Ownership, Governance & ESG Considerations in Investment Analysis

Question 1

Dispersed Ownership

Answer 1

Many shareholders, no shareholder can individually exercise control over the corporation

Question 2

Concentration ownership

Answer 2

an individual shareholder or a group that exercise control over the corporation (e.g. family, another company or soverign entity)

Question 3

High ownership control relative to ownership stake case come from… (3)

Answer 3

Horizontal Control
Vertical Ownership
Dual-Class

Question 4

Horizontal Control

Answer 4

Companies with mutual business interest that have cross-holding share arrangements with each other - help facilitate strategic alliance

Question 5

Vertical Ownership

Answer 5

involves a company or group that has controlling interest in two or more holding companies who in turn have controlling interests in various operating companies

Question 6

Dual-Class

Answer 6

shares also disconnect the degree of share ownership from actual control, grand one share class superior or sole voting rights and the other none.

Question 7

Dual Class shares and vertical ownership arrangements mean the company or group at the top can

Answer 7

issue to itself all or a very high number of shares with superior voting rights and thus maintain control

Question 8

Principal-agency problem

Answer 8

dispersed ownership, dispersed voting power - weak shareholders and strong managers, managers use company resources to pursue their own interests and not maximise shareholder wealth

Question 9

Principal-principal problem (concentrated ownership and concentrated voting power)

Answer 9

strong shareholders and weak managers - controlling owners may also be able to allocate company resources to their own benefit at the expense of minority owners

Question 10

Principal-principal problem (dispersed ownership and concentrated voting power)

Answer 10

controlling shareholders with less than majority ownership can control other minority owners with dual-class shares and pyramid structures and monitor management due to their outsized voting power

Question 11

Concentrated Ownership and Dispersed Voting Power arises from

Answer 11

voting caps - legal restrictions on voting rights of large share positions

Question 12

Types of Influential Shareholders (8)

Answer 12

Banks
Families
State Owned Enterprises
Institutional Investors
Company Groups
Private Equity Firms
Foreign Investors
Managers and Directors - insiders

Question 13

Effects of Ownership Structure on Corporate Governance - Independent Directors

Answer 13

For dispersed ownership jurisdictions, strengthen the board’s monitoring role over managers. For concentrated ownership, independent directors must serve on audit, nomination and compensation committees. Principal-agent problem is generally less of a concern in concentrated ownership structure than in a dispersed ownership structure.

Question 14

Effects of Ownership Structure on Corporate Governance - Board Structures (One and Two Tier Boards)

Answer 14

One Tier structure consists of a single board of directors, composed of executive (internal) and non-executive (external) directors. A two-tier board structure consists of a supervisory board that oversees a management board

Question 15

Effects of Ownership Structure on Corporate Governance - Special Voting Arrangements

Answer 15

improve the position of minority shareholders

Question 16

Corporate Governance Laws, Code and Disclosure Requirements

Answer 16

Firms disclose their adoption of recommended corporate governance practices or explain why they have not done so

Question 17

Stewardship Codes

Answer 17

Encourage investors to exercise their legal rights and increase their level of engagement in corporate governance

Question 18

Evaluating Board Effectiveness (5)

Answer 18

Board of Directors Structure
Board Independence
Board Committees
Board Skills and Experience
Board Composition

Question 19

Board of Directors Structure considers…

Answer 19

does the board provide sufficient oversight and accountability to shareholders? CEO-chair duality - monitoring and oversight role of the board may be compromised relative to independent chair person and CEO

Question 20

Board Independence considers…

Answer 20

that without independent directors, the potential exists for management to act in a self-serving manner

Question 21

Board Committees must be…

Answer 21

sufficiently independent and focus on key governance concerns, such as audit, compensation and the selection of directors?

Question 22

Other important aspects of board effectiveness… (2)

Answer 22

Board skills and experience - director tenure and board composition - a board with too many members or that lacks diversity in gender, age and tenure, may govern less effectively than boards that are smaller or more diverse

Question 23

Straight Voting

Answer 23

shareholders granted the right of one vote for each share owned

Question 24

Dual Class Share

Answer 24

compnay founders or management typically have shares with more voting power than the class of shares available to the general public

Question 25

Shareholder Voting Rights - Potential Conflict of Interest

Answer 25

between minority shareholders and the company’s founders and management - one group of shareholders can benefit over another