Corporate Governance Flashcards
What are the fundamental questions regarding corporate ownership?
Who owns the corporation? Who (should) control(s) the corporation? For the pursuit of what goals and whose interests?
What is the doctrine of the ‘Separation of Ownership and Control’?
It refers to the situation where shareholders cannot effectively control the company due to their large number, leading to control being exercised by a limited number of managers.
Why do companies resort to stock markets?
Companies sell millions of shares to the public to receive capital to fund their investments.
Do directors always pursue the best interests of the company?
No! Examples include excessive bonuses in troubled businesses like Royal Bank of Scotland, Thomas Cook, and Carillion.
How does ownership in corporate law differ from other areas of law?
In other areas of law, ownership means exclusive control over an object, while in corporate law, ownership is separated from control due to the large number of shareholders.
What challenges do shareholders face in exercising control over a company?
Shareholders are too many to coordinate, may not be part of the management board, and may lack interest or knowledge about company decisions.
Who exercises control in a corporation?
Control passes to directors, separating it from ownership.
What is the ‘nexus of contracts’ model?
The company is viewed as a contract among individuals to pursue profit, emphasizing shareholder supremacy.
Who are the exclusive members of the company in the ‘nexus of contracts’ model?
The shareholders are the exclusive members, while everyone else is external to the company.
What is the primary aim of shareholders in the ‘nexus of contracts’ model?
Shareholders buy shares solely to profit from them, making social considerations irrelevant.
What document is fundamental to the ‘nexus of contracts’ model?
The Articles of Association, which has a contractual nature.
What is the significance of ‘limited liability’ in the ‘nexus of contracts’ model?
It limits the risk shareholders take when investing their money into the company.
What is the role of the board in the ‘nexus of contracts’ model?
The board is single, and directors may also be shareholders, with the company’s interest aligned with shareholders.
What is the Stakeholder Theory?
It extends attention to all actors considered stakeholders, including employees, suppliers, creditors, customers, and the community.
What does the Stakeholder Theory suggest regarding stakeholder interests?
It suggests granting incentives to stakeholders to align their interests with those of shareholders for wealth maximization.
How does the Stakeholder Theory view the company’s social impact?
The company is inclusive of stakeholders and interested in the social impact of its actions.
What is the Concession Theory?
It views the company’s existence as a privilege granted by the state to private individuals.
What role do stakeholders play in the Concession Theory?
Stakeholders are integral to corporate governance and decision-making processes, including workers’ representation on management boards.
