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Corporate issuer > ESG and corporate governance > Flashcards

ESG and corporate governance Flashcards

1
Q

What is a shareholder?

A
  • It provides capital to the company, and it is entitled to the company’s net value.
  • They elect the board of directors and vote on important resolutions.
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2
Q

What is a creditor?

A
  • They have little influence on the company other than covenants and restrictions they can put in place as its banks or bondholders.
  • They receive interest and principal repayments.
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3
Q

What are the employees group?

A

They have a significant stake in the company’s operation, as they are paid salaries as well as other incentives and perquisites for their work.

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4
Q

What is the board of directors?

A
  • It acts in the best interest of the shareholders who elect them.
  • They oversee the operations by monitoring the company and management performance while providing strategic decisions.
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5
Q

What is the customer group?

A
  • They like a product that is a good value for the price and is safe to operate
  • They desire ongoing support.
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6
Q

What are company suppliers?

A

They have a goal of being paid for their services and materials. They want stability.

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7
Q

What are the government and regulators?

A

They wish to protect the economy and the interests of the general public.

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8
Q

What are the 5 key relationships to consider for potential conflicts?

A
  • Shareholder and manager/director relationships
  • Controlling and minority shareholders
  • Manager and board relationships
  • Shareholder vs creditor interest
  • Other stakeholder conflicts
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9
Q

What is a straight voting structure?

A

There is one vote for each share owned.

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10
Q

What are 2 most important aspects of stakeholder management?

A
  • Effective communication
  • Active engagement
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11
Q

What is the legal structure?

A

It lays out the framework of rights established by law as well as the ease or availability of legal recourse.

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12
Q

What is the contractual structure?

A

It is the means used to secure the rights of both parties through contractual agreements between the company and its shareholders.

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13
Q

What is the organizational structure?

A

It is the manner in which the company manages its stakeholder relationships through its governance procedures, internal systems, and practices.

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14
Q

What is the governmental infrastructure?

A

It is the regulations imposed on the company.

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15
Q

What is corporate governance?

A

It is defined as the system of internal controls and procedures through which individual companies are managed.

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16
Q

What are the 10 common elements used to manage shareholders?

A
  • General meetings
  • Board of directors
  • Audit function
  • Reporting and transparency
  • Remuneration policies
  • Say on pay
  • Contractual agreements with creditors
  • Employee laws and contracts
  • Contractual agreements with customers and suppliers.
  • Laws and regulations
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17
Q

Describe what a general meeting is.

A
  • Shareholders have the right to participate in these meetings and exercise their voting rights.
  • Shareholders can see the financial position of the company to make decisions about its situation.
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18
Q

What is a cumulative voting structure?

A

Shareholders have the ability to accumulate and vote all their shares for a single candidate in an election involving more than one director.

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19
Q

What is proxy voting?

A

It is when a shareholder gives authorization to another shareholder to have their share voted.

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20
Q

What is the audit function?

A
  • It helps to provide assurances that financial statements are properly reported.
  • It provides a service that evaluates the control environment within a company.
  • It reviews and analyzes the various systems, controls, and policies/procedures that are in place to examine the operations and the manner in which financial information is accumulated.
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21
Q

What are remuneration policies?

A

Aligning pay with shareholders’ interests helps to ensure that long-term strategies are implemented that will benefit the overall value of the company.

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22
Q

What is the say on the pay concept?

A

It is a concept that helps to decrease potential conflicts and issues with shareholders by gaining their insights into the company’s remuneration policy.

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23
Q

What is an indenture?

A

It is a legal contract that outlines the obligations and rights of the issuer and the bondholder.

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24
Q

What are the covenants that come with an indenture?

A

They are covenants that identify actions that are both required and prohibited.

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25
Q

What is another way to increase the likelihood of repayment of a creditor?

A

By putting assets as collaterals for financial guarantee.

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26
Q

What are employment contracts?

A

They are for the individual and outline the employee’s rights and responsibilities; they are not all-encompassing, leaving some discretion within the relationship.

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27
Q

What are the insights that the board of directors should have?

A
  • Strategy
  • Finance
  • Audit
  • Risk management
  • Human resources
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28
Q

What is a one-tier structure?

A

It is made of executive directors (internal) and non-executive directors (external) who offer objective insight.

29
Q

What is a two-tier structure?

A

It has a supervisory board and a management board that is independent of each other.

30
Q

What are staggered boards?

A
  • The board is broken into three classes and has separate elections in consecutive years.
  • It provides a continuous implementation of strategy and oversight without constantly being reassessed by new board members.
31
Q

What are the 6 common committees to provide feedback and recommendation?

A
  • Audit Committee
  • Governance Committee
  • Remuneration Committee
  • Nomination committee
  • Risk committee
  • Investment Committee
32
Q

What is the principal role of the audit committee?

A
  • Review information technology.
  • Evaluate policies and procedures.
  • Supervise the internal audit group.
  • Appoint and evaluate the findings from the external auditors.
  • Perform other necessary processes and procedures.
33
Q

What is the governance committee?

A

It has the goal of monitoring the adoption and implementation of good corporate governance practices.

34
Q

What is the remuneration committee?

A
  • It will develop and propose policies ad present them for approval.
  • It will include setting performance criteria and establishing human resource policies.
  • It will also set and oversee the implementation of various employee benefits.
35
Q

What is the nomination committee?

A

It will create the nomination policies and procedures for new board members and executive management.

36
Q

What is the risk committee?

A
  • It plays a critical role in establishing, implementing, and monitoring the appropriate level of risk within the company.
  • The committee seeks to systematically manage existing and potential issues by identifying, assessing, and mitigating risk throughout the enterprise.
37
Q

What is the investment committee?

A

The board is responsible for the strategic direction of the company.
- It will establish and regularly review and update the investment policies.

38
Q

What are the 3 market factors that affect the stakeholder relationship and corporate governance?

A
  • Shareholder engagement
  • Shareholder activism
  • Competition and takeover.
39
Q

What is shareholder engagement?

A

It is a growing trend that companies engage with shareholders more frequently throughout the year.

40
Q

What is shareholder activism?

A
  • It is the second market factor that seeks to modify the behaviors within a company.
  • The ultimate goal is to increase shareholder value.
  • Hedge funds tend to draw the largest amount of activism due to their loosely regulated nature.
41
Q

What are the 3 types of corporate takeover? Describe them.

A
  • Proxy contest: shareholders are persuaded to vote for a group seeking to take positions that will control the company’s board of directors.
  • Tender offer: when there is an attempt to persuade shareholders to sell their shares to the group seeking to gain control.
  • Hostile takeover: result when an entity acquires a company without the consent of company management.
42
Q

What are nonmarket factors? Name the 3 most common.

A

They are factors present in an environment that can change governance and its relationship with stakeholders:
- Legal environment
- Media
- Corporate governance industry

43
Q

What are the 4 potential issues of a weak control environment?

A
  • weak control systems
  • Ineffective decision making
  • Legal, regulatory, and reputational risks
  • Default and bankruptcy risks
44
Q

What are the 4 benefits of effective governance?

A
  • Operational efficiency
  • Improved control
  • Better operating and financial performance
  • Lower default risk and cost of debt
45
Q

What is the operational efficiency benefit?

A

It clarifies the organizational structure that outlines responsibilities, reporting lines, and the internal environment; employees will have a clear understanding of their perspective duties.

46
Q

What is the improved control benefit?

A

It helps to minimize various risks, including regulatory, legal, and financial risks.

47
Q

What is the better operating and financial performance benefit?

A
  • The company can see better operating performance and better information gathering.
  • This leads to improved decision-making and can decrease the response time to changes in the market.
48
Q

What are the lower default risk and cost of debt benefit?

A
  • business investment risk is reduced.
  • It will help to protect creditors’ interests and will ultimately reduce the company’s cost of debt and default risk.
49
Q

What are the 6 key areas that should be considered to have a good structure?

A
  • Economic ownership and voting control
  • Board of Directors representation
  • Remuneration and company performance
  • Investors in the company
  • Strength of shareholders’ rights
  • Managing long-term risks.
50
Q

Stranded assets are a specific concern about which sector?

A

Energy sector

51
Q

What are examples of environmental factors?

A
  • Climate change and carbon emissions
  • Air and water pollution
  • Biodiversity
  • Deforestation
  • Energy efficiency
  • Waste management
  • Water scarcity
52
Q

What are examples of social factors?

A
  • Human rights
  • Labor standards
  • Data security and privacy
  • Occupational health and safety
  • Customer satisfaction and product responsibility
  • Treatment of workers
  • Equity and diversity
  • Community relations and charitable activities
53
Q

What are examples of governance factors?

A
  • Bribery and corruption
  • Shareholder rights
  • Board composition (independence and diversity)
  • Audit committee structure
  • Executive compensation
  • Lobbying and political contributions
  • Whistleblower schemes
54
Q

Which law system offers bigger protection to the interests of the shareholders?

A

Common law system

55
Q

What is responsible investing?

A

It is an umbrella term used to describe investment strategies that incorporate environmental, social, and governance factors into their approaches.

56
Q

What is ESG integration?

A

It refers to the careful consideration of material ESG factors in the investment analysis and portfolio construction processes.

57
Q

What is socially responsible investing (SRI)?

A

It refers to the practice of excluding investments in certain industries such as tobacco. It promotes positive environmental or social attributes.

58
Q

What is thematic investing?

A

It refers to investment in themes or assets specifically related to ESG factors. It is based on economic or social trends.

59
Q

What is the impact of investing?

A

It refers to investments made with the intention of generating positive, measurable social and environmental impact alongside a financial return.

60
Q

What is sustainable investing?

A

It is a term used in a similar context to responsible investing, but its key focus is on factoring in sustainability issues while investing.

61
Q

What is green finance?

A

It is a responsible investing approach that utilizes financial instruments that support a green economy.

62
Q

What is a value-based approach?

A
  • It aims to mitigate risks and identify opportunities by analyzing and incorporating material ESG considerations in addition to traditional financial metrics.
  • It expresses the moral or faith-based beliefs of an investor.
63
Q

What is negative screening?

A

It is excluding companies or sectors based on business activities or environmental or social concerns.

64
Q

What is positive screening?

A

It is including sectors or companies based on specific ESG criteria, typically ESG performance relative to industry peers.

65
Q

What is ESG integration?

A

Systematic consideration of material ESG factors in asset allocation, security selection, and portfolio construction decisions for the purpose of achieving or exceeding the product’s stated investment objective.

66
Q

What is thematic investing?

A

It is investing in themes or assets related to ESG factors.

67
Q

What is engagement/active ownership?

A

It is using shareholder power to influence corporate behavior to achieve targeted ESG objectives along with the financial return.

68
Q

What is impact investing?

A

It is investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.

69
Q

What are stranded assets (carbon assets)?

A

These items are at risk of no longer being economically viable because of changes in regulations or investor sentiment.

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