Chapter 11:: Ownership And Goverance Of The Corporation Flashcards
(24 cards)
Role of the owner stakeholder
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.
The ownership of Canadian business
Investors
●Entrepreneurs
●Employees and Managers
●Customers or Consumers
●Producers
●Mutual Funds
●Pension Funds
The ownership of Canadian businesses
●Corporate Ownership
●Private Equity firms
●Venture Capital Company
●Not-for-profit organization ownership
●Government Ownership
Union sponsored investment funds
Issues of ownership
Widely held versus concentration ownership
●Minority versus majority shareholders
●Dual-class stock (non-voting or restricted shares)
Passive vs active shareholder
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.
Pros and Cons of Employee Ownership
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
Issues of accountability
●Accountability of Non-public Corporations
●Accountability of Government-owned Corporations
Protecting owners and investors
Shareholder Democracy: the exercise of power by owners to ensure they are treated fairly and enjoy equally the privileges and duties of ownership
Protecting Owners and Investors
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)
U.S. Sarbanes-Oxley Act (2002)
Public Company Accounting Oversight Board
●Auditor independence
●Corporate responsibility
●Enhanced financial disclosures
●Corporate and criminal fraud accountability
●White-collar crime penalty enhancements
Responsible investing
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)
Stakeholders Monitoring Responsible Investment
●Social Investment Organization (Canada)
●Jantzi Social Index (Canada)
●Domini 400 Social Index (US)
●Dow Jones Sustainability Indexes (US)
●FTSE4Good Index Series (UK)
Corporate governance
The processes, structures, and relationships through which the shareholders, as represented by a board of directors, oversee the activities of the corporation.
Rights of shareholders
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,
Responsibilities of the board
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)
Board of membership
●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.
Board of structure
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.
Disclosure and Transparency
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.
Evaluating Board and Director Performance
Criteria for evaluating board performance:
●Legal
●Strategic and social
●Financial
●Business
●Human resources
●Governance
Criticism of Corporate Governance Reform
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
Rebalancing Power in the Corporation
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
Corporate Governance and Performance
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
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OECD Principles of Corporate Governance
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
Ownership, Governance, and CSR
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?
