Ch 29 corporate governance

tunneling

A conflict of interest that arises when a shareholder who has a controlling interest in multiple firms moves profits (and hence dividends) away from companies in which he/she has relatively less cash flow toward firms in which he/she has relatively more cash flow rights ("up the pyramid")

pyramid structure

A way for an investor to control a corporation without owning 50% of the equity whereby the investor first creates a company in which he/she has a controlling interest This company then owns a controlling interest in another company. The investor controls both companies but may own as little as 25% of the second company.

outside (independent) director

Any member of a board of directors other than an inside or gray director

shareholder voice

Any shareholder can submit a resolution that is put to a vote at the annual meeting. Recently, unhappy shareholders have started to refuse to vote to approve the slate of nominees for the board

captured

Describes a board of directors whose monitoring duties have been compromised by connections or perceived loyalties to management

proxy contests

Disgruntled shareholders can hold a proxy contest and introduce a rival slate of directors for election to the board. This gives shareholders an actual choice between the nominees put forth by management and the current board and a completely different slate of nominees put forth by dissident shareholders

the cadbury commission

Following the collapse of some large public companies, the U.K. government commissioned Sir Adrian Cadbury to form a committee to develop a code of best practices in corporate governance

Board of directors duty

In the United States, the board of directors has a clear fiduciary duty to protect the interests of the shareholders

management entrenchment

Large investors have become increasingly interested in measuring the balance of power between shareholders and managers in a firm.

IRRC index

Many find to be a helpful way to measure the degree to which managers are entrenched

inside directors

Members of a board of directors who are employees, former employees, or family members of employees

gray directors

Members of a board of directors who are not as directly connected to the firm as insiders are but who have existing or potential business relationships with the firm

threat of takeover

One motivation for a takeover can be to replace poorly performing management. An active takeover market is part of the system through which the threat of dismissal is maintained.

shareholder approval

Shareholders must approve many major actions taken by the board. For example, target shareholders must approve merger agreements

stakeholder model

The explicit consideration most countries (other than the United States) give to other stakeholders besides equity holders, in particular, rank-and-file employees

corporate governance

The system of controls, regulations, and incentives designed to minimize agency costs between managers and investors and prevent corporate fraud role is to mitigate the conflict of interest that results from the separation of ownership and control without unduly burdening managers with the risk of the firm.

dual class shares

When one class of a firm's shares has superior voting rights over the other class

Dodd-frank act

added new regulations designed to strengthen corporate governance, including: Independent Compensation Committees Nominating Directors Vote on Executive Pay and Golden Parachutes Clawback Provisions Pay Disclosure

greater mgmt ownership

associated w/ fewer value-reducing actions by mgr increasing managerial ownership may reduce perquisite consumption, it also makes managers harder to fire.

independent director role

board w/ insider, gray, and independent directors, role of the independent director is that of a watchdog. However, because the personal wealth of independent directors is less likely to be sensitive to performance than that of inside and gray directors, independent directors have less incentive to closely monitor the firm

monitor: lender

carefully monitor firms to which they are exposed as creditors.

cross-holding

company's largest shareholder is another company, it is the norm in many countries but not in the US

compensation policies

give managers a direct incentive to increase the stock price which ties managerial wealth to the wealth of shareholders.

smaller boards associated with

greater firm value and performance found smaller make better decisions

(SOX)

intent is to improve the accuracy of information given to both boards and to shareholders. attempted to achieve this goal in three ways: -overhauling incentives and independence in the auditing process -stiffening penalties for providing false information -forcing companies to validate their internal financial control processes

monitor: employee

most likely to detect outright fraud because of their inside knowledge

backdating

practice of choosing the grant date of a stock option retroactively so that the date of the grant would coincide with a date when the stock price was lower than its price at the time the grant was actually awarded

monitor: securities analysis

produce independent valuations of the firms they cover so that they can make buy and sell recommendations to clients.

monitor: SEC

protects the investing public against fraud and stock price manipulation

insider trading

when a person makes a trade based on privileged information