Samenvatting
Summary Corporate Strategy Ownership and Governance
- Instelling
- Erasmus Universiteit Rotterdam (EUR)
Summary Corporate Strategy Ownership and Governance articles, lectures, and some cases.
[Meer zien]Voorbeeld 4 van de 105 pagina's
Voorbeeld 4 van de 105 pagina's
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Voorbeeld van de inhoud
Session 1: Corporate Strategy and The Theory of (the) Firm(Boundaries)
Content: In this lecture, we will discuss a number of fundamental questions, concepts, and
theories that we will rely on throughout this module. Overall, we will seek to answer the
question of why firms exist, to begin with, and how the so-called ‘theory of the firm’ that
seeks to answer this question relates to questions of corporate strategy, ownership, and
governance. Although we will draw heavily on transaction cost theory (TCE), we will also
discuss a multi-theoretical approach to explaining firm boundaries. Additionally, we will draw
upon law and economics to identify 5 characteristic legal features of the corporate form
that will be essential for developing an understanding of what corporations are, and what will
be needed for exploring what the most suitable ownership and governance structures would
be for a particular firm.
Kraakman, R, et al. (2009, 2nd edition) The Anatomy of Corporate Law; A Functional
and Comparative Analysis, Oxford: Oxford University Press, Chapter 1, ‘What is
Corporate Law’, p.1-19 (please focus on the five characteristics of corporations).
Five legal characteristics of business corporations: There is a set of fundamentally
similar legal characteristics among business corporations across different national
jurisdictions
1. Legal personality – entity shielding
● To serve as a single contracting party that is distinct from the various individuals who
own or manage the firm or are suppliers or customers of the firm.
- Separate patrimony: permits the firm to own assets that are distinct from the
property of other persons (e.g. firm’s investors). The firm’s rights of ownerships over
its designated assets include the rights to use and sell them, and – most importantly
– to make them available for attachment (onderpand) by its creditors § Core function
of separate patrimony is entity shielding/affirmative asset partitioning: protecting the
firm’s assets from the creditors of the firm’s owners. It creates creditor’s rights by
favoring business creditors over the individual creditors of investors and managers.
● Rule of priority: grants to creditors of the firm (as security for the firm’s debts) a claim
on the firm’s assets that is prior to the claims of the personal creditors of the firm’s
owners ® in case of bankruptcy, money from liquidating will first be used to pay
bondholders. Shareholders will get paid last.
, ● Rule of liquidation protection: shareholders cannot withdraw their share of firm assets
at will, thus forcing partial or complete liquidation of the firm, nor can the personal
creditors of an individual owner foreclose on the owner’s share of firm assets ® to
protect the going concern value of the firm against destruction either by individual
shareholders or their creditors
- Partnerships are characterized only by priority rule and not by liquidation protection
(thus weak form of legal personality)
2. Limited owner liability – owner shielding
● The firm’s creditors are limited to making claims against the assets that are property of
the firm itself and have no further claim against the personal assets of the firm’s
shareholders (or managers). It reserves shareholder’s individual assets exclusively for
their personal creditors
- Defensive asset partitioning: shielding the personal assets of a firm’s owners from the
creditors of the firm
● Permits firms to isolate different lines of business for the purpose of obtaining credit. The
assets associated with each venture can conveniently be pledged as security just to the
creditors who deal with that venture
● The formation of corporations and subsidiary corporations can be used as a means of
sharing the risks of transactions with the parties with whom a firm contract
● Limited liability permits flexibility in allocation of risk and return between equityholders
and debtholders, reduces transaction costs of collection in case of insolvency, and
simplifies and substantially stabilizes the pricing of stock
→ lecture: limited liability not for the managers or directors you are off the hook when the
firm goes bankrupt but the shareholders go off the hook because you do not have to pay
more than your initial investment. Not liable for the debts of the company beyond what you
invested. Important because risky enough business to give the money without promised
returned - not liable if not have an influence in the business of the firm. No influence for
minority ownership so not liable with all your assets because too risky. Protect the owners
from the firm, they are not involved in the company because they are outsiders so need to be
protected.
Chain of liability, the owners are disconnected. Defensive: partition your assets as an owner
to defend yourself from claims of the owner.
Legal personality <---> Limited liability
Strong form legal personality reinforces the stability and creditworthiness of the firm and,
when combined with limited liability, isolates the value of the firm from the personal financial
affairs of the firm’s owners sufficiently to permit the firm’s shares to be freely traded ® a
, shareholder’s personal assets are pledged as security for his personal creditors, while
corporation assets are reserved for corporation creditors.
Lecture: you cannot have limited liability without legal personality - mirror of limited liability
Protect the firm against the owners. Shareholders cannot easily get their money back /
withdraw because it would jeopardize the going concern value of the firm (presumption that
the firm will keep on existing forever) → effect on the liquidation value of the assets; with
bankruptcy investors get their money latest. Risk of not getting anything in bankruptcy is
higher if the shareholders could withdraw very easily. Valuation of the assets in an ongoing
situation is much higher than the liquidation value of the assets. Liquidation protection: legal
features of an incorporated firm assures that the investors in the firm cannot withdraw the
assets that the firm has invested whenever they want.
Affirmative asset partitioning: partition your assets from the firm that are different to the
assets of the owners
3. Fully transferable shares
● Permits the firm to conduct business uninterruptedly as the identity of its owners’
changes, thus avoiding the complications of member withdrawal that are common
among for example partnerships.
● Maximizes liquidity of shareholders and the ability to diversify their investments.
● Gives the firm maximal flexibility in raising capital
● Makes it difficult to maintain negotiated control arrangements
● Closely connected with liquidation protection (feature of legal personality) and limited
liability
→ Lecture: freely tradable shares to be publicly listed
Exchange shares with someone without restrictions - only for publicly listed firms
Not freely tradeable in closely held firms:
- Employees that own shares - insiders cannot benefit from asymmetric information
- Family firm that restricts to family members - closely held firm → growth constraints
and not get fair price if you have to sell to another family member because most times
problems in the family in terms of conflict - need permission from others
- Law firm or accounting firms you have partners - you work your way in, human capital
4. Centralized/delegated management under a board structure
● Delegation permits the centralization of management necessary to coordinate productive
activity.
● Delegation of decision-making power to specific individuals notifies third parties as to
who in the firm has the authority to make binding agreements.
, ● Business operations are distinguished by a governance structure in which all but the
most fundamental decisions are put in the hands of a board of directors that has four
basic features:
1) The board is separate from the operational managers of the corporation.
- A formal distinction between the board and hired officers facilitates a separation
between, on the one hand, initiating and execution of business decisions, which is
the province of hired officers, and on the other hand the monitoring and ratification
of decisions, and the hiring of the officers themselves, which are the province of
the board ® useful check on quality of decision-making by hired officers
2) The board is formally distinct from the firm’s shareholders
- Economizes on the costs of decision-making by avoiding the need to inform the
firm’s ultimate owners and obtain their consent for all but the most fundamental
decisions regarding the firm
- Provides a check on opportunistic behavior by controlling shareholders
3) The board of a corporation is elected – at least in substantial part – by the firm’s
shareholders
- Helps to assure that the board remains responsive to the interests of the firm’s
owners, who bear the costs and benefits of the firm’s decisions and whose
interests are not strongly protected by contract
4) The board has multiple members (but there are exceptions)
- Facilitates mutual monitoring and checks idiosyncratic decision-making
→ Lecture: delegated board /management
Shareholders not actively involved in managing the firm - most decisions taken by the board,
somebody has to make the decision. Liquid investors are not involved they do not bother to
vote; when freely tradable shares → decisions only by the board.
Which of the following decisions should always be taken by the shareholders of listed firms
around the world? → Relocation (move legally from one company to another is different type
of corporate law with different shareholder rights - Unilever) = to incorporate in another
company due to jurisdiction - reincorporation different type of corporate law. More rights in
UK.
5. Shared ownership by contributors of capital
● Corporate law is designed to facilitate investor-owned firms in which both elements of
ownership (right to control the firm and right to receive the firm’s net earnings) are tied
to investment of capital in the firm.
● Both rights are typically proportional to the amount of capital contributed to the firm
→ Lecture: investor ownership
Investor owned companies bring financial capital → external financing in investor ownership:
- Equity: investors - you have a say in the company - paid with dividend
- Debt: sources of financing from financial institutions - paid with interest, no say in the
company
How an investor makes money from both types of investments: equity investor from dividend
payments (value increases in dividends or sell shares for a better price as only possibility if
you do not get dividends - there is no obligation to pay the equity investors) and debt is pay
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