Mgmt 466 Ch.10 Corporate Governance

insiders

are active top-level managers in the company who are elected to the board because they are a source of information about the firm's day-today operations

Agency Relationships

exists when one party delegates decision-making responsibility to a second party for compensation -Ex: shareholders, top level mgmt, consultants

Corporate Structure in the US

focused on maximizing shareholder value

Ownership Concentrations

is defined by the number of large-block shareholders and the total percentage of the firm's shares they own. -concentrated ownership produces more active and effective monitoring.

Outsiders

provide independent counsel to the firm and may hold top-level managerial positions in other companies or may have been elected to the board prior to the beginning of the current CEO's tenure

Corporate structure in China

the central government still plays a major role in corporate governance practices. -China has a unique and large, socialist mixed with a market-oriented, economy.

Managerial employment risk

the risk of job loss, loss of compensation, and loss of managerial reputation

Agency Costs

the sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals because governance mechanisms cannot guarantee total compliance by the agent.

Long-term incentive plans

(typically involving stock options and stock awards) are an increasingly important part of compensation packages for top-level managers, especially those leading U.S. firms.

3 groups of bored of directors

1. Insiders 2.related outsiders 3.outsiders

Family-controlled firms face at least two critical issues related to corporate governance

1. as they grow, they may not have access to all of the skills needed to effectively manage the firm and maximize returns for the family 2. as they grow, they may need to seek outside capital and thus give up some of the ownership

The three internal governance mechanisms

1. ownership concentration, represented by types of shareholders and their different incentives to monitor managers 2. the board of directors 3. executive compensation.

CEO duality

A situation in which an individual holds both the CEO and chair of the board title is called

SOX effect on Board of directors

Through implementation of the SOX Act, outsiders are expected to be more independent of a firm's top-level managers compared with directors selected from inside the firm.

Executive Compensation

a governance mechanism that seeks to align the interests of managers and owners through salaries, bonuses, and long-term incentives such as stock awards and options -A firm's board of directors is responsible for determining the effectiveness of the firm's executive compensation system. An effective system results in managerial decisions that are in shareholders' best interests.

Separation of Ownership and Managerial Control

allows shareholders to purchase stock, which entitles them to income (residual returns) from the firm's operations after paying expenses. -As risk-bearing specialists, owners diversify their risk by investing in multiple corporations with different risk profiles -owners expect their agents to make decisions that will max profits

hostile takeover

an acquisition of a target company by an acquiring firm that is accomplished "not by coming to an agreement with the target company's management but by going directly to the company's shareholders or fighting to replace management in order to get the acquisition approved.

Institutional owners

are financial institutions, such as mutual funds and pension funds, that control large-block shareholder positions. -institutional owners have both the size and the incentive to discipline ineffective top-level managers and that they can significantly influence a firm's choice of strategies and strategic decisions

Problems with Separation of ownership and control

creates an agency problem when an agent pursues goals that conflict with the principals' goals. Principals establish and use governance mechanisms to control this problem

Corporate structure in Germany

employees, as a stakeholder group, take a more prominent role in governance. -In many private German firms, the owner and manager may be the same individual. In these instances, agency problems are not present

Board of directors

group of elected individuals whose primary responsibility is to act in the owners' (shareholders) best interests by formally monitoring and controlling the firm's top-level managers.

related outsiders

have some relationship with the firm, contractual or otherwise, that may create questions about their independence, but these individuals are not involved with the corporation's day-to-day activities.

the market for corporate control

is an external governance mechanism that is active when a firm's internal governance mechanisms fail

Managerial Opportunism

is the seeking of self-interest with guile (i.e., cunning or deceit).23 Opportunism is both an attitude (i.e., an inclination) and a set of behaviors (i.e., specific acts of self-interest) -principals establish governance and control mechanisms to prevent agents from acting opportunistically

Strategic Competiveness

results when firms are governed in ways that permit, at least, minimal satisfaction of capital market stakeholders (e.g., shareholders), product market stakeholders (e.g., customers and suppliers), and organizational stakeholders (e.g., managerial and non-managerial employees -Effective governance mechanisms ensure that the interests of all stakeholders are served -produces ethical behavior in the formulation and implementation of strategies

Corporate Governance

set of mechanisms used to manage the relationships among stakeholders and to determine and control the strategic direction and performance of organizations -Effective governance that aligns managers' decisions with shareholders' interests can help produce a competitive advantage for the firm.

large block shareholders

typically own at least 5 percent of a company's issued shares. -Ownership concentration as a governance mechanism has received considerable interest because large-block shareholders are increasingly active in their demands that firms adopt effective governance mechanisms to control managerial decisions so that they will best represent owners' interests

Corporate Structure in Japan

until recently, Japanese shareholders played virtually no role in monitoring and controlling top-level managers. However, Japanese firms are now being challenged by "activist" shareholders -The concepts of obligation, family, and consensus affect attitudes toward corporate governance in Japan. -a keiretsu (a group of firms tied together by cross-shareholdings) is more than an economic concept—it, too, is a family