Shareholder Rights And Corporate Governance Flashcards
What are shareholders?
They are investors or stockholders who own a corporation through purchase of company stock.
What are the two types of shareholders?
Individual: individuals that directly own stock shares “Main Street investors”
Institutions: pensions, mutual funds, insurance companies “Wall Street investors”
What are the two types of ownership?
Public limit company: offers shares to the general public
Private limited company: does not offer shares to the general public
What are the objectives of owning stock?
Earning money: rise: capital appreciation, and they earn dividends
Name the shareholder’s rights.
Receive dividends if declared
Vote on members of boards and major decisions
Defining corporate governance
Process by which a company is governed through systems of internal governance that determine strategic direction and balance.
What is the role of the board of directors?
BoD is central to establish objectives, develop strategies and protect stakeholder’s interest, as well as controlling management.
Describe a board’s composition.
Typically between 9-11 members, majority are outside the company directors, many include ceos of other companies, for example. Average tenure is 8-10 years. A share of female members is mandatory through legislations.
What is the difference between one tier and two tier system?
One tier is common in the US, two tier is common in EU. One tier is composed of one board only, the executive directors are combined in one management body. In the two tier system, there are two boards, one made of ceos and other insiders, and one supervising board.
What are the functions in the board?
Compensation committee: approves salaries and benefits
Nominating committee: recommends candidates for positions like directors and officers
Audit committee: reviews financial reports
Specialised committee: focus on niche areas.
What are the characteristics of a board that make it effective?
Select outside directors
Hold open elections for members of the board
Hold elections for all directors annually
Separate ceo and board chairperson
Diversity
What is the agency problem?
Modern corporations have separate ownership and control. Many important decisions are left to the managers or hired professionals. The issue stands in the fact that there is no way to verify that they will act in the interest of the company rather than their own.
What is the agency relationship?
What possible issues may there be?
It implies a principal delegating to an agent the right to make decisions on his behalf.
Conflict of interest: if both principal and agent are utility maximisers, the agent will probably act in their own interest.
Safeguard mechanisms: the principal will be compelled to implement safeguard mechanisms, which are usually very costly.
What is a possible danger of putting into action a compensation per performance?
The executives fixation to overperform may bring unethical practices.
What are some things that protect shareholder’s interests?
Financial disclosure
Insider trading is illegal
