Final Study - 9&10 Flashcards
Who is in the center of Freeman’s Stakeholder Wheel
The Firm
External Relations Risk
Adverse business consequences resulting from poor communications or damaged relationships with those with public voices, including media, consumer relations, stock analysts, politicians, rating agencies, other key stakeholders, balancing opposing requirements
Not all Stakeholders are equal because
- The priority given to satisfying the needs and interests of each stakeholder
- The power a stakeholder has to facilitate or impede the achievement of an activity’s objective
Variables affecting stakeholders’ relative importance and influence
- Legal hierarchy
- Control of strategic resources
- Negotiating position
- Possession of specialist knowledge & skills
Are all Stakeholders Formal Organizations?
No
Mitigating External Relationship (Stakeholder) Risk Steps
- Answer the question: what is our purpose?
That will help to define which stakeholders we will prioritize - Goal is to find a win-win with key stakeholders
- Values are essential: we need to find common values or at least values we can agree on
- These do not typically emerge from business
negotiations: we need conversations that get at common values - Win‐win is not always possible. In that case the goal
is tradeoff or compromise
Credit rating agencies assign credit ratings (such
as “AAA” or “not investment quality”) to what types of companies?
companies/entities that issue debt
The credit rating is designed to
provide information on the creditworthiness of the company and its debt instruments (bonds, preferred stock, collateralized securities)
Generally, the better the credit rating, the less
interest the company pays to borrow money (loans from banks, issuing bonds)
Three large agencies control 95% of the ratings business
Moody’s, Standard & Poor’s (S & P), Fitch Ratings
What best specializes in insurance company ratings
AM
A ratings downgrade or lowering of the credit rating may increase
the interest rate at which a company borrows money; may lower the stock price of the company; and may trigger the default of the company’s debt
Country risk enters into the credit rating of
companies doing
business internationally
Country risk assessment sub-factors
- Economic risk
- Institutional and governance effectiveness risk
(includes risks known as “political risk”) - Financial system risk
- Payment culture and rule-of-law risk
country risk assessment, ranking
‘1’ to ‘6’ (strongest to weakest) is assigned to each of the following four sub factors
- Country risk index is the average of the sub
factors
Institutional & governance effectiveness risk
Crises in emerging markets are caused by political instability, high external debt, unsustainable financial policies, heavy dependence on exports, and unstable financial markets.
Financial system risk for developed markets
Global default studies show significant correlation of defaults with weak points in business cycles and banking crises
Payment culture and rule-of-law risk
This risk focuses on: Property rights, contract rights, enforceability, and corruption.
Economic risk
- Relative income levels and changes in income
- Economic diversity and volatility
External Indicators Used to Assess Payment Culture and Rule-of-law Risk
- World Bank Governance Indicators
- ‘Corruptions Perception Index’
- World Bank ‘Doing Business In’ Indicator
- Standard & Poor’s analytics
Rating Agency Relationship Management
- Enhance the communications, and dialogue with your analyst
- Ensure that there is understanding and agreement on key rating issues
- Be easy to interact with, provide information requested on a timely basis
- Establish an honest, direct, friendly, transparent
relationship with your rating analysts
What is Corporate Governance?
A system of rules, practices, and processes by which a corporation is directed and controlled.
What is Corporate Governance Risk?
The risk of unexpected events or actions by insiders that are inconsistent with the requirements, processes, procedures, controls imposed by the organization’s corporate governance structure, such as fiduciary breaches, bad conduct
The “agency problem” suggests
the professional management’s interests may not align with the interests of the shareholders
- Hence, the need for Corporate Governance to mitigate the agency problem
The equation for agent and shareholders
Agent = Management / Principal = Shareholders
