Session 3 - Corporate Governance Theories

Question 1

what is corporate governance

Answer 1

system of rules practices (common shared best practices) and processes by which a firm is directed and controlled

Question 2

agency theory

Answer 2

owners (shareholders) appoint an agent (director) to perform some tasks on their behalf.

• AGENTS = managers appointed by the shareholders which runs & manage the company on behalf of the shareholders
• PRINCIPALS = shareholders, owners of the company which delegate to the managers the management of the company on their behalf transferring relevant responsibilities/liabilities

Question 3

what is the agency problem? 2 conflicts

Answer 3

1. conflict of INTEREST = separation of ownership and control can lead to potential conflicts of interests
2. conflict in OBJECTIVES = agents’ objectives could be different from the shareholders’s (PRINCIPAL).
   - Shareholders set short, medium and long visions
   - but managers have some objective to achieve but how to achieve these results is in the decision of the managers, so we can have potential conflicts.

Question 4

how to mitigate the issues of the agency problem?

Answer 4

1. fair & accurate financial disclosure: showing numbers and impacts of decision
2. efficient board of directors and monitoring managers performances
3. accounting information
4. contractual obligation to be put the engagement of directors where it is clear what shareholders require
5. incentive schemes for managers REWARDING THEM FINANCIALLY FOR MAXIMIZING SHAREHOLDER INTERESTS

Question 5

stewardship theory

Answer 5

no conflict between managers and shareholder because objectives are aligned and managers (stewards) protects and maximizes shareholder wealth through firm performance, because by doing so, the steward’s utility functions are maximized.

Question 6

stakeholder theory

Answer 6

considering interest of third parties besides shareholders and managers.
- internal and external

Question 7

what are the goals of a good corporate governance structure?

Answer 7

fairness
transparency
accountability
checks and balances

Question 8

what are the two classes of shareholders rights

Answer 8

1) EXIT RIGHTS
2. VOICE RIGHTS

Question 9

what are the exit rights of shareholders

Answer 9

1. right to WITHDRAWAL = (recesso) = in the occurance of event that may substantially affect the shareholders position within the company or compromise their investment they can freely back off the company
2. wall street rule = right to freely and fully transfer the property of shares together with legitimacy to shareholder status.

Question 10

which are the voice rights of shareholders?

Answer 10

1. VOTING RIGHTS (right to partecipate in meetings, call them, table proposals, raise questions and access to info of meetings)
2. RIGHT OF REMOVAL (right to REPORT criminal conducts incurred by board members + right to CLAIM DAMAGES to directors

Question 11

can shareholders remove directors even without breach ? at which condition

Answer 11

A director can be removed in any case whenever (in theory) but if there is not a breach the consequence of a removal is to pay compensation to the directors.

Question 12

what are the consequences of shareholders to have voting rights (meaning they are more competent and active in CG)?

Answer 12

it is a good sign because

• ENCOURAGE a DIALECTIC between dominant shareholders (managers) and non controlling shareholders
• INFORMATION ASYMMETRY IS MITIGATED
• TRANSPARENCY is improved
• ACCOUNTABILITY of agents
• Capital markets efficiency

Question 13

what are agency costs

Answer 13

shareholder costs to exercise participation rights

Question 14

shareholders right directive

Answer 14

shareholders rights directive 2007/36
improving shareholder activism and power to mitigate the presence of inactive and apathetic shareh.

• Equal treatment of shareholders (art. 4)
• Information PRIOR to the general meeting
• Right to put items on the agenda of AMG
• ask questions
• voting by correspondence
• Participation in the AGM by electronic means

Question 15

benefits of institutional investors (insurance, mutual funds, banks, hedge and pension funds)

Answer 15

• watchdogs
• high information
• reducing the collective action problems

Question 16

how the BoD must be?

Answer 16

a collegiate and articulated body in terms of

• composition and members profiles: Having different profiles, skills and background creates more synergies
• organization and structure
• tasks, roles, duties and liabilities

Question 17

what are EU special rules for BoD?

Answer 17

• governing directors’ nomination and shareholder voting
• assuring BoD internal “diversity” as for: - skills, professional experience, expertise and values; - origin; - gender;
• requiring separation between executive and non-executive roles
• appointment of specific commissions within BoD vested with an advisory function in key areas

Question 18

which are the limitations of directors?

Answer 18

• law compliance
• corporate purpose (art ULTRA VIRES, going beyond the power of the individual)

Question 19

do directors have fiduciary duties towards creditors?

Answer 19

yes, when corporation in “zone of insolvency”
sometimes also independently from the insolvency of the corporation

Question 20

duty of care (manage diligently)

Answer 20

• manage in COMPLIANCE with the law and the governing documents in a diligent way
• with care, skill and diligence
• not automatically reliable for not achieving shareh. results

Question 21

duty of loyalty

Answer 21

duty of directors to act ✓ avoiding conflict of interest ✓ fairly & honestly ▷ for the benefit of members ✓ showing independence of judgment.

in case of conflict of interest - DISCLOSE it

Question 22

when directors are liable for creditors?

Answer 22

• bankruptcy = only contractual rights but no fiduciary duties
• insolvency = duty of care and loyalty

Question 23

3 main fields of disclosure

Answer 23

1. financial statements
2. corporate governance report
3. remuneration report

Question 24

what does the corporate governance report disclose?

Answer 24

• capital structure: how equity is divided
• restriction of shares transfer
• mechanism of voting rights
• SHAREHOLDERS AGREEMENTS on how to vote and transferability and exit

Question 25

what are remuneration reports

Answer 25

Structure guidelines for directors’ remuneration

All payments need to comply with these rules

Need to be published in the market in a clear and comprehensive way (including benefits, non-monetary rewards) -

Question 26

who are gatekeepers

Answer 26

The quality of disclosure & reports can be enhanced through verification by trusted third parties (Gatekeepers).

• AUDITORS (external and internal)
• Supervisors
• Stock exchange authority
• Regulatory bodies
• Tax authorities
• Statutory auditors

Question 27

3 perspectives of Corporate social responsibility

Answer 27

1. social perspective = corporations should be accountable for their social impact. The company is accountable and liable for their social impact
2. strategy driven perspective = CSR is an integral part of the wealth creation process.
3. stakeholders p= alignment of corporate values and actions with the expectations and needs of their stakeholders

Question 28

costs of not conforming with CSR

Answer 28

legal costs damages
restitution cost
legal fees
product recalls

The loss of reputation can be even higher, affecting sales, costs and employee turnover.

Question 29

S. 172 UK Companies Act. Duty to promote the success of the company

Answer 29

A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members, and in doing so have regard (amongst other matters) to:
- the likely consequences of any decision in the long term
- the interests of the company’s employees
- the need to foster the company’s business relationships with suppliers, customers and others
- the impact of the company’s operations on the community and the environment
- the desirability of the company maintaining a reputation for high standards of business conduct
- the need to act fairly between members of the company

Question 30

2018 EU Commission ACTION PLAN (March 2018) Financing Sustainable Growth: 3 objectives

Answer 30

1. Financing sustainable growth= reorient capital flows towards sustainable investment, for sustainable & inclusive growth
2. foster transparency & long-termism in financial and economic activity
3. manage financial risks stemming from climate change, environmental degradation and social issues

Question 31

2014/95/EU Directive (“NF Directive”)

Answer 31

(“NF Directive”) which applies large public-interest companies with more than 500 employees, obliges certain corporations and groups to provide a non-financial statement

• publish reports on the policies they implement in relation to:
  environmental protection: measures taken to protect and preserve it
  social responsibility and treatment of employees: not only about the remuneration
  respect for human rights
  anti-corruption and bribery
  diversity on company boards