Reading 28 - Corporate Governance Flashcards
What is the basic premise of corporate governance?
“a system of principles, policies, procedures, and clearly defined responsibilities and accountabilities used by stakeholders to overcome conflicts of interest inherent in the corporate form”
What are two major objectives of corporate governance?
- Eliminate or reduce conflicts of interest
- Use the company’s assets in a manner consistent with the best interests of investors and other stakeholders
What are the core attributes that all effective corporate governance systems share?
- Define the rights of shareholders and other important stakeholders
- Define and communicate to stakeholders the oversight responsibilities of managers and directors
- Provide for fair and equitable treatment in all dealings between managers, directors, and shareholders
- Have complete transparency and accuracy in disclosures regarding operations, performance, risk , and financial position
Describe a Sole Proprietorship and explains its conflict of interest concerns…….
- are businesses owned and operated by a single individual
- from a legal perspective, there is no distinction between the business and its owner, results in unlimited liability
Conflict:
- conflicts betwen management and owners do not exist (b/c they are the same person)
- Conflicts typically involve creditors and suppliers
Describe a Partnership and explains its conflict of interest concerns…….
- Are composed of two or more owners/managers
- Liability is unlimited, but is shared among the partners
Conflict:
- involving creditors and suppliers (similar to Sole Proprietorships)
- between partners (are typically addressed by creatig partnership contracts that delineate the roles and responsibility of each partner)
What are some advantages that Corporations have compared to sole proprietorships and partnerships?
- It is much easier to raise large amounts of capital
- There is no need for owners to be industry experts
- Ownership stakes are easily transferable
- corporate shareholders have limited liability
Conflict:
- shareholders typically have no input in day-to-day management of the firm
- between management and shareholders
What is the principal-agent problem?
Where the agent may act for his own well being rather than that of the principal
These can be broken down into two areas:
- between managers and shareholders
- between directors and shareholders
What are some examples of ways that management may act for their own interests rather than those of shareholders?
- Using funds to expand the size of the firm
- Granting excessive compensation and perquisites
- Investing in risky ventures
- Not taking enough risk
What are some factors that may cause directors to align more closely with managers than shareholders?
- lack of independence
- board members have personal relationships with managments
- board members have consulting or other business agreements with the firm
- interlinked boards
- directors are overcompensated.
What are some of the responsibilities of a board of directors for a corporation ?
- Institute corporate values
- Ensure that the firm complies with all legal and regulatory requirements
- Create long-term strategic objectives
- Determine management’s responsibilities
- Evaluate the performance of the CEO
- Require manangement to supply the board with complete and accurate info
- Meet regularly
- Ensure board members are adequately trained
What are some things an analyst must assess to determine the effectiveness of a board of directors?
- The composition of the board of directors and whether or not the directors are independent.
- Whether the board has an independent chairman
- Qualifications of directors
- How the board is elected
- Board self-assesment practices
- Audit committee and audit oversight
- Nominating committee
- Compensation committee and the compensation awarded to management
- Use of independent or expert legal counsel
- Statement of governance policies
- Disclosure and transparency
What are the main elements of a company’s statement of corporate governance policies?
- Code of ethics
- Director’s oversight, monitoring and review responsibilities
- Management’s responsibility to the board
- Reports of director’s oversight and review of management
- Board self assessments
- Management performance assessments
- Director training
What are the 3 ESG factors?
- Environmental risk
- Social risk
- Governance risk
What are the categories that risks from ESG factors can be broken down into?
- Legislative and Regulatory risk
- Legal risk
- Reputational risk
- Operating risk
- Financial risk
What are some of the risks of an ineffective corporate system?
- Financial disclosure risk
- Asset risk
- Liability risk
- Strategic policy risk
