Chapter 11:: Ownership And Goverance Of The Corporation

Question 1

Role of the owner stakeholder

Answer 1

Owners, also referred to as investors or shareholders, are key stakeholders in a capitalist system as they provide a major portion of the capital to finance corporations.
●Governing system: The processes, structures, and relationships through which decisions are made.

Question 2

The ownership of Canadian business

Answer 2

Investors
●Entrepreneurs
●Employees and Managers
●Customers or Consumers
●Producers
●Mutual Funds
●Pension Funds

Question 3

The ownership of Canadian businesses

Answer 3

●Corporate Ownership
●Private Equity firms
●Venture Capital Company
●Not-for-profit organization ownership
●Government Ownership

Union sponsored investment funds

Question 4

Issues of ownership

Answer 4

Widely held versus concentration ownership
●Minority versus majority shareholders
●Dual-class stock (non-voting or restricted shares)

Question 5

Passive vs active shareholder

Answer 5

Passive shareholders: do not attempt to influence the affairs of the corporation even though they have a legal right to do so.
●Active shareholders: participate in the governance of the firm to the full extent allowed by law.

Question 6

Pros and Cons of Employee Ownership

Answer 6

Pros:
●Increases morale
●Increases company loyalty
●Motivates employees, leading to higher productivity
●Sometimes can save failing firms
Cons:
●Jobs and often savings and pensions depend on fate of firm
●Employees seldom have majority ownership
●Management may still not relinquish control to employees

Question 7

Issues of accountability

Answer 7

●Accountability of Non-public Corporations
●Accountability of Government-owned Corporations

Question 8

Protecting owners and investors

Answer 8

Shareholder Democracy: the exercise of power by owners to ensure they are treated fairly and enjoy equally the privileges and duties of ownership

Question 9

Protecting Owners and Investors

Answer 9

Governments (e.g., US Sarbanes-Oxley Act, 2002)
●Self-Regulatory Agencies and Organizations (e.g., stock exchanges)
●Industry Associations (e.g., Investment Dealers’ Association)
●Individual and Institutional Activists (e.g., Small Investor Protection Association)

Question 10

U.S. Sarbanes-Oxley Act (2002)

Answer 10

Public Company Accounting Oversight Board
●Auditor independence
●Corporate responsibility
●Enhanced financial disclosures
●Corporate and criminal fraud accountability
●White-collar crime penalty enhancements

Question 11

Responsible investing

Answer 11

Screening investments in corporations or mutual and pension funds for their response to social or ethical responsibilities as well as their financial or economic actions.
●Use “positive” screens and “negative” screens (e.g., alcohol, tobacco, weapons, and nuclear power)

Question 12

Stakeholders Monitoring Responsible Investment

Answer 12

●Social Investment Organization (Canada)
●Jantzi Social Index (Canada)
●Domini 400 Social Index (US)
●Dow Jones Sustainability Indexes (US)
●FTSE4Good Index Series (UK)

Question 13

Corporate governance

Answer 13

The processes, structures, and relationships through which the shareholders, as represented by a board of directors, oversee the activities of the corporation.

Question 14

Rights of shareholders

Answer 14

Secure ownership registration
●Capability to transfer ownership
●Access to relevant corporate information
●Participation and voting at shareholder meetings
●Election and removal of board members
●Share in profits of the corporation
●Knowledge of extraordinary transactions or decisions
●Disclosure of dual-class shares
●Rules and regulations to ensure transparent functioning of capital markets
●Capability to exercise ownership rights
●Ability to consult other shareholders relating to their rights
Source: OECD,

Question 15

Responsibilities of the board

Answer 15

Board of Directors: group of individuals elected by shareholders to govern or oversee the corporation’s affairs.
●Fiduciary duties: obligations of directors to shareholders that are prescribed by laws or regulations.

oard’s written mandate must include board’s satisfaction with integrity of CEO and other executives and that they are creating a culture of integrity (Canadian Stock Exchanges)
●Board must apply high ethical standards and take into account the interests of stakeholders (OECD, 2004)

Question 16

Board of membership

Answer 16

●Independent director: A director who is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the corporation.

Question 17

Board of structure

Answer 17

Board committee examples:
●audit; finance; human resources; pension; compensation; nominating; governance; and strategic planning.
●Audit committee is required to have independent members.
●Most experts recommend separation between the role of the board chair and the CEO.

Question 18

Disclosure and Transparency

Answer 18

Disclosure requirements for Canadian public companies (National Instrument 58-201):
●Disclose whether board has adopted written code
●Describe steps board takes to encourage and promote a culture of ethical business conduct
●Disclosure of executives’ compensation
●Board’s audit committee oversees the internal and external accounting auditing function to ensure that financial statements accurately and appropriately represent the condition of the corporation and that regulated disclosures are made.

Question 19

Evaluating Board and Director Performance

Answer 19

Criteria for evaluating board performance:
●Legal
●Strategic and social
●Financial
●Business
●Human resources
●Governance

Question 20

Criticism of Corporate Governance Reform

Answer 20

Audit fees have increased
●Management attention diverted away from operation of business
●Additional costs have made North American business less competitive in global market
●Changes may not make a difference to firm performance or in protection of shareholders
●Approach should be principles-based, not rule-based

Question 21

Rebalancing Power in the Corporation

Answer 21

CEOs have been too powerful
●New balance of power emerging among management, board, professional services
(e.g., lawyers, auditors)
●Directors now playing bigger role in strategic decision making and ethical responsibilities
●Auditors more cautious
●Legal counsel representing everyone
●Some shareholders more active in pressuring boards

Question 22

Corporate Governance and Performance

Answer 22

Some research suggests that good corporate governance affects firm performance
●Effective boards:
●Are accountable and independent
●Have experienced, knowledgeable and effective directors with the highest level of integrity
●Have clear roles and responsibilities
●Engage with stakeholders

Question 23

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OECD Principles of Corporate Governance

Answer 23

Rights of stakeholders are to be respected
●Effective redress for stakeholders when rights violated
●Stakeholders should have access to information
●Stakeholders should be allowed to blow whistle on illegal or unethical practices to board

Question 24

Ownership, Governance, and CSR

Answer 24

Directors are encouraged to ask five questions about the corporation’s ethics management:
●What is the strategy to manage ethics?
●Who is responsible for ethics in our company?
●Are people in our firm equipped to recognize and resolve moral dilemmas?
●Are people in our firm provided with a safe opportunity to discuss ethical issues of concern?
●Do we reward or punish ethical integrity and moral courage if it has a negative impact on the bottom line?