Corporate Ownership, Goals, and Governance. Chapter 2

Август 12, 2022

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Corporate Ownership, Goals, and Governance. Chapter 2

Содержание

2. Shareholder return
3. Example BritMart’s Return. Since its listing last year on the FTSE 100, the market value of
4. Solution a) If the company paid no dividend
5. b) The company decides to pay a dividend of ￡0.85 per share.
6. c) The company paid the dividend, but the total return to the shareholder is separated into
7. Corporate Governance Although the governance structure of any company – domestic, international, or multinational – is
8. Corporate Governance The single overriding objective of corporate governance is the optimization over time of the
9. Corporate Governance The most widely accepted statement of good corporate governance practices has been established by
10. Corporate Governance cont. Stakeholder rights. Governance practices should formally acknowledge the interests of other stakeholders—employees, creditors,
11. Structure of Corporate Governance The modern corporation’s actions and behaviors are directed and controlled by both
12. Exhibit 2.5 The Structure of Corporate Governance
13. Structure of Corporate Governance The board of directors is the legal body that is accountable for
14. Structure of Corporate Governance Equity markets should reflect the market’s constant evaluation of the promise and
15. Exhibit 2.6 Comparative Corporate Governance Regimes
16. Failures in Corporate Governance Failures in corporate governance have become increasingly visible in recent years. In
17. Good Governance and Corporate Reputation Good governance SHOULD matter. Exhibit 2.7 describes a set of governance
18. Exhibit 2.7 The Growing Consensus on Good Corporate Governance
19. Exhibit 2.8 IR Global Rankings: The Top 30
20. Corporate Governance Reform Within the United States and the United Kingdom, the main corporate governance problem
21. The Sarbanes-Oxley Act This act was passed by the U.S. Congress, and signed by President George
22. Additional Corporate Governance Issues Board structure and compensation issues E.g. replacing stock options with restricted stock.
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Shareholder return

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Example
BritMart’s Return. Since its listing last year on the FTSE

100, the market value of BritMart rose from ￡21 to ￡23.5. For each of the following cases calculate the rate of return, distinguishing the dividend yield from the capital gain:
a. BritMart pays no dividend.
b. BritMart decides to pay a dividend of ￡0.85 per share.
c. BritMart paid the dividend, but the total return to the shareholder is separated into the dividend yield and the capital gain.

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Solution a) If the company paid no dividend

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b) The company decides to pay a dividend of ￡0.85 per

share.

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c) The company paid the dividend, but the total return to

the shareholder is separated into the dividend yield and the capital gain.

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Corporate Governance
Although the governance structure of any company – domestic, international,

or multinational – is fundamental to its very existence, this subject has become a lightning rod for political and business debate in the past few years.
Spectacular failures in corporate governance have raised issues about the very ethics and culture of the conduct of business.

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Corporate Governance
The single overriding objective of corporate governance is the optimization

over time of the returns to shareholders.
In order to achieve this goal, good governance practices should focus the attention of the board of directors of the corporation by developing and implementing a strategy that ensures corporate growth and improvement in the value of the corporation’s equity.

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Corporate Governance
The most widely accepted statement of good corporate governance practices

has been established by the OECD:
Shareholder rights. Shareholders are the owners of the firm, and their interests should take precedence over other stakeholders.
Board responsibilities. The board of the company is recognized as the individual entity with final full legal responsibility for the firm, including proper oversight of management.
Equitable treatment of shareholders. Equitable treatment is specifically targeted toward domestic versus foreign residents as shareholders, as well as majority and minority interests.

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Corporate Governance cont.
Stakeholder rights. Governance practices should formally acknowledge the interests

of other stakeholders—employees, creditors, community, and government.
Transparency and disclosure. Public and equitable reporting of firm operating and financial results and parameters should be done in a timely manner, and available to all interests equitably.

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Structure of Corporate Governance
The modern corporation’s actions and behaviors are directed

and controlled by both internal forces and external forces (Exhibit 2.5).
The internal forces, the officers of the corporation and the board of directors, are those directly responsible for determining both the strategic direction and the execution of the company’s future.
The external forces include equity markets in which the shares are traded, the analysts who critique the company’s investment prospects and external regulators, among others.

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Exhibit 2.5 The Structure of Corporate Governance

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Structure of Corporate Governance
The board of directors is the legal body

that is accountable for the governance of the corporation.
Management :the senior officers of the corporation are the creators and directors of the corporation’s strategic and operational direction.
Exhibit 2.6 illustrates how different corporate governance regimes lead to different characteristics of ownership, efficiency, and transparency.

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Structure of Corporate Governance
Equity markets should reflect the market’s constant evaluation

of the promise and performance of the company.
Debt markets should reflect the company’s ability to repay its debt in a timely and efficient manner.
Auditors and legal advisors are responsible for providing an external professional opinion as to the fairness, legality and accuracy of corporate financial statements.
Regulators work to ensure, among other things, that a regular and orderly disclosure process of corporate performance is conducted so that investors may evaluate a company’s investment value with accuracy.

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Exhibit 2.6 Comparative Corporate Governance Regimes

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Failures in Corporate Governance
Failures in corporate governance have become increasingly visible

in recent years.
In each case, prestigious auditing firms missed the violations or minimized them, presumably because of lucrative consulting relationships or other conflicts of interest.
In addition, security analysts urged investors to buy the shares of firms they knew to be highly risky (or even close to bankruptcy).
Top executives themselves were responsible for mismanagement and still received overly generous compensation while destroying their firms.

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Good Governance and Corporate Reputation
Good governance SHOULD matter.
Exhibit 2.7 describes a

set of governance policies and practices
Exhibit 2.8 shows selected governance rankings by IR Global. There are several international governance ranking agencies.
Governance rankings and cost of capital do not appear to be highly correlated
Anglo-American board members do signal good corporate governance in non-Anglo-American firms.

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Exhibit 2.7 The Growing Consensus on Good Corporate Governance

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Exhibit 2.8 IR Global Rankings: The Top 30

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Corporate Governance Reform
Within the United States and the United Kingdom, the

main corporate governance problem is the one treated by agency theory: with widespread share ownership, how can a firm align management’s interest with that of the shareholders?
Because individual shareholders do not have the resources or the power to monitor management, the U.S. and U.K. markets rely on regulators to assist in the agency theory monitoring task.
Outside the U.S. and U.K., large, controlling shareholders are in the majority – these entities are able to monitor management in some ways better than the regulators can.

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The Sarbanes-Oxley Act
This act was passed by the U.S. Congress, and

signed by President George W. Bush during 2002 and has three major requirements:
CEOs of publicly traded companies must vouch for the veracity of published financial statements;
corporate boards must have audit committees drawn from independent directors;
companies can no longer make loans to corporate directors; and
companies must test their internal financial controls against fraud
Penalties have been spelled out for various levels of failure.
Most of its terms are appropriate for the U.S. situation, but some terms do conflict with practices in other countries.

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Additional Corporate Governance Issues
Board structure and compensation issues
E.g. replacing stock options

with restricted stock.
Transparency, accounting and auditing
U.S. Accounting is rule based whereas Western Europe uses conceptually based accounting.
Minority shareholder rights
Exhibit 2.9 illustrates minority shareholder responses when dissatisfied with firm performance.

Corporate Ownership, Goals, and Governance. Chapter 2

Содержание

Shareholder return

Example BritMart’s Return. Since its listing last year on the FTSE

Solution a) If the company paid no dividend

b) The company decides to pay a dividend of ￡0.85 per

c) The company paid the dividend, but the total return to

Corporate GovernanceAlthough the governance structure of any company – domestic, international,

Corporate GovernanceThe single overriding objective of corporate governance is the optimization

Corporate GovernanceThe most widely accepted statement of good corporate governance practices

Corporate Governance cont.Stakeholder rights. Governance practices should formally acknowledge the interests

Structure of Corporate GovernanceThe modern corporation’s actions and behaviors are directed

Exhibit 2.5 The Structure of Corporate Governance

Structure of Corporate GovernanceThe board of directors is the legal body

Structure of Corporate GovernanceEquity markets should reflect the market’s constant evaluation