Reading 34: Corporate Governance: Introduction (Stakeholder (Company…
Reading 34: Corporate Governance: Introduction
Corporate governance is the internal controls and procedures of a company that describe the rights and responsibility of various groups; and how to solve the conflict of interest among various group.
Company stakeholder groups
Board of Directors
Principal-agent relationship & Conflicts of Interest
: owners employ agents to act in their interest.
Conflict of interest
may arise as agent's incentive may not align with the owner's , or the interest of one group in the company is different from others'
is the management of the company relation with stakeholders
having a good understanding of stakeholder interests
maintaining effective communication with stakeholder
Mechanism to manage relationship
is based on legal, contractual, organizational and government infrastructure.
Board of Directors
Select senior management, set their compensation and evaluate their performance.
Set the strategic direction for the company
Approve capital structure changes, significant acquisitions, and large investment expenditures.
Review company performance and implement any necessary corrective steps
Plan for the continuity of management and CEO succession
Establishing, monitoring and overseeing firm's internal controls and risk management.
Ensure the quality of the firm's financial reporting and internal audit.
Factors affecting stakeholder relationship & corporate governance
Communication and engagement with shareholder
Threat of hostile takeover and existence of anti-takeover provisions.
Company's legal environment
Growth of firm's that advise funds on proxy and rate company's corporate governance
Potential risk of poor governance
Weak Control System
Poor decision making
Benefits of goods government
Improve operational efficiency & performance
Increase firm's value.
Factors relevance to corporate governance analysis
Ownership & voting structure
strength of shareholder rights
Longterm risk management
Environmental and social consideration in investment analysis
is the use of environmental, social, and governance factors in making investment decision.
Several issues to consider:
Potential environmental effect
Changing demographic of workers.
Changing work preference
How to use ESG in investment analysis
Integrating ESG concerns into portfolio construction
Negative Screening, Positive screening