E2, Ch 12: Corporate Governance Flashcards
hierarchy of a Public Stock Company
state grants charter of incorporation to shareholders –>
shareholders appoint Board –>
Boards oversees management
4 key characteristics of a Public Stock Company
- limited liability for investors (only liable for amnt invested)
- transferability of investor ownership
- legal personality
- separation of legal ownership and management control
transferability of investor ownership means…
ownership can be transferred through trading stock on exchanges
“legal personality” of a public stock company means…
- a PSC has legal rights/obligations and a right to enter into contracts that can continue beyond founder’s death
- also, can own property similar to how an individual does
michael porter states that managers should have a dual focus on creating what?
SHARED VALUE, aka
1. value creation for shareholders (economic)
2. value creation for society
the shared value creation framework (3)
- provides guidance to managers
- helps reconcile gaining, sustaining competitive advantage with CSR
- creates larger “pie” to benefit shareholders and stakeholders
issues with public companies:
principal-agent problem
agent (manager) does not act in interest of principal (shareholders)
principal-agent problem:
adverse selection
when information asymmetry increases likelihood of selecting inferior alternatives
(ex. agent misrepresents ability to do job)
principal-agent problem:
moral hazard
info. asymmetry increases incentive of 1 party to take risks bc the costs incur to another party
sarbanes-oxley (3)
legislative response to accounting scandals (Enron) requiring companies to:
- track performance of material risks
- CEOs required to vouch for financial statements
- Board must have independent Audit Committees
corporate governance
system by which companies are directed and controlled; offer checks and balances and addressing principal-agent problem
the board of directors is the ___________ of corporate governance
centerpiece
responsibilities of Board (4)
- general strategic oversight and guidance
- selecting, compensating CEO
- monitoring, approving strategic initiatives (ex. acquisitions)
- risk assessment and mitigation
chairperson
most powerful member of the board who ensures duties to shareholders are fulfilled and link the board to top mgmt
duality
occurs when CEO is also board chairman – about half of S&P 500 CEOs have duality
controversy behind duality
the risk of lack of oversight vs. unity of command
executive compensation
often ties to firm performance by utilizing stock options with the goal of aligning compensation to shareholder interests
to avoid misrepresentation of financial results: (2)
- public financial statements must follow Generally Accepted Accounting Principles, GAAP
- financial statements must be audited
financial analysts
provide oversight and financial recommendations (buy, hold, sell)
Market of Corporate Control (3)
- an external corporate-governance mechanism is the use of Activist Investors:
- seek to gain control of underperforming company by buying shares to gain control
- often “court of last resort”
_____ is NOT typically considered a governance mechanism; however we might consider it to be the most internal of corporate governance mechanisms
ethics
business ethics
agreed-upon code of conduct in business that provides training for behavior that is consistent with societal standards – differs culturally
bad apples vs. bad barrels
- individuals who act opportunistically, vs.
- an unethical organizational climate
to set an ethical tone, leaders should (4)
- set clear ethical expectations
- put structure, culture, and control systems in place
- align formal/informal culture
- executive behavior should adhere to company values
