week 3 Flashcards
Investor Ownership
implies that ultimate control over the firm often lies in the hands of shareholders who are far removed from the firm’s day-to-day operations and who face significant information and coordination costs;
Delegated Management
which is functional precisely because of shareholders’ information and coordination costs, but which opens up the possibility for opportunistic behaviour, due to:
absent, discontinuous or shallow monitoring on managers’ (and/or dominant shareholders’) conduct
risk of misalignment between managers’ (and/or dominant shareholders’) interest and investors’ (non-controlling) interest
deficiency of a proper and efficient system of checks and balances: no managers’ accountability
From the (Private) Corporation as a “Nexus for contracts” to the (Public) Corporation as a “Nexus of conflicts of interests”
Imploding Model
Strong property vs weak directors
normally with concentrated ownership, mostly in the hands of a small number of investors
dominating role typically lays in the hands of families and/or groups of business firms (and/or Banks/State)
high presence of pyramidal groups; interlocking directors and shareholders agreements, with limited contestability of control
marginal role of capital markets
capital ownership is mostly allocated in the hands of the two ideally different groups of shareholders («shareholder-investors» vs «shareholder-businessman»)
the first group (investors) is mainly adverse to being involved in the running of the business and company
final outcome: two different and antagonistic groups in terms of quality as well as of quantity
consolidation of the control ownership
(potentially “leveraged” by means of: shareholders’ voting agreement; pyramidal groups;
Exploding Model
Strong directors vs weak property
high access to capital markets for raising investments
the capital ownership is mostly spread and dispersed in the hands of thousands (various and frequently) changing «shareholder-investors» (only one group of shareholders) (although with significant presence of “institutional investors”)
short-terminism
high likelihood of hostile takeovers and control contestability, with consequent high pressure to managing politics
Moral Hazard Risk
a conflict endemic to any corporation, even private and/or closely held corporation), despite the fact that shareholders are residual claimants, shareholders bear limited liability but are entrusted too with ownership rights
Common problems engender
Company Law’s function is to provide business enterprises with a legal form (statute) that possesses - and is coherent with - all the five (core) hallmarks (attributes)
Company Law’s duty is to set forth appropriate rules and standards to govern the problems/conflicts deriving from such attitudes
reduce the ongoing costs
Facilitating the coordination between participants
Lessening the scope for value-reducing forms of opportunism among different constituencies
Addressing three principal sources of opportunism:
Conflicts amongst shareholders
Conflicts between managers and shareholders
Conflicts between company and stakeholders
Takeover threat
Market of corporate control: effectiveness o
Voice through Exit
Market of capitals: efficacy of «Wall Street Rule»
Corporate Rule
Emphasis on transparency of:
ownership and corporate rights allocation
Emphasis on company monitoring and supervisory instance, throughout:
more involvement of shareholders in company’s decision
more accurate allocation of duties and liabilities within company’s organs and boards members
on two different moments and decisions
when the investor is taking his decision about if, what, how and where to invest («Firm on the market» Rules)
when the investor is (already a shareholder and) has an equity interest in company risk capital («Market in the firm» Rules)
Race to the top
Competition amongst Companies’ Corporate Governance Statutes is beneficial
Hard law (Corporate rule) itself is not enough, as:
Firms and economic systems evolve
Law rules cannot perfectly embrace and provide for every situation
Business risks constantly enhance
Firm organization in PlCs become more and more complex
