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Key Facts > ESG And Corporate Governance > Flashcards

ESG And Corporate Governance Flashcards

1
Q

What are 3 global variations of corporate ownership

A
  1. Dispersed
  2. Concentrated
  3. Hybrid
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2
Q

What do ownership classifications focus on

A
  1. Individual or small group of shareholders.

2. That can control the corporation

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3
Q

List 3 arrangements that give minority shareholders greater control than their basic percentage

A
  1. Horizontal ownership
  2. Vertical ownership
  3. Dual-class
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4
Q

How can minority shareholders control a corporation through dual class shares?

A

Dual share class allows one share class to be dispersed by way of its voting rights being capped.

The controlling shareclass is concentrated ownership with more voting rights.

  1. Different voting rights
  2. Voting caps
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5
Q

Which is the most common class of ownership arrangement?

Give two examples of shareholders

A

Concentrated

  1. Familiy
  2. Government
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6
Q

Which 4 countries have the most dispersed ownership

A

Australia
Ireland
USA
UK

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7
Q

Which 5 regions have mostly concentrated ownership

A 
Main Europe (ex Germany)
Russia
China
Brazil
Turkey
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8
Q

Which 5 regions have mostly hybrid ownership arrangements

A 
Canada
Germany
Japan
Netherlands
Switzerland
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9
Q

What are hybrid ownership arrangements

A

Combination of

  1. Concentrated
  2. Dispersed
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10
Q

Explain dual ownership class shares.

What does this achieve?

A

Gives superior voting rights to one class and inferior rights to the other class.

Separates control from size of shareholdings.

Allows concentrated group of shareholders to dominate a larger group of dispersed shareholders.

Achieved with

  1. Better voting rights
  2. Voting caps
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11
Q

Explain how vertical ownership leads to control

A
  1. A company or group that has a controlling interest in two holding companies A and B, each of which has a stake in C
  2. A and B may also have superior voting rights in C
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12
Q

Explain how horizontal ownership can effect control

A
  1. Commercial power over the investee

2. Also cross holdings favour voting for mutual interests

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13
Q

Explain the conflict due to “dispersed ownership and dispersed voting power”

A
  1. Principal-Agent conflict. Interests of weak shareholders are not protected against interests of management.
  2. Managers may over invest rather than maximise shareholder wealth.
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14
Q

What type of conflict arises from “concentrated ownership and concentrated voting power”

Explain in 2 points

A
  1. Principal-Principal conflict.
  2. Interests of minority shareholders and management are not protected against interests of strong controlling shareholders.
  3. Strong shareholders are controlling shareholders because they are not majority and dispersed and concentrate voting power to control the board and take advantage of company resources to detriment of non controlling minority shareholders which are dispersed.
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15
Q

What type of conflict arises due to “dispersed ownership and concentrated voting power”

Explain briefly

A

Principal-Principal problem

Controlling shareholders are not the majority but gain control through pyramid (coordinated concentration) or dual-class shares.

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16
Q

What conflict arises from “concentrated ownership but dispersed voting power”?

Why?

A

No Principal or Agency conflicts.

Legal restrictions are placed on majority shareholders to limit their control.

e.g Voting caps apply to large shareholders reducing their ability to control the firm.

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17
Q

What influence from Banks must be analysed

A

Take advantage of role as lender to disadvantage shareholders.

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18
Q

Give 4 issues with family control

A
  1. Difficult to recruit talent
  2. Lack of concern for minority shareholders
  3. Minimal transparancy
  4. Low accountability for family managers
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19
Q

What problem can family ownership reduce

A

Principal - Agent problem

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20
Q

What is the conflict inherent with SOE’s

A

Provide a public benefit not shareholder maximisation

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21
Q

What is another name for Vertical ownership

A

Pyramid

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22
Q

Explain the difference between “dispersed ownership” and “concentrated ownership” .

A

“Dispersed ownership” reflects many shareholders, none of whom has control over the corporation.

In contrast, “concentrated ownership” reflects an individual shareholder or a group (called controlling shareholders) with the ability to exercise control over the corporation due to its relative strength.

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23
Q

Explain the difference between horizontal ownership and vertical ownership.

A

Horizontal ownership involves companies with mutual business interests (e.g., key customers or suppliers) that have cross-holding share arrangements with each other. This structure can help facilitate strategic alliances and foster long-term relationships among such companies.

Vertical ownership (or pyramid ownership) involves a company or group that has a controlling interest in two or more holding companies, which in turn have controlling interests in various operating companies.

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24
Q

Describe dual-class shares.

A

Dual-class shares grant one share class superior or even sole voting rights, whereas the other share class has inferior or no voting rights.

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25
Q

Describe voting caps.

A

Voting caps are legal restrictions on the voting rights of large share positions. Voting caps have been imposed by a number of sovereign governments to deter foreign investors from obtaining controlling ownership positions in strategically important local companies.

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26
Q

Describe interlocking directorates.

A

An interlocking directorate occurs when individuals serve on the board of directors of multiple corporations.

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27
Q

Define insiders.

A

Insiders are managers and board directors who are also shareholders of a company.

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28
Q

Describe the difference between a one-tier board and a two-tier board.

A

A one-tier board structure is mixed internal and external and consists of a single board of directors, composed of executive (internal) and non-executive (external) directors.

A two-tier board structure consists of a supervisory board that oversees a management board.

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29
Q

Describe the ownership structure that can result in a principal-agent problem.

A

The combination of dispersed ownership and dispersed voting power is associated with shareholders who lack the power to exercise control over managers.

Under this combination, shareholders are interested in maximizing shareholder value, while managers may seek to use a company’s resources to pursue their own interests.

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30
Q

List the 8 types of corporate shareholders that can have a significant influence on corporate governance.

A
  1. Banks
  2. Families
  3. State-owned enterprises
  4. Institutional investors
  5. Group companies
  6. Private equity firms
  7. Foreign investors
  8. Managers and board directors
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31
Q

Describe the benefits of a family ownership corporate structure.

A

A benefit of family control is lower risks associated with principal-agent problems as a result of families having concentrated ownership and management responsibility.

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32
Q

Define independent board directors.

A

Independent board directors are directors with no material relationship with the company regarding employment, ownership, or remuneration.

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33
Q

List the activities a supervisory board can perform to serve as control functions over the management board as part of the two-tier board structure.

A

Inspecting the corporation’s books and records
Reviewing the annual report
Overseeing the work of external auditors
Analyzing information provided by the management board
Setting or influencing management compensation

34
Q

Define shareholder activism.

A

Shareholder activism refers to the

strategies used by shareholders to attempt to compel a company to act in a desired manner.

35
Q

Describe the difference between straight voting and dual-class share structures.

A

Describe the difference between straight voting and dual-class share structures.

36
Q

Define CEO duality.

A

CEO duality is when the chief executive officer (CEO) also serves as chairperson of the board.

37
Q

Identify the key attributes for consideration when evaluating a board’s structure.

A
  1. Board of directors structure
  2. Board independence
  3. Board committees
  4. Board skills and experience
  5. Board composition
38
Q

Describe the benefits and drawbacks of a long board tenure.

A

A board member with a long tenure may have a comprehensive understanding of how the corporation’s business operates, as well as how effective company management has been during the director’s tenure.
On the other hand, a long tenure may affect the independence of board members (i.e., they could be too closely aligned with management), or may result in directors being less willing to embrace changes in the corporation’s business.

39
Q

List the key governance concerns investors assess when evaluating a company’s board committees.

A

Audit
Compensation
Selection of directors

40
Q

List the topics a board evaluation typically covers.

A

Duties
Leadership
Structure
Interaction between the board and management (culture)

41
Q

Describe clawback policy.

A

A clawback policy allows a company to recover previously paid remuneration if certain events, such as financial restatements, misconduct, breach of the law, or risk-management deficiencies, are uncovered.

42
Q

Describe ESG integration and how it differs between equity and fixed-income analyses.

A

ESG integration is the implementation of qualitative and quantitative ESG factors in traditional security and industry analysis. It typically differs for equity and fixed-income (debt) analysis.
In equity analysis, ESG integration is used to both identify potential opportunities and mitigate downside risk, whereas in fixed-income analysis, ESG integration is generally focused on mitigating downside risk.

43
Q

Define stranded assets.

A

Stranded assets are assets that are obsolete or not economically viable, often owing to changes in regulatory or government policy or shifts in demand.

44
Q

Identify the approaches analysts typically use to identify a company’s ESG factors.

A

Proprietary research
ESG data providers
Not-for-profit industry organizations and initiatives

45
Q

Describe materiality in an ESG context.

A

In an ESG context, materiality typically refers to ESG-related issues that are expected to affect a company’s operations, its financial performance, and the valuation of its securities.

46
Q

Describe the challenges of integrating ESG factors into investment analysis.

A

A primary challenge of integrating ESG factors in investment analysis is identifying and obtaining information that is relevant and useful. Additionally, ESG information and metrics are inconsistently reported by companies, and such disclosure is voluntary.

47
Q

Describe the proprietary method approach for identifying a company’s ESG factors.

A

With the proprietary method approach, analysts use their own judgment or their firm’s proprietary tools to identify ESG information by researching companies, news reports, industry associations, environmental groups, financial markets, labor organizations, industry experts, and government organizations. Company-specific ESG data are generally publicly available from such sources as annual reports, corporate citizenship or sustainability reports, proxy reports, and regulatory filings.

48
Q

Describe the ESG data providers approach for identifying a company’s ESG factors.

A

The ESG data providers approach involves the use of information supplied by an ESG data provider (vendor), such as MSCI or Sustainalytics. The information obtained by vendors is reflected in individual ESG analyses, scores, and/or rankings for each company in the vendor’s universe. In addition, vendors may score and/or rank companies within their industries and provide detailed industry analyses relating to ESG considerations.

49
Q

Describe the not-for-profit industry organizations and initiatives approach for identifying a company’s ESG factors.

A

The not-for-profit industry organizations and initiatives approach involves the consideration of not-for-profit initiatives that provide data and insights on ESG issues. These include the International Integrated Reporting Council (IIRC), the Global Reporting Initiative (GRI), and the Sustainable Accounting Standards Board (SASB).

50
Q

Define green bonds.

A

Green bonds are bonds in which the proceeds are designated by issuers to fund a specific project or portfolio of projects that have environmental or climate benefits.

51
Q

Describe ESG-related adjustments that may be made to a company’s financial statements or valuation.

A

ESG-related adjustments to a company’s balance sheet often reflect an analyst’s estimate of impaired assets.
For equities, valuation adjustments often include adjusting a company’s cost of capital using the discount rate or a multiple of price or terminal value.
For bonds, an analyst may adjust an issuer’s credit spread or CDS to reflect anticipated effects from ESG considerations.

52
Q

Identify the key elements of the ESG Integration Framework.

A

Qualitative and quantitative research

Securities valuation of equities and fixed income

53
Q

What class of conflict is “dispersed ownership, dispersed voting power”

Why?

A

Principal-Agent

Management has control

54
Q

What type of conflict is “concentrated ownership, concentrated voting power”

Why?

A

Principal-Principal

One group of share holders has strong direct majority control

55
Q

What type of conflict is thr dispersed ownership, concentrated voting power”

Why?

A

Principal-Principal

Because a group of minority shareholders have control over others and can monitor management.

56
Q

Describe special voting arrangements

A

Improve power of minority shareholders

Minority ahareholders are provided board nomination and election mechanisms

57
Q

Explain “comply or explain” corporate governance codes

What type of company does this most often apply to?

What type of investors?

A

Company Must disclose corporate governance practises

Or explain why not.

Public companies.

Institutional investors, who are expected to enable other investors to exercise their rights (Stewardship codes)

58
Q

Describe “stewardship codes”

A
  1. In some countries
  2. Institutional investors must help others exercise legal rights.
  3. Comply or Explain
59
Q

Describe the 4 drawbacks of a family ownership corporate structure.

A

Conversely, the drawbacks of family ownership may include:

  1. poor transparency,
  2. lack of management accountability,
  3. modest consideration for minority shareholder rights
  4. difficulty in attracting quality talent for management positions.
60
Q

What ESG risk from Institutional investors must be analysed.

How can this be mitigated?

A
  1. Sophisticated at using minority shareholder positions to influence board and management.

Stewardship codes.

61
Q

What is the ESG risk posed by Group Company shareholders

A
  1. Use cross holdings via vertical and horizontal ownership.

2. Obtain outsize influence vis a vis other minority shareholders

62
Q

What influence do private equity firms have on corporate governance

A

Improve corporate governance because they may try to make a company ready to go public

63
Q

What type of influence from foreign investors is relevant to ESG?

A

Foreign investors make demands that reduce risk because Cross listing requires:

  1. Greater transparancy
  2. Greater accountability
64
Q

What are the benefits of shareholders that are Managers and / or Board Members

A

More likely to use the firms resources to boost firm profitability over the long term.

Less likely to serve their own interests

65
Q

What are the drawbacks of shareholders that are Managers and / or Board Members

A

Insiders may use their ownership to protect their own interests above other shareholders.

66
Q

Give 5 consequences of ineffective corporate governance

A
  1. Reputation damage
  2. Difficulty to compete
  3. Low stock price or high volatility
  4. High cost of capital
  5. Lower profitability
67
Q

How may shareholders respond to ineffective corporate governance?

A

Shareholder activism may occure

68
Q

Give two benefits of board independence

A
  1. Less likely that management will be self serving

2. Investors perceive lower risk

69
Q

Give 8 benefits of effective corporate governance

A
  1. Shareholder returns
  2. Profitability
  3. Lower cost of capital (lower credit spread)
  4. Better long term performance of share price
  5. Higher access to credit
  6. Higher sustainable dividends
  7. Better reputation
  8. More competitive
70
Q

List 5 board committees that should be independent from management

A 
Compensation
Nomination
Audit
Risk
Compliance
71
Q

Give 3 factors to consider for board skills and experience

A
  1. Industry specific experience
  2. Broad experience
  3. Reasonable tenure
72
Q

What are the pros and cons of long board tenure

A
  1. Good knowledge of company operations

2. Resistance to change - too close to management

73
Q

List 9 factors important for board composition

A
  1. Profession / Skills
  2. Cultural background
  3. Gender
  4. Age
  5. Tenure
  6. Number of board members
  7. Interaction with management
  8. Frequency of reviews
  9. External reviews / evaluation
74
Q

Give 6 considerations and KPIs for executive remuneration

A
  1. Transparancy - is it disclosed
  2. Incentive and performance criteria - short term or long term
  3. Alignment of remuneration with company strategy - long term aspects
  4. Controls on remuneration levels - excessive pay differentials between CEO and other workers in the company

Provisons:

  1. Say on pay - vote or feedback on remuneration
  2. Claw backs - reclaim past remuneration in some circumstances
75
Q

What are the two data challenges for ESG

A
  1. Quality

2. Quantity

76
Q

What are the two challenges of ESG corporate communications

A
  1. No uniformity (lack of consistency)

2. Disclosures and communications are Voluntary

77
Q

Describe materiality in overall financial reporting.

A

In overall financial reporting, information is considered material if omission or misstatement of the information could influence users’ decisions.

78
Q

Give 3 examples of methods to identify relevant factors important for data collection

A
  1. ESG data providers - MSCI, Sustainalytics, RepRisk
  2. Industry organizations - Not for profits:
    (A) IIRC (International Integrated Reporting Council)
    (B) SASB (Sustainable Accounting Standards Board)
  3. Proprietary methods -
    (A) 10-K filings
    (B) Corporate sustainability reports
    (C) Annual reports
79
Q

What is the key difference in how ESG factors are used for Fixed Income and Equity securities

A

For Fixed Income the focus is downside protection. Credit risk, credit spreads, impairments, obsolescence
E.g. law suite, stranded assets

For Equity analysis both upside and downside e.g changes to valuation variables discount rate and Re

Sensitivity and scenario analysis

80
Q

Describe ESG integration

A
  1. ESG factors used to adjust financial statements:
    (i) Cash flow statement
    (ii) Income statements
    (iii) Balance sheet

2.

81
Q

Describe Greenwashing

A

Greenwashing is to obtain a green premium from a bond but to not use the proceeds for green projects.

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