Module 31.2: Factors Affecting Corporate Governance Flashcards
What are activist shareholders?
pressure companies in which they hold a significant number of shares for changes, often changes they believe will increase shareholder value
What is a proxy fight?
group of shareholders which seek the proxies of other shareholders to vote in favor of their alternative proposals.
what is a tender offer?
an activist group may make a tender offer for a specific number of shares of a company to gain enough votes to take over the company.
What is a hostile takeover?
Both senior management and directors can be replaced by shareholders if they believe company performance is poor and would be improved by a change.
What is a common-law system vs. civil law system?
common-law system - countries under which judges’ rulings become law in some instances
civil law system - judges are bound to rule based only on specifically enacted laws.
What are some risks of poor governance and stakeholder management?
Weak control functions and poor recordkeeping influencing company performance
weak governance could lead to lower-than-optimal risk, reducing company value
could increase legal and reputational risks.
What are some benefits of effective governance and stakeholder managment?
Ensures that management and board member incentives align their interests well with those of shareholders.
Could lead to better operating results with formal policies regarding conflict of interests.
Minimize risk of debt default or bankruptcy.
What is the typical voting structure of a publicly traded firm? What about a dual class structure? What is the purpose of dual class?
1 share = 1 vote
in a dual class structure one share may be entitled to several votes per share, while another class of shares is entitled to one vote per share.
Purpose is to allow control to a subset of shareholders even though they own less than 50%.
Why would an analyst carefully consider the company’s board of directors? What are some important factors to consider?
1) whether the board is execute, non-executive, or independent
2) whether they are involved in related-party transactions
3) have diversity of expertise that suits the company’s current strategy
4) have served many years and may be too close to management
What would cause an analyst to be concerned about management incentives and rumeneration?
1) the inventive plan seems to offer greater incentives at the expense of long term company value
2) performance based incentive pay is fairly stable, indicating performance targets are easy to achieve
3) management payments are very high relative to that of comparable companies
4) management incentives are not aligned with current company strategy and objectives
Why is the composition of shareholders important to understand?
if a significant portion of a company’s outstanding shares are held by an affiliated company or institution, those shareholders may be able to exert enough influence to dictate the company’s policies and direction.
What is ESG investing?
Investing in companies that boost the environmental, social, and governance factors in making investment decisions
What are three other terms of ESG investing?
sustainable investing, responsible investing, or socially responsible investing
What conflicts could occur through ESG investing?
ESG investing could conflict with fiduciary duty of fund managers to boost profit as much as possible.
What is negative screening?
refers to specific companies or industries from consideration for the portfolio based on their practices regarding human rights, environmental concerns, or corruption.
What is positive screening?
investors attempt to identify companies that have positive ESG practices.
What is the relative / best-in-class for ESG?
seeks to identify companies within each industry group with the best ESG practices.
What is Full integration when it comes to ESG?
when a firm will estimate ESG factos in future cash flows or company’s cost of capital.
What is thematic investing for ESG?
investing in sectors or companies in an attempt to promote specific ESG-related goals, such as sustainable practices.
What is engagement and active ownership for ESG?
refers to using ownership of company shares or other securities as a platform to promote ESG practices.
What is green finance and green bonds?
producing economic growth in a more sustainable way.
green bonds - funds raised are used for projects with a positive environmental impact.
what is overlay / portfolio tilt and risk factor / risk premium?
overlay / portfolio tilt - used by managers to manage the ESG characteristics of their overall portfolios.
Risk factor / risk premium - investing refers to the treatment of ESG factors as an additional source of systemic factor risk.
