CG kim repair hiper twnsio hap# 01.pptx
- 1. Corporate Governance By: 1. Kenneth A. Kim John R. Nofsinger And 2. A. C. Fernando
- 2. Chapter outline ◦ What is corporate Governance ◦ Investors influence on management ◦ How to monitor management ◦ Corporate governance: An integrated and complex system. Corporate Governance
- 3. What is Corporate Governance? “Problems that result from the separation of ownership and control Focusing on The internal structure and rules of the board of directors; The creation of independent audit committees; Rules for disclosure of information to shareholders and creditors And control of the management This explain how a corporation is structured. Corporate Governance
- 4. Separation of ownership and management Corporate Governance Separation of ownership and management Shareholders Employees Board Management
- 5. Separation of Ownership and Control . Stockholders own the firm and officers (or executives )control the firm. . Hundreds of thousands of investors can’t collectively take decisions. So firms hire managers for that work. .The shareholder’s main focus is toward business performances and return of their stock, rather than in decision making process. Corporate Governance
- 6. Why should managers should care about the owners? Satisfactory profit for the stockholders and massive perks for themselves (principal-agent problem or the agency problem) Managers may be tempted to use the firm’s assets for their own ends. Secretaries may take the supplies Managers may take extra food or fancy furniture for their offices Executives can use expensive jets for travelling Etc;etc Corporate Governance
- 7. Ability to steel from the shareholders, the most are the executives. This problem can be solved by Incentives Common incentives Offering stocks, restricted stocks or stock options (normal practice in US companies) And monitoring Corporate Governance
- 8. Can Investors Influence Managers? Theoretically, managers work for owners but in reality, firms actually seems to belong to management. There is a race of win-lose between shareholders and management but most of the time, management has always having the upper hand. Corporate Governance
- 9. Different proposals are made by the shareholders but are defeated when it comes in the annual shareholders meeting. There are normally two types of proposals; . Those relate to governance (e.g. suggesting changes in board structure) . Those relate to social reform (e.g. proposing to stop selling chemicals to rogue countries) etc; etc. Corporate Governance
- 10. . Without management approval, proposals have little chance of succeeding. . Shareholders have to trust management and must go with their wants which leads to chaos in the firms. Corporate Governance
- 11. Example Carly Fiorina’s Takeover of COMPAQ (2002) ◦ Carly Fiorina (CEO Hewlett-Packard) announce acquisition of Compaq on Sept 4, 2001 for $25.5Billion. ◦ Faced negative reaction by stock market, industry experts and the business media. Corporate Governance
- 12. Cont: ◦ Hewlett-Packard stock was down by 18% and Compaq’s stocks by 10% following the announcement. ◦ Two major shareholders i.e David W. Packard and Walter Hewlett were against this decision. ◦ They placed their pressure on other shareholders but all in vain. ◦ Fiorina went ahead with her plan. Corporate Governance
- 13. Monitoring . Investing public doesn’t know about the firm’s operational level. . Only managers know. . Consequently managers may not act in the shareholder’s best interest which demonstrates the need for MONITOR. Corporate Governance
- 14. Monitoring . Investing public doesn’t know about the firm’s operational level. . Only managers know. . Consequently managers may not act in the shareholder’s best interest which demonstrates the need for MONITOR. Corporate Governance
- 15. Stakeholders Corporate governance Monitors Creditors Stockholders Government SEC IRS Outside Company Auditors Analysts Investment Banks Credit Agencies Within Company BoDs Managers Controllers Society Employees
- 16. . Similarly market force is helpful in monitoring. . Stakeholders can also monitor by participating. . Creditors can also check by ensuring that the firm is properly handling its debt processing. . Employees, such as, internal auditors can play a vital role in monitoring. . Society can inject a sense of responsibility at the executive level by acting as a noble corporate citizenship. . Unfortunately, all of these mechanism can fail at one time or another. Corporate Governance
- 17. An Integrated System of Governance ◦ The corporate governance system is integrated and complicated. ◦ Every concern stakeholder is keen to get the perks i.e. executives, auditors, boards, banks, analysts and so on. Corporate Governance
- 19. Cont:- ◦ The shareholders and executives interest can be aligned through incentives involving stock options. ◦ these incentives can’t guarantee to reduce the level of RISK. Corporate Governance
- 20. Differences: o Some countries are more bank-oriented (e.g., Germany, Japan), where banks play a larger role in corporate governance. o Others are more market-oriented (e.g., the US), focusing on stock market performance and shareholder value. Challenges: Governance issues like conflicts of interest and unethical behavior can happen globally, but approaches to solving them differ by country. International Perspectives on Corporate Governance:
- 21. Challenges in Corporate Governance: Misaligned Incentives: Managers may focus on personal gain (e.g., stock options) rather than the company’s long-term success. Conflicts of Interest: Auditors, analysts, and regulators may avoid taking action due to longstanding relationships with companies. Ethical Risks: Managers may resort to aggressive accounting practices or other unethical behaviors to meet financial targets or boost stock prices. International Perspectives on Corporate Governance:
- 22. Summary ◦ corporate form of business allows firm to have excessive capital ◦ it contributes a lot toward country’s economy ◦ main disadvantage lies in the relationship between the owner and controller Corporate Governance