structure where a company has a controlling interest in multiple holding companies, and those holding companies hold controlling interests in operating companies. Horizontal ownership refers to companies with shared business interests that cross-hold the shares of each other.
Dual-class shares give superior (or sole) voting rights to one share class and lesser (or no) voting rights to another.
The board of directors of a company can be structured either as a one-tier board consisting of internal (executive) and external (non-executive) directors, or a two-tiered board where the management board is overseen by a supervisory board.
b. evaluate the effectiveness of a company’s corporate governance policies and practices
The situation where the CEO is also the company’s chairperson of the board is called CEO duality. CEO duality raises the concern that, relative to having independent chairperson and CEO roles, oversight and monitoring roles of the board could be compromised.
c. describe how ESG-related risk exposures and investment opportunities may be identified and evaluated;
ESG information and metrics are inconsistently reported by companies, and such disclosure is voluntary. This makes it difficult for analysts to identify useful and relevant ESG factor data.
Materiality in ESG refers to an issue that could impact a firm’s securities, performance, or operations.
There are three main approaches for identifying a company’s ESG factors: 1) ESG data providers, 2) industry organizations, and 3) proprietary methods.
In fixed-income analysis, ESG considerations are primarily concerned with downside risk. In equity analysis, ESG is considered both in regards to upside opportunities and downside risk.
d. evaluate ESG risk exposures and investment opportunities related to a company.
Analysts evaluate ESG factors and then make corresponding adjustments to estimate a discount rate or risk premium. ESG factor adjustments related to income statement and statement of cash flows relate to projected revenues, costs, margins, earnings, capex, or other line items. ESG adjustments to a firm’s balance sheet often involve evaluating potential impairment of the firm’s assets.
