summary chapter 3 Flashcards
one tier board
a unitary board has legal powers both to manage and supervise the management of a corporation, either directly or through the boards committees. A unitary board has legal power both to manage and supervise the management of a corporation, either directly or throught the boards committees.
Two tier board
prescribes a formal separation between the management and monitoring functions. Monitoring powers are allocated to elected supervisory boards of non-management directors, which then appoint and supervise management boards (e.g. Germany, brazil, italy, france)
In jurisdictions with labor codetermination (germany) the supervisory board is not devoted exclusively to
the interests of hte shareholder class, but rather serves the function of lowering the costs of coordination bbetween two different constituencies, namely shareholders and employees
The most basic legal strategies implied by investor ownership are appointment rights
the shareholders retain powers to appoint (and remove) members of the board of directors
When delegated management may lead to suboptimal outcomes due to badly aligned incentives corporate laws also grant shareholders
decision rights
The efficacy of these mechanisms in controlling agency costs are a function
shareholders information and coordination costs on the one hand and the severity of management costs on the other hand.
Shareholder coordination can
decrease shareholder-manager agency costs by permitting shareholders to control managers more effectively
Increased shareholder - shareholder agency costs by permitting a faction to gain control to the detriment of the shareholders as a group.
At the core of appointment rights lies shareholders power to
vote on the selection of directors
The impact of this power is much greater if shareholders also have the power to nominate the candidates for election. The allocation of these entitlements reflects the balance between shareholder information and coordination costs and managerial agency costs. The most common approach in most jurisdictions is for the board to propose a slate of nominees, which is then rarely opposed at the annual shareholders meeting.
The power to remove directors is another
potent mechanism for controlling agency sots, perhaps even more so than appointment rights. Many jurisdictions accord shareholder majorities a non waivable right to remove directors at any time, regardless of cause or the nominal duration of their term (e.g. uk, france, italy, japan, and brazil) our other jurisdictions, however, provide weaker romoval rights, Where removal without cause is not permitted, the standard mode of idrector “removal” is dropping their names from the companys slate or failing to re-elect them.
shareholders obtain mandatory decision rights principally when directors (or their equivalents) have
conflicted interests or when decisions call for basic changes in governance structure or fundamental transactions that potentially restructure the firm. Almost all jurisdictions require sharehodlers to approve some corporate actions, whether upon a board proposal or even a shareholders. Shreholder decision rights in public companies diverge across jurisdictions; however, inclosely held companies, they converge on flexible and extensive shareholder decision rights
Legal constraints and affiliation rights
legal constraints and affiliation rights play an important role in the structure of corporate governance by protection the interests of shareholders as aclasss. All managerial and board decisions are constrained by general fiduciary norms, such as the duties of loyalty and care.
All core jurisdictions impose a very broad duty on corporate directors and officers to take reasonable care in the exercise of their offices -
the duty of care- This duty is a non trivial component of the wider corporate governance system: in some jurisdictions there is a real risk of being held liable for its breach; in jurisdictions where this is not the case, compliance with other sets of legal obligations will implicitly force directors to exercise due care in a number of situations
The laws deference to corporate decision-making has two main justifications:
judges are poorly equipped to evaluate highly contextual business decisions. In particular absent clear standards, hindsight bias can make even the most reasonable managerial decision seem reckless ex post
Given hazy standards and hindsight bias, the risk of legal error associated with agressively enforcing the duty to care might lead corporate decision-makers to prefer safe projects with lower returns over risky projects with higher expected returns
Moreover affiliation rights in the form of mandatory disclosure
informa both shareholders and boards of directors by providing a metric for evaluating managerial performance in the form of well-informed share prices. And, of course, the right to exit by freely selling shares underpins the market for corporate control, an essential component of governance in dispersed ownership firms.
Alll our core jurisdictions mandate extensive public disclosre as a condition for allowing companies into the public markets. It is quite plausible that such disclosure obligations make both a direct contribution to the quality of corporate governance, by informing shareholders, and an indirect contribution, by enlisting market prices in evaluating the performance of corporate insiders. In particular, by making stock prices more informative, mandatory disclosure
makes hostile takeovers less risky
