Ownership, Governance & ESG Considerations in Investment Analysis Flashcards
Dispersed Ownership
Many shareholders, no shareholder can individually exercise control over the corporation
Concentration ownership
an individual shareholder or a group that exercise control over the corporation (e.g. family, another company or soverign entity)
High ownership control relative to ownership stake case come from… (3)
Horizontal Control
Vertical Ownership
Dual-Class
Horizontal Control
Companies with mutual business interest that have cross-holding share arrangements with each other - help facilitate strategic alliance
Vertical Ownership
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
Dual-Class
shares also disconnect the degree of share ownership from actual control, grand one share class superior or sole voting rights and the other none.
Dual Class shares and vertical ownership arrangements mean the company or group at the top can
issue to itself all or a very high number of shares with superior voting rights and thus maintain control
Principal-agency problem
dispersed ownership, dispersed voting power - weak shareholders and strong managers, managers use company resources to pursue their own interests and not maximise shareholder wealth
Principal-principal problem (concentrated ownership and concentrated voting power)
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
Principal-principal problem (dispersed ownership and concentrated voting power)
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
Concentrated Ownership and Dispersed Voting Power arises from
voting caps - legal restrictions on voting rights of large share positions
Types of Influential Shareholders (8)
Banks
Families
State Owned Enterprises
Institutional Investors
Company Groups
Private Equity Firms
Foreign Investors
Managers and Directors - insiders
Effects of Ownership Structure on Corporate Governance - Independent Directors
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.
Effects of Ownership Structure on Corporate Governance - Board Structures (One and Two Tier Boards)
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
Effects of Ownership Structure on Corporate Governance - Special Voting Arrangements
improve the position of minority shareholders
Corporate Governance Laws, Code and Disclosure Requirements
Firms disclose their adoption of recommended corporate governance practices or explain why they have not done so
Stewardship Codes
Encourage investors to exercise their legal rights and increase their level of engagement in corporate governance
Evaluating Board Effectiveness (5)
Board of Directors Structure
Board Independence
Board Committees
Board Skills and Experience
Board Composition
Board of Directors Structure considers…
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
Board Independence considers…
that without independent directors, the potential exists for management to act in a self-serving manner
Board Committees must be…
sufficiently independent and focus on key governance concerns, such as audit, compensation and the selection of directors?
Other important aspects of board effectiveness… (2)
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
Straight Voting
shareholders granted the right of one vote for each share owned
Dual Class Share
compnay founders or management typically have shares with more voting power than the class of shares available to the general public
Shareholder Voting Rights - Potential Conflict of Interest
between minority shareholders and the company’s founders and management - one group of shareholders can benefit over another
