Corporate Issuers Flashcards
Corporate Governance
system of internal controls and procedures by which individual companies are managed.
Under shareholder theory, what is the primary focus of a system of corporate governance
the interests of shareholders
Under stakeholder theory, what is the primary focus of a system of corporate governance
consider conflicts between groups that have an interest in the activities and performance in the firm
principal-agent conflict
when an agent (management) and the principal (owner of business) have conflicting interests/incentives in running the company
Management of stakeholder relationships based on four types of inrastructure:
- Legal infrastructure (laws relevant to the rights of stakeholders)
- Contractual infrastructure (contracts between company and stakeholders)
- Organisational infrastructure (corporate governance procedures)
- Governmental infrastructure (regulations to which the companies are subject to)
Discussions at an AGM
- audited financial statements for year
- company performance
- any significant actions
- shareholder questions
Ordinary resolutions
require a simple majority of the votes cast
e.g. approval of auditor / election of directors
Special resolutions
require a supermajority vote for passage (2/3 or 3/4 majority).
Majority and cumulative voting (when electing board members)
Majority voting: candidate with most votes for each single board position is elected
Cumulative voting: number of votes * shares owned (more representative)
Two-tier board structure
additional supervisory board that excludes executive directors
Activist shareholders
Pushing for changes within companies to increase shareholder value.
e.g. shareholder lawsuits, seeking representation on the board of directors, proposing shareholder resolutions
proxy fight
Putting pressure on proxies of shareholders to vote in favour of an alternative proposal
tender offer
An activist group may make a tender offer for a specific number of shares of a company to gain enough votes to take over the company.
Factors affecting stakeholder relationships
- Market factors
e. g. pressure from activist shareholders, threat of hostile takeover. - Non-market factors
e. g. legal environment, communication challenges, third-party ratings
Common-law system
judicial rulings may become law
Shareholder and creditor interests are considered to be better protected in a common-law system
Civil-law system
judges must rule according to enacted laws
agency relationship
The relationship between a company’s shareholders and its senior managers
Capital Allocation Process
Used to determine and select profitable (or the most profitable) long-term projects:
- Generate ideas
- Analyse project proposals
- Create the capital budget for the firm
- Monitor decisions and conduct a post-audit
Type of capital allocation projects
- replacement projects to maintain the business
- replacement projects for cost reduction
- expansion projects
- new products or markets
- mandatory projects (safety + environmental)
- others such as pet projects/R+D
Principals of capital allocation
- Decisions are based on after-tax cash flows, not accounting income.
- Any sunk costs/financing costs not included (reflected in IRR)
- Cash flows are based on opportunity costs.
- The timing of cash flows is important.
Independent and mutually exclusive projects
Independent projects can be evaluated solely on their own profitability
Mutually exclusive projects: only one project can be profitable.
In the capital allocation process, a post-audit is used to:
improve cash flow forecasts and stimulate management to improve operations and bring results into line with forecasts.
cannibalization
the reduction of the sales of a company’s own products as a consequence of its introduction of another similar product.
NPV
expected change in value of the firm from taking the project.
for independent projects - accept projects with NPV > 0