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corporate issuers > LM 2 & 3: Corporate Governance & Investors & Other Stakeholders > Flashcards

LM 2 & 3: Corporate Governance & Investors & Other Stakeholders Flashcards

1
Q

What does ESG stand for?

A

Environmental, social, and governance (ESG)

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2
Q

What is shareholder theory?

A

shareholder theory of governance, a company’s primary obligation is to maximize shareholder value

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3
Q

What are the 8 primary stakeholder groups of a corporation? SCBMECSG

A
  1. Shareholders
  2. Creditors/ Debtholders
  3. Board of Directors
  4. Managers
  5. Employees
  6. Customers
  7. Suppliers
  8. Governments
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4
Q

What is stakeholder theory?

A

corporate governance should consider interest of all stakeholders not just shareholders

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5
Q

Describe the 8 primary stakeholder groups of a corporation? SCBMECSG

A
  1. Shareholders (own company, provide equity capital)
  2. Creditors/ Debtholders (lend money to company for interest & principal)
  3. Board of Directors (represent interest of shareholders)
  4. Managers (determine company’s strategic direction & overseeing day-to-day operations.)
  5. Employees (labor and skill for working value)
  6. Customers (quality products and services for a fair price)
  7. Suppliers (paid on time for products & services provided)
  8. Governments (protect interest of the general public)
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6
Q

What are the 2 types of creditors? BP

A
  1. banks and private lenders
  2. public debtholders
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7
Q

Whats the difference between inside directors and independent directors?

A

Inside directors are company executives, while outside directors are non-employees with no relationship to company

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8
Q

What is the difference between single slate of directors and staggered boards?

A

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

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9
Q

What is the difference in terms of stakeholders for non-profit corporations and for-profit corporations?

A

non-profit organizations don’t have shareholders

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10
Q

What is principal-agent relationship ?

A

principal-agent relationship, or agency relationship, is created when a principal hires an agent to act on its behalf. eg. shareholder hires managers

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11
Q

What is information asymmetry?

A

an imbalance between two negotiating parties in their knowledge of relevant factors and details. eg. managers have more inside knowledge than shareholders (high asymmetry)

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12
Q

What is the primary reason for compensation packages for managers?

A

used to keep management’s interests more closely aligned with those of shareholders.

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13
Q

What are 3 compensation package conflicts? EEE

A
  1. entrenchment
  2. empire building
  3. excessive risk taking
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14
Q

What is entrenchment conflict?

A

when manager compensation is so high that they simply avoid taking any risks that might jeopardize their employment

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15
Q

What is empire building?

A

compensation is tied to size of business

can lead to management growing business through acquisitions, even if returns are low

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16
Q

What is excessive risk taking?

A

compensation packages rely too heavily on stock grants and options leading to big risk form more upside on the stock grants and options

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17
Q

What is agency theory?

A

problems that arise when one person delegates decision making authority to another.

eg. manager using company resources to maximize personal benefits

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18
Q

What is agency costs?

A

costs incurred for purposes of reducing potential for conflicts of interest.

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19
Q

What is the difference between controlling shareholders and minority shareholders?

A

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)

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20
Q

What is dispersed ownership?

A

many minority shareholders, none of whom is in a position to exert control individually

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21
Q

What is straight voting?

A

each share gets one vote

22
Q

What is concentrated ownership?

A

single shareholder is able to control the outcome of votes, or at least exert significant influence.

23
Q

What is multiple class share structures?

A

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.

24
Q

What is the risk appetite of equity owners vs creditors?

A

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)

25
Q

What is the risk appetite of shareholders?

A

Shareholders have a greater appetite for risk and leverage due to their residual claims.

26
Q

What is the risk appetite of lenders?

A

Lenders have an asymmetric return profile and a desire to limit downside risk through covenants.

lenders have insight and influence in management and company

27
Q

What is corporate governance?

A

Use of checks, balances, and incentives to manage conflicts between company’s management, board, shareholders, creditors, & other stakeholders

28
Q

What are the 5 different shareholder mechanisms? CSSDC

A
  1. Corporate Reporting and Transparency
  2. Shareholder Meetings
  3. Shareholder Activism
  4. Derivative Lawsuits
  5. Corporate Takeovers
29
Q

What is Corporate Reporting and Transparency?

A

shareholders access to range of financial and non-financial information

eg. proxy statements, annual statements, etc.

30
Q

What is annual general meeting vs extraordinary general meeting?

A

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

31
Q

What is proxy voting?

A

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.

32
Q

What is cumulative voting?

A

allows shareholders to vote all their shares for a single candidate

33
Q

What is shareholder activism?

A

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.

34
Q

What are shareholder derivative lawsuits?

A

legal proceedings initiated by shareholders against board directors, management, or controlling shareholders

35
Q

What are corporate takeovers?

A

means that can be used to gain control of a company

36
Q

What are 3 types of corporate takeovers? PTH

A
  1. proxy contest
  2. tender offer
  3. hostile takeover
37
Q

Describe the 3 types of corporate takeovers.

A
  1. A proxy contest is a campaign to persuade shareholders to vote to replace the current board of directors.
  2. A tender offer involves shareholders selling interests directly to a group seeking to take control.
  3. A hostile takeover is an effort to execute a takeover without management’s consent.
38
Q

What are 3 examples of environmental factors in ESG considerations? CCA

A
  1. climate change
  2. carbon emissions
  3. air/water pollution,
39
Q

What are 3 examples of social factors in ESG considerations? CDT

A
  1. customer satisfaction
  2. diversity
  3. treatment of employees
40
Q

What are 3 examples of governance factors in ESG considerations? BBE

A
  1. board independence/ diversity
  2. bribery/corruption
  3. executive compensation
41
Q

What is responsible investing?

A

used to describe the broad field of ESG investing.

42
Q

What is sustainable investing?

A

particular emphasis on factoring sustainability issues into investment decisions.

43
Q

What is socially responsible investing?

A

refers to investing in companies with positive social attributes.

44
Q

What is value based approach to ESG vs values based approach to ESG?

A

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.

45
Q

What are the 6 different ESG investment approaches? NPETEI

A
  1. Negative screening
  2. Positive screening
  3. ESG integration
  4. Thematic investing
  5. Engagement/Active ownership
  6. Impact investing
46
Q

What is negative screening vs positive screening?

A

Negative screening excludes investments in certain sectors.

Positive screening identifies companies with best-in-class ESG aspects, regardless of their sector.

47
Q

What is ESG integration vs thematic investing?

A

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.

48
Q

What is engagement/ active ownership in ESG investment approaches?

A

Engagement/Active ownership is an effort to influence corporate actions through direct engagement with management and/or directors.

49
Q

What is impact investing?

A

Impact investing seeks to simultaneously generate specific environmental/social objectives as well as meaningful financial returns.

50
Q

What is green finance?

A

general term for financing that supports sustainable economic (ESG) development

51
Q

What are green bonds?

A

issued to finance projects that have a positive environmental impact

52
Q

What is sustainability linked loans (aka green loans)?

A

financing the general functioning of an issuer that has explicit sustainability targets

corporate issuers (6 decks)

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