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This summary contains the materials discussed during lectures as well as an overview of the chapters of the p...
Week 1
Subjects
- Introduction
- Corporate governance
- Realm of corporate governance
- General themes
- Agency problems
- Legal strategies for agency costs
Corporate governance
You can look at corporate governance from different points of view: during the course we will look at the
corporate governance of listed companies only – companies who have shares in stock exchange anywhere
in the world. A company needs more than a hundred shareholders to be called a listed company.
Shareholders are the owners, but they do not make the actual decisions. In day to day business they are the
investors of the company and they choose a board to make the actual decisions and to run the daily
management.
The decisions for corporate governance create multiple problems and see to the allocation of power,
transparency and disclosure. G20 defines corporate governance as:
“a set of relationships between a company’s management, its board, its shareholders and other stakeholders.
Corporate governance also provides the structure through which the objectives of the company are set, and the
means of attaining those objectives and monitoring performance are determined.”
Different countries, stock market and jurisdictions have different models, but this definition can be seen as a
minimum standard for corporate governance. The definition speaks of the allocation of power as well as the
need for checks and balances. The G20/OECD Principles:
I. Ensuring the basis for an effective corporate governance framework
The basic criteria need to be established.
o Framework with a view on overall economic performance, market integrity and incentives it creates
o Legal and regulatory requirements should be consistent with the law
o Clear division of responsibilities among different authorities designed to serve the public interest
o Stock market should support corporate governance
o Authorities should have authority, integrity and resources, their rulings timely, transparent and motivated
o Cross border cooperation should be enhanced, including information exchange
II. The rights and equitable treatment of shareholders and key ownership functions.
The need to establish what rights shareholders get and the allocation of power in general.
III. Institutional investors, stock markets and other intermediaries.
Sees to the need for checks and balances.
IV. The role of stakeholders in corporate governance
How much should the board act on the interest of shareholders versus stakeholders.
V. Disclosure and transparency
VI. The responsibilities of the board
Based on the G20 article the following definition of corporate governance can be derived:
“Corporate governance is the comprehensive set of rules, standards and norms by which corporate entities and
their activities are governed, directed, supervised and controlled.”
The key aspects of CG are thus:
- Powers and responsibility of management supervision
- Transparency
- Accountability
Internal versus external corporate governance
You can look at corporate governance from an internal point as view: the way you organize your company,
with different sub companies, different boards and branches, etcetera. In this course we will focus on
corporate governance from an external point of view: shareholders, the board, etcetera. The external point of
view focuses on the ultimate parent/holding company of the structure that is listed at the stock exchange
market.
General themes
There are a few general themes which will be the focus of the course.
- Allocation of powers between the board and the shareholders
, o This is always a fundamental question.
- Agency problems and agency costs
o Shareholders appoint managers to make the decisions on their behalf and to run the
company.
o See below.
- Remuneration
o Remuneration is the compensation one receives in exchange for performed work or
services.
o Within corporate governance the question arises who sets the remuneration of the board
and who gets the right to reward the agents.
o The answer depends on the applicable jurisdiction.
- Takeovers
o What is the role of shareholders in selling their shares in case of a takeover?
o What is the role of the board in selling of shares in case of a hostile takeover (takeover
against the will of the management)?
o The answers depend on the applicable jurisdiction.
- Board primacy versus shareholder primacy
o Board
The board has a lot of power;
The board is autonomous, because of efficiency;
The board does not have to consult the shareholders when making decisions
o Shareholder
The opposite;
The board has limited power;
The board needs to consult shareholders when making decisions.
o Fundamental decisions.
- Stakeholders versus shareholders
o Whose interest should the board serve?
The company and all its stakeholders, to ensure continuity and durable growth; or
The shareholders, value maximization at all costs.
Shareholders
The basic shareholder rights should include the right to:
1. Secure methods of ownership registration
2. Convey or transfer shares
3. Obtain relevant and material information on a timely and regular basis
4. Participate and vote in general shareholder meetings
5. Elect and remove members of the board
6. Share in the profits
7. Be informed and have a right to approve/participate in decisions on fundamental corporate changes
a. Amendments to the statutes, articles, etc.
b. Authorisation of additional shares
c. Extraordinary transactions
Agency problems
Agency problems are the conflicts of interest among corporate constituencies, including those between
corporate ‘insiders’ (such as controlling shareholders and top managers) and ‘outsiders’ (such as
shareholders and creditors). Agency problems occur when the welfare of one party, the principle, depends on
the actions taken by the other party, the agent: how does the principle motivate the agent to act in the
principals interests rather them simply in his own interests?
There are three agency problems:
1. Conflict between the firm’s owners (principals) and its hired managers (agents)
How can the owners assure that the managers are responsive to the owners interests?
2. Conflicts between owners who posses the majority/controlling interest (agents) and the minority/non
controlling owners (principals).
How can the minority assure the majority does not expropriate them?
3. Conflicts between the firm (agents) and other parties with whom the firm contracts, such as creditors,
employees and costumers (principals).
How do third parties assure the firm does not expropriate them?
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