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OBS214 > Chapter 11 > Flashcards

Chapter 11 Flashcards

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1
Q

Shareholder?

A

A shareholder (stockholder) is a person or institution that owns shares in a company , making them a partial owner. Shareholders are market stakeholders because they have a financial stake in the company success.

Eg. If you buy 100 shares of apple ink, you are a shareholder and owner of the company.

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2
Q

Types of shareholders?

A
  1. Individual shareholders
  2. Institutional shareholders
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3
Q

Individual shareholders? A.k.a. Main Street investors.

A
  • own stocks personally, usually through brokers
  • Often invest in small amounts
  • Come from all walks of life

Eg. A person buys 50 shades of Coca-Cola for their retirement account.

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4
Q

Institutional shareholders? A.k.a. Wall Street investors.

A
  • organisations such as pension funds, mutual funds and insurance companies
    -Control Large volumes of stock
  • More likely to vote and influence corporate decision decisions

Eg. Vanguard or calpers investing billions in stock market on behalf of members.

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5
Q

Objectives of shareholders?

A
  • Capital Appreciation
    Want the value of their stock to rise
  • Dividends
    Prefer steady income from company profits
  • Long-term growth
    Some focus on sustainable value increase
  • Short-term gains
    Others seek quick profits
  • Social/ethical influence
    A few invest to influence Company behaviour

Eg. Shareholders may support to merger or vote against to depending on expected financial return or ethical concerns.

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6
Q

Bear vs bull markets?

A

Share prices are influenced by broader economic conditions.
Bear = falling prices
Bull = rising prices

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7
Q

Legal rights of shareholders?

A
  • receive dividends
    If declared — payments from Company profits
  • Vote on
    Board members, mergers/acquisitions, shareholder proposals
  • Receive financial reports
    Shareholders have the right financial transparency
  • sue
    The company/officers if miss conduct/negligence occurs
  • Sell their shares
    At any time (exit their investment)

Eg. 2017 shareholder of the company for fraud and receive $44 million.

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8
Q

Proxy voting?

A

Many shareholder voted by proxy(remotely) especially institutions (91% vote rate) compare compared to individuals (29%)

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9
Q

What is corporate governance?

A

Corporate governance is the system by which a company is controlled and directed. It includes practices and processes for overseeing the company strategy, accountability, and stakeholder interest.

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10
Q

Purpose of corporate governance?

A

Just like government, corporations need governance to balance the diverse interest of stakeholders and ensure ethical and strategic decision-making

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11
Q

Role of the board of directors?

A

The board of directors is an electric group responsible for :
- Setting corporate objectives and policies
- Selecting and supervising top executives
- monitoring company performance
- Safeguard and shareholder/stakeholder interests
** Boards Usually meet around six times per year with some engaging in strategy retreats**

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12
Q

Structure and composition of the board of directors?

A
  • boards often have 9 -11 members
  • Most directors are outside directors (not company employees)
  • Boards include : CEO of other companies, institutional investors, bankers
  • Diversity
  • board compensation
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13
Q

Board diversity?

A
  • Emphasis on cognitive variety (skills/perspectives)
  • 20% women in fortune 500 boards
  • 8% black, 3% Latinos, 2% Asian
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14
Q

Board compensation?

A
  • Median for non-management directors = $300,000
  • 40% in cash, 60% in stock based compensation
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15
Q

Key committees of the board?

A
  • compensation committee
  • Nominating committee
  • Audit committee
  • Corporate responsibility committee
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16
Q

Compensation committee?

A

Oversees executive pay incentives

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17
Q

Nominating committee?

A


Recommends new board members

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18
Q

Audit committee?

A
  • ensures financial integrity
  • Must consist of financially literate outside directors
  • Play the crucial role post Enron scandal
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19
Q

Corporate responsibility committee?

A

Oversees sustainability and ethics, often linked to CSR

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20
Q

Board election and accountability?

A

Board members are elected by shareholders
- Proxy voting — shareholder vote remotely, commonly used by institutions and individuals
- Proxy access movement — shareholders can nominate board members (60% O allow this)
- Challenges — what elections can be in competitive, boards often self select successes (limiting shareholder in influence)

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21
Q

International comparison?

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A

Europe uses a two tier board system :
- Executive board : include CEO and insiders
- Supervisory board : includes independent members and represents labour/government interests
Common in Germany, Austria and parts of Scandinavia

22
Q

Principles of good governance?

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A
  • select independent directors
    Reduces conflict of interest
  • Open elections
    Shareholders should have genuine choice
  • annual elections
    Improve accountability
  • Independent lead director
    Separates power from CEO
  • Diversity
    Improves board effectiveness
23
Q

Corporate governance ensures?

Study These Flashcards
A

that companies act in the best interest of shareholders and broader society. Board of directors play a crucial role in balancing profits motives with ethical responsibility, long-term strategy and stakeholder engagement

24
Q

Executive compensation?

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A

Is the total package of pay and benefits provided to a firms top managers, often including salaries, bonuses, stock options and other incentives. It’s function is to align the interest of managers (agent) with those of shareholders (owners) to reduce what is known as agency problem

25
Functions of executive compensation?
- **Align executive and shareholder goals** - **Attract and retained top talent** - **Reward performance** - **Driving innovation and growth** - **Manage risk and compliance**
26
Align executive and shareholder goals?
- **encourages managers to prioritise long-term firm value** Eg. Options gain value and share prices rise.
27
Attract and retain top talent?
**Offers competitive packages to secure skilled leadership** Eg. CEOs in high demand sectors often command high packages.
28
Reward performance?
**Bonuses or equity are tied to keep performance metrics** Eg. Bonus for achieving revenue or profitability targets.
29
Drive innovation and growth?
**Equity based pay encourages long-term investments in innovation** Eg. Firms like Amazon reward long-term innovation of a short-term profit spikes
30
Manage risk and compliance?
**When well structured, it discourage excessive risk taking or fraud** Eg. Clawbacks clauses allow firms to recover bonuses after misconduct is discovered.
31
Components of executive compensation?
- **Base salary** - **Annual bonus** - **Stock options** - **Stock grants** - **Retirement benefits** - **Perks**
32
Details and impact of base salary and annual bonus?
**Base salary** *Fixed annual cash payment* Impact/purpose: provide financial security, forms a small portion of total package **Annual bonus** *Short term performance reward* Purpose/impact : usually based on meeting sales/profit goals or KPIs
33
Details and impact of stock options and stock grants?
**Stock options** *Right to buy shares as a set “strike price” in future* Purpose/impact: encourages managers to increase share price for capital gain **Stock grants** *Shares given as part of compensation* Purpose/impact : aligns managers, wealth with companies long-term value
34
Details and impact of retirement benefits and perks?
**Retirement benefit** *Includes pensions, deferred compensation* Purpose/impact: long-term incentive to remain with the firm **Perks** *Use of private jets, club memberships, event tickets etc* Purpose/Impact: can create controversy if excessive or not disclosed
35
Are top executives pay too much? **IN FAVOUR**
- High salaries reflect **high responsibility** and short tenure of CEO roles - Competitive compensation attracts **scarce global leadership talent** - Performance based pay **motivates** executive to drive innovation and results - CEOs like Jeff Bezos owned modest salaries while delivering massive shareholder value - high pay linked to value creation in tough, global markets
36
Are top executives pay too much? **AGAINST**
- Pay packages often **exceed company performance**, pay not tied to real shareholder return - Creates income inequality and **resentment among employees** - Encourages unethical behaviour (inflated profits, short-termism) - CEO to worker pay ratio was 347: 1 — often not justified by outcomes - ceo. compensation committee often made up of friends or loyalist, reducing **independent judgement**
37
Shareholder activism?
**Refers to the way shareholders use their rights to influence Company behaviour** They may seem to increase financial performance, promote ethical conduct, improve governance or address social and environmental issues
38
Key forms of shareholder activism?
1. Institutional investor activism 2. Hedge funds and private equity 3. Social investment (known as SRI/ESG investing) 4. DIvestment strategies 5. Social responsibility, shareholder resolutions. 6. Shareholder lawsuits.
39
1. Institutional investor activism?
- Pension funds, mutual funds and large acid managers use their voting power to shape governance - Because they hold large blocks of shares they often cannot sell easily and instead push for change - Councils like council of institutional investor support collective action and shareholder rights - Study show that companies targeted by institutional activism of an improved performance afterwards
40
2. Hedge funds and private equity.
- these investors take large stakes and push aggressively for restructuring, asset sales or leadership changes - Their goal is often to boost stock prices quickly
41
3. Social investment (also known as SRI/ESG investing)
- Investor companies based on social, environmental and governance standards - They may avoid firms that pollute, discriminate or operate in human rights violating countries - Globally $23 trillion was managed using responsible investment strategies by 2016
42
4. Divestment strategies?
Shareholders may choose to sell their shares to protest unethical practices (tobacco, fossil fuels, or arms production) - These movements raise public awareness and pressure companies to reform
43
5. Social responsibility, shareholder resolutions?
- Shareholders propose resolutions on topics like executive pay, climate change or diversity - Although non-binding, many firms responsive avoid reputational damage or regulatory scrutiny
44
6. Shareholder lawsuits?
- when executives commit fraud or violate fiduciary duties, shareholders can sue - These lawsuits may be derivative (on behalf of the company) or direct Eg. Lending club shareholder suit off the internal control failures latest 35% stock drop in $950 million loss.
45
Shareholders plan an active role in?
Not only the profitability of companies, but also their social and environmental responsibility— whether through voting, divestment, they have an ability to influence corporate strategy and outcomes in line with financial goals/broad ethical principles
46
The role of SEC (securities and exchange commission)
The SEC is the main US government agency responsible for protecting shareholders rights. It was created in 1934 after the stock market crash and great depression.
47
Main mission of SEC?
**To ensure markets run fairly and that financial information is fully disclosed to investors** self funding model: it operates fees collected from companies listed on stock exchanges
48
Key protective actions by the SEC?
- **Transparency and disclosure** Shareholders must be provided with reliable, timely access to Co financials, corporations are legally required to share financial reports, earnings, expenditures, executive compensation and ESG data (social/environmental/governance) - **Preventing fraud** Protect shareholders from fraudulent accounting practices, investigates companies that mislead shareholders through false reporting - **Enforcing insider trading laws** Insider trading is when someone uses confidential, non-public company information to buy or sell stock for unfair vantage
49
Insider trading threats and SEC enforcement?
- inside the trading undermines public trust and market fairness - SEC monitors mergers, acquisitions and internal leaks that may lead to unfair market gains - SEC broad major cases against insider trading schemes but sometimes failed to act aggressively (Bernard Madoff case where invested loss up to $65 billion in one of the largest frauds in US history)
50
SEC enforcement?
**Government enforcement is vital in ensuring shareholder protection** Through SEC laws against fraud and insider trading are maintained to preserve confidence in stock market markets and ensure all investors operate on equal footing
51
Shareholders play a critical role in the success of corporate businesses. What are their main contributions?
- providing capital - Monitoring corporate performance - Ensuring efficient operation of stock markets - Raising issues that hold management accountable

OBS214 (7 decks)

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