LM 2 & 3: Corporate Governance & Investors & Other Stakeholders Flashcards
What does ESG stand for?
Environmental, social, and governance (ESG)
What is shareholder theory?
shareholder theory of governance, a company’s primary obligation is to maximize shareholder value
What are the 8 primary stakeholder groups of a corporation? SCBMECSG
- Shareholders
- Creditors/ Debtholders
- Board of Directors
- Managers
- Employees
- Customers
- Suppliers
- Governments
What is stakeholder theory?
corporate governance should consider interest of all stakeholders not just shareholders
Describe the 8 primary stakeholder groups of a corporation? SCBMECSG
- Shareholders (own company, provide equity capital)
- Creditors/ Debtholders (lend money to company for interest & principal)
- Board of Directors (represent interest of shareholders)
- Managers (determine company’s strategic direction & overseeing day-to-day operations.)
- Employees (labor and skill for working value)
- Customers (quality products and services for a fair price)
- Suppliers (paid on time for products & services provided)
- Governments (protect interest of the general public)
What are the 2 types of creditors? BP
- banks and private lenders
- public debtholders
Whats the difference between inside directors and independent directors?
Inside directors are company executives, while outside directors are non-employees with no relationship to company
What is the difference between single slate of directors and staggered boards?
single slate 15 new directors every 3 years.
staggers is 5 new directors every single year, totaling 15 new directors in a 3 year timespan
What is the difference in terms of stakeholders for non-profit corporations and for-profit corporations?
non-profit organizations don’t have shareholders
What is principal-agent relationship ?
principal-agent relationship, or agency relationship, is created when a principal hires an agent to act on its behalf. eg. shareholder hires managers
What is information asymmetry?
an imbalance between two negotiating parties in their knowledge of relevant factors and details. eg. managers have more inside knowledge than shareholders (high asymmetry)
What is the primary reason for compensation packages for managers?
used to keep management’s interests more closely aligned with those of shareholders.
What are 3 compensation package conflicts? EEE
- entrenchment
- empire building
- excessive risk taking
What is entrenchment conflict?
when manager compensation is so high that they simply avoid taking any risks that might jeopardize their employment
What is empire building?
compensation is tied to size of business
can lead to management growing business through acquisitions, even if returns are low
What is excessive risk taking?
compensation packages rely too heavily on stock grants and options leading to big risk form more upside on the stock grants and options
What is agency theory?
problems that arise when one person delegates decision making authority to another.
eg. manager using company resources to maximize personal benefits
What is agency costs?
costs incurred for purposes of reducing potential for conflicts of interest.
What is the difference between controlling shareholders and minority shareholders?
Controlling shareholders hold enough shares to determine the outcome of shareholder votes.
Minority shareholders are not in a position to influence corporate activities. (small position)
What is dispersed ownership?
many minority shareholders, none of whom is in a position to exert control individually
What is straight voting?
each share gets one vote
What is concentrated ownership?
single shareholder is able to control the outcome of votes, or at least exert significant influence.
What is multiple class share structures?
grant disproportionately large voting power to certain classes of shareholders.
eg. Founders can use this structure to retain control over a company even as their economic interest is diluted.
What is the risk appetite of equity owners vs creditors?
Equity owners generally want companies to pursue growth
Creditors tend to prefer stability. (they get fixed amount of interest no matter the risk, prefer stability)
What is the risk appetite of shareholders?
Shareholders have a greater appetite for risk and leverage due to their residual claims.
What is the risk appetite of lenders?
Lenders have an asymmetric return profile and a desire to limit downside risk through covenants.
lenders have insight and influence in management and company
What is corporate governance?
Use of checks, balances, and incentives to manage conflicts between company’s management, board, shareholders, creditors, & other stakeholders
What are the 5 different shareholder mechanisms? CSSDC
- Corporate Reporting and Transparency
- Shareholder Meetings
- Shareholder Activism
- Derivative Lawsuits
- Corporate Takeovers
What is Corporate Reporting and Transparency?
shareholders access to range of financial and non-financial information
eg. proxy statements, annual statements, etc.
What is annual general meeting vs extraordinary general meeting?
annual general meeting: managers and executives provide audited financial statements and an overview of the state of the company
extraordinary general meeting: may be called by either the company or its shareholders to hold a vote on matters that require shareholder approval
What is proxy voting?
allows shareholders that are unable to attend the meeting to have others vote on their behalf. It is the most common form of participation by shareholders.
What is cumulative voting?
allows shareholders to vote all their shares for a single candidate
What is shareholder activism?
Efforts to change a company’s direction may result from a broad-based campaign by many shareholders or they may be driven by a single shareholder with a significant minority positions.
What are shareholder derivative lawsuits?
legal proceedings initiated by shareholders against board directors, management, or controlling shareholders
What are corporate takeovers?
means that can be used to gain control of a company
What are 3 types of corporate takeovers? PTH
- proxy contest
- tender offer
- hostile takeover
Describe the 3 types of corporate takeovers.
- A proxy contest is a campaign to persuade shareholders to vote to replace the current board of directors.
- A tender offer involves shareholders selling interests directly to a group seeking to take control.
- A hostile takeover is an effort to execute a takeover without management’s consent.
What are 3 examples of environmental factors in ESG considerations? CCA
- climate change
- carbon emissions
- air/water pollution,
What are 3 examples of social factors in ESG considerations? CDT
- customer satisfaction
- diversity
- treatment of employees
What are 3 examples of governance factors in ESG considerations? BBE
- board independence/ diversity
- bribery/corruption
- executive compensation
What is responsible investing?
used to describe the broad field of ESG investing.
What is sustainable investing?
particular emphasis on factoring sustainability issues into investment decisions.
What is socially responsible investing?
refers to investing in companies with positive social attributes.
What is value based approach to ESG vs values based approach to ESG?
value-based approach considers ESG factors as risks to be mitigated like any other (e.g., credit risk, interest rate risk)
values-based approach is used to express moral or ethical beliefs.
What are the 6 different ESG investment approaches? NPETEI
- Negative screening
- Positive screening
- ESG integration
- Thematic investing
- Engagement/Active ownership
- Impact investing
What is negative screening vs positive screening?
Negative screening excludes investments in certain sectors.
Positive screening identifies companies with best-in-class ESG aspects, regardless of their sector.
What is ESG integration vs thematic investing?
ESG integration explicitly includes ESG factors as inputs in decisions related to asset allocation, security selection, and portfolio management.
thematic investing focuses on themes related to ESG factors.
What is engagement/ active ownership in ESG investment approaches?
Engagement/Active ownership is an effort to influence corporate actions through direct engagement with management and/or directors.
What is impact investing?
Impact investing seeks to simultaneously generate specific environmental/social objectives as well as meaningful financial returns.
What is green finance?
general term for financing that supports sustainable economic (ESG) development
What are green bonds?
issued to finance projects that have a positive environmental impact
What is sustainability linked loans (aka green loans)?
financing the general functioning of an issuer that has explicit sustainability targets
