Lesson 2: Intro to Corporate Governace Flashcards
What is Corporate Governance?
Corporate governance is
1- a SYSTEM by which companies are directed and controlled
2- a SET of RELATIONSHIPS between management, the board, shareholders and other stakeholders
3 - a STRUCTURE by which company’s objectives are set, a means for attaining those objectives, and monitoring performance versus those objectives
What are the corporate governance theories?
There are two main theories:
1) SHAREHOLDER THEORY
Under the shareholder approach the board manages the company in the BEST INTEREST of the shareholder / owner
2) STAKEHOLDER THEORY
Under the stakeholder approach the board should take into consideration the views of its stakeholders in DECISION MAKING
Other approaches include:
3) INCLUSIVE STAKEHOLDER APPROACH
4) ENLIGHTENED SHAREHOLDER APPROACH
Explain inclusive stakeholder approach
The board should CONSIDER LEGITIMATE INTERESTS and expectations of stakeholders in decision making.
This approach is adopted by South Africa as part of the Kings code.
Explain the enlightened shareholder approach
The ENLIGHTENED shareholder approach is adopted by the Uk.
It states that in MAXIMIZING SHAREHOLDER VALUE, the board should CONSIDER the VIEWS and impact on stakeholders BUT ONLY in so far as it is in the best interest of the shareholder
Explain the 4 conflicts of the agency theory
There are 4 potential conflicts in the agency theory
1) MORAL HAZARD
the managers may be more concerned with their benefits.
2) RETAINED EARNINGS
the managers may be interested in growing the company as they believe the size of the company correlates to their compensation. Whereas the shareholder is interested in return on investment / dividends
3) TIME HORIZON
the manager is focused on the short term performance, whereas the shareholder is interested in long term sustainability.
4) LEVEL OF EFFORT
managers may work less hard because they are not owners of the company.
Corporate governance can be used to ALIGN these interests
Explain the agency theory
The agency theory is based on the SEPARATION of ownership and control.
An agency conflict may exist where the managers interest is not aligned to the owner / shareholders interest
Where the manager is focused on short term and shareholder is focused on long term sustainability.
Explain stakeholder capitalism
Stakeholder capitalism is based on CREATING SHAREHOLDER VALUE by CREATING VALUE FOR SOCIETY as a whole.
Most companies have intangible assets e.g access to talent, reputation and intellectual property.
Stakeholder capitalism takes into consideration these INTANGIBLE ASSETS.
Explain the benefits of reputational management
1) IMPROVED RELATIONS with SHAREHOLDERS
2) ACCESS to CAPITAL
3) ABILITY to ATTRACT and retain the best EMPLOYEES
4) ABILITY to ATTRACT best BUSINESS PARTNERS , including suppliers
5) ABILITY to SECURE PREMIUM PRICES for products and services
6) REDUCE BARRIERS to NEW MARKETS
7) MINIMIZE the THREAT of LITIGATION
8) REDUCE the potential for CRISIS
9) REINFORCE CREDIBILITY and TRUST for STAKEHOLDERS
Explain PRINCIPLES of good corporate governance
RESPONSIBILITY
those with authority should act with HONESTY and INTEGRITY
ACCOUNTABILITY
those with responsibility should provide HONEST INFORMATION
FAIRNESS
all classes of SHAREHOLDERS should be treated equally
TRANSPARENCY
there should be transparency with regard to the organization and its actions
Explain the importance of adopting good corporate governance
Good corporate governance equates to:
1) long term SUSTAINABILITY
2) SUCCESSION planning
3) effective DECISION MAKING
4) ANTI-CORRUPTION tool
5) improved OVERSIGHT, monitoring and evaluation
6) improved OPERATIONAL PERFORMANCE
7) improved SHARE PERFORMANCE
8) improved FIRM VALUATION
9) improved access to FINANCING
10) lower CAPITAL cost
11) reduced risk of CRISIS and scandals
What are the consequences of weak corporate governance to companies as well as to the industry
Weak corporate governance can lead to CORPORATE FAILURE or REPUTATIONAL DAMAGE
From an industry perspective, weak corporate governance can result in:
- excessive regulation
- lack of capital investment
- a focus on regulating and disclosing executive pay
- the establishment of powerful regulators
Explain section 172 of the Company’s Act
Section 172 CA 2006 relates to one of the 7 directors duties.
Section 172 states that directors should PROMOTE THE SUCCESS of the Company and have regard for / consider the CONSEQUENCE of DECISIONS in the long term
- interests of EMPLOYEES
- impact on the COMMUNITY
- impact on the ENVIRONMENT
- the need to foster relationships with SUPPLIERS
- the desirability of maintaining a REPUTATION for high standards
This aligns with expectations under the ENLIGHTENED SHAREHOLDER APPROACH UK
The Companies (Miscellaneous Reporting Act) 2018 requires companies to prepare a Strategic Report which explains how they have carried out their duties in relation to section 172 promoting the success of the company whilst taking in consideration the consequences in the long term on stakeholders including: employees, customers, community, environment, suppliers, etc.
