Summary College Aantekening, Conclusies en Begrippen Financial Management
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Course
Financial Management
Institution
Tilburg University (UVT)
Book
Corporate Governance
De complete pre-master module van collegejaar . Dit document omvat alle stof die voorkwamen in de final en de resit van Financial Management. Incl. lecture notes, conclusies en een begrippenlijst per topic.
Topic 1: Introduction to Financial Management ................................................................................. 3
Lecture notes ................................................................................................................................... 3
1 Defining corporate governance and key theoretical models .................................................. 4
Topic 2: International Corporate Government Environment.............................................................. 8
Lecture notes ................................................................................................................................... 8
2 Corporate control across the world ...................................................................................... 11
4 Taxonomies of corporate governance systems..................................................................... 12
Topic 3: Board of Directors................................................................................................................ 16
Lecture notes ................................................................................................................................. 16
7 Boards of directors ................................................................................................................ 17
Topic 4: Managerial Incentives.......................................................................................................... 19
8 Incentivizing managers and disciplining of badly performing managers .............................. 21
Topic 5: Payout policy........................................................................................................................ 23
Lecture notes ................................................................................................................................. 23
Topic 6: Initial Public Offering ........................................................................................................... 26
Lecture notes ................................................................................................................................. 26
11 Corporate governance in initial public offerings (IPOs) .................................................... 28
Topic 7: Debtholders ......................................................................................................................... 31
Lecture notes ................................................................................................................................. 31
14 Debtholders ....................................................................................................................... 33
Topic 8: CSR and SRI .......................................................................................................................... 35
Lecture notes ................................................................................................................................. 35
13 Corporate social responsibility and socially responsible investment................................ 37
Topic 9: Behavioral Biases ................................................................................................................. 40
Lecture notes ................................................................................................................................. 40
12 Behavioral biases and corporate governance ................................................................... 42
Topic 10: Behavioral Finance Puzzles ................................................................................................ 45
Lecture notes ................................................................................................................................. 45
,Topic 1: Introduction to Financial Management
Lecture notes
After the 2008 financial crisis, many people lost faith in the financial system and its management. CG
aims to mitigate conflicts of interest between managers and shareholders, shareholders and
stakeholders, debtholders and shareholders, etc. By aligning interests of the different stakeholders of
a firm, value is created.
The goal of a manager (often referred to as agent in the context of this course) is to maximize the
value of the firm. The manager does so by making decisions like:
1. Investment decisions, investing in assets that earn a great return for the firm.
2. Financial decisions, finding the capital structure for the firm (debt/equity financing).
3. Payout decisions, figuring out which part of profits need to be distributed to shareholders or
other stakeholders.
Traditional capitalist theory suggests that the objective of a firm is to make as much profit as possible
(for the shareholders). Modern theory states that a firm’s objective does not consist solely of
generating value by means of profit, but also by improving stakeholder value or ESG value. The latter
is referred to as “growing the pie”, increasing everyone’s benefit as opposed to the benefit of a few
stakeholders or “slices of pie”.
Ignoring the “pie mentality” is costly for firms as it increases conflict between stakeholders.
Financial management also consists of a human element (more on that in later topics).
, 1 Defining corporate governance and key theoretical models
(Public) Stock corporations, stocks, shares: firms with outstanding equity which is traded
on official stock exchanges.
Control rights (voting rights) Typically voting rights (attached to shares),
control rights give the holder the right to make
certain decisions about the firm or vote for
points in the agenda of the AGM (annual
general shareholder meeting).
Board of directors The governing body of an organization. Two
main tasks:
1. Monitor the management of the firm
2. Provide advice and strategic direction
for the firm
Stakeholders Debt- and equity holders, non-financial
stakeholders of a company that have interest in
running the firm.
Executive directors Directors that run the firm on a day-to-day basis
Non-executive directors The other type of directors that monitor and
challenge the executive directors/top
management of a firm.
Residual claimants The providers of finance, in particular the
shareholders, that are the residual risk bearers
or the residual claimants to the firm’s assets (all
other risk bearers go first in the case of FD).
Conflicts of interest Exist between, shareholders and managers,
shareholders and debtholders, large
shareholders and minority shareholders,
shareholders and customers/other non-
financial stakeholders. CG deals with prevention
and mitigation of these conflicts.
Cadbury Report One of the first official codes of best practice
(CG code). The Cadbury Report defines CG as
“the system by which companies are directed
and controlled”.
Principle of shareholder primacy The directors are expected to look after the
interest of all stakeholders of the firm, but they
should only do so if it’s also in the long-term
benefit of the company (shareholders benefit).
Agent The firm’s management.
Principal Shareholders, long-term stakeholders.
Moral hazard Moral hazard consists of the fact that once a
contract has been signed, the incentive to act
less responsible may have increased for the
manager. In simple, moral hazard exists
because the principal cannot always track the
agent.
Complete contracts Contracts that include covenants in order to
reduce moral hazard after that contract has
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