Chapter 5 pt 3 Flashcards
(73 cards)
1
Q
Which of the ESG factors are most likely considered by investment analysts?
A
- Governance: Global 67%, EMEA region 74%
- E&S: 54%
2
Q
What are the links of ESG factors to financial performance
A
- 62% of the studies they reviewed showed a positive correlation between governance and corporate financial performance
- 58% of environmental studies
- 55% of social studies showed the same correlation
3
Q
How much did UK investment manager estimate companies with good/improving governance outperform companies with poor or worsening?
A
30 basis points a month
4
Q
What were failures of board in Enron?
A
- Board put controls in place that weren’t adequate or implemented adequately
- Senior managers did not exercise sufficient oversight or respond adequately when issue arose
- Audit and compliance comittee carried out reviews in cursory way
- Board of directors denied important info
- Outside auditors did not identify Audit Committees inadequacies in implementation
5
Q
Why do some people say governance is less of an issue in private equity and infrastructure vehicles?
A
- Because investors are directly represented on the board which reduces the risk of misinformation and a lack of responsiveness
- But it does not remove all governance risks.
3.Indeed, given the highly indebted nature of many such investments, the margin for error is not always large, and so failure can be swift if it does occur, often overwhelming even more responsive governance structure
6
Q
Describe case study of Theranos Board:
A
- 2014, raising money from private market investors at a valuation of more than $1 billion
- Claimed to be reinventing blood testing
- Elizabeth Holmes - CEO and chair
- Non-execs exclusively male, with military or foreign service backgrounds rather than medical or scientific experience and average age of 73
- More former secretaries of state in 90s than people with medical training
- Oversight limited and influence was further hindered by company’s dual-class share structure that saw the founder hold 99% voting rights
- Board met infrequently, several directors had poor attendance rates
- all of the US$700 million invested in the business was lost, after revealed falsified test results and misled investors about nature and effectiveness of tech
7
Q
What did Uber have to do to its governance practices after series of damaging scandals?
A
- The founding CEO’s responsibilities were reallocated, preferential voting rights were adjusted, and the board’s independence was strengthened.
8
Q
What were the governance issues in WeWork?
A
- dominant decision-making position of the founding CEO (which would persist even after his death, when his wife was to be handed the choice of his successor)
- related-party deals with the CEO
- obliged to abandon its planned initial public offering (IPO)—and its valuation plummeted from the intended capitalization at listing
9
Q
What was board diversity found to do in study on Fortune 1000 Firms?
A
- Statistically significant positive relationships between presence of women or minorities on the board and firm value
- Diversity in the board of directors reduces stock return volatility
- Firms with diverse boards tend to adopt policies that are more stable and persistant
- Diverse boards take less risks and invest more in r&d
10
Q
What are the different ways fund managers integrate governance factors?
A
- Threshold assessment - formal minimum criterion to consider before making an investment
- Risk assessment tool - may represent level of confidence about future earnings, or more in simple level of confidence in valuation range or investment thesis
- If built into valuation models done by adding a risk premium to cost o capital or raising the discount rate applied if bad governance characteristics
- Others regard weak governance as investment opp - think can improve so valuation can be enhanced
11
Q
In most markets what will investors have to make voting decisions on annually?
A
- accepting the report and accounts,
- board appointments,
- the appointment of the auditor and perhaps the auditor’s fees, and
- executive remuneration.
12
Q
What is one of the most fundamental structural differences in governance globally:
A
- Separating between supervisory board and management board
- Two-tier vs Single-tier
13
Q
Which countries have two-tier boards?
A
- Germany,
- Netherlands
- China
- Some Scandinavian
14
Q
Which countries have Single-tier boards?
A
- UK
- USA
- Japan
- France
- Most of rest of world
15
Q
What type of single-tier board structure do USA and France have?
A
- a single executive sits on the board and often bears the responsibility of both chair and CEO
- declining in the USA, with around half of S&P 500 companies now having an independent chair).
- In Australia, the CEO is usually the board’s single executive director (and does not usually chair the board) but is typically not subject to election by shareholders.
16
Q
What type of single-tier bard structure does Japan have?
A
- there is usually a single-tier board dominated by executive directors, with only a small handful of non-executive directors (not necessarily independent), though these numbers are now increasing
17
Q
What single-tier board structure do rest of world have?
A
single-tier boards have a few executive directors and a majority of non-executives (most of whom are independent), one of whom acts as chair.
18
Q
What are supervisory boards normally like?
A
- All members being non-executives.
- In some cases, however, they are not perceived as independent, as some members may be direct representatives of major shareholders or representatives of employees
- in some cases the chair of the supervisory board is the former CEO of the company (though this tradition is slowly being abandoned).
19
Q
What is a good source for details on governance structures and approaches in different jurisdictions?
A
The OECD’s Corporate Governance Factbook
20
Q
Describe the corporate governance structure in Australia:
A
- Australia has a single-tier board structure
- A single executive director (often called the managing director instead of, or as well as, CEO).
- This individual is typically not subject to election by shareholders, who vote on the appointment of the non-executive directors annually.
- Boards are also relatively small in comparison to public companies in most other major markets, with six or seven directors being typical.
- While some companies have moved to annual elections for all directors (other than the CEO), many still face re-election only every third year.
21
Q
What did Aus do in terms of pensions:
A
- One of the first countries to make superannuation (saving for retirement) compulsory
- Led to creation of superfunds - supervised by Australian Council of Superannuation Investors (Acsi)
22
Q
Give an example of how investors have a strong influence on Aus companies:
A
- Mining company Rio Tinto 2020
- The CEO and two other senior executives were ousted following a public outcry after the company destroyed the Juukan Gorge site (caves that showed evidence of continuous human habitation for 46,000 years and were considered sacred by the local Puutu Kunti Kurrama and Pinikura peoples) to develop it for iron ore mining.
- Had licence but public outcry and the concerns expressed by both politicians and investors made it impossible for the company not to take action against top executives
23
Q
Are shareholder resolutions common in Aus?
A
- Yes, only US face more proposals
- Because relaxed law interpretations and strength/organisation of shareholders
- To propose a new board member, you only need to own a small number of shares, as long as you give notice on time. This makes it more accessible for shareholders to have a say in who joins the board.
- “Other resolutions require 5% of capital or 100 shareholders”
- Activists and campaigners use social media to reach and rally shareholders, making it easier to meet the requirements and gather support for resolutions.
24
Q
What voting system for board members does Brazil have?
A
- Cumulative voting for directors
- If 9 places on a board then shareholder has 9 votes - can vote for 9 different individuals or accumulate their votes
- Aim to enable minority shareholders to have some board representation
- Help foster culture of independent candidates putting themselves forward for election
- If no cumulative voting then seat set aside for chosen representative of independent shareholders even non-voting shareholders
25
What do Brazil have alongside the board of directors?
1. Fiscal councils
2. Subject to election by shareholders- usually cumulative voting model
26
What are Fiscal councils?
1. The fiscal council is analogous to a supervisory board, with powers of oversight of the actions of the board and management
2. duty to report annually to shareholders on their views of those actions and the progress of the company (including disclosing dissenting opinions on that report).
3. This report must be provided to shareholders ahead of the AGM each year.
4. If no fiscal council exists, one must be formed if 10% of the shareholders (or 5% of non-voting shareholders) formally request it at a general meeting.
27
What is Brazils code for corporate governance?
1. The Brazilian Institute of Corporate Governance (IBGC) Code is considered the most established and comprehensive code of corporate governance in Brazil.
2. Compliance with the IBGC Code is not mandatory.
3. Based on the principle of “comply or explain,” non-compliance does not trigger any penalties.
28
What is Assogestioni's role in Italian board allocation?
1. an Italian investor association, often coordinates a minority slate on behalf of institutional investors, helping ensure professional and independent candidates are proposed.
29
What is a recent change to the slate laws in Italy
1. If a dominant shareholder submits a slate, the board is no longer allowed to submit another slate
30
What are statutory auditors?
1. Not the independent auditors
2. Have legal role to affirm the legality of actions by the board
3. 1 of 3-5 is a lawyer and another is former financial statements auditor
4. Appointed through voto di lista slate process
31
What is the duration of boards and statutory auditors in Italy?
1. Elected for multi-year periods - usually 3 years
2. Boards not eligible for re-election
3. Statutory auditors can be reelected for a second term
4. Challenges in last year of mandate as may be sense of weaker board
32
Describe board structure and governance in Japan
Have statutory auditors
33
Describe statutory auditors in Japan
1. to ensure accuracy of accounts
2. 3 or 5
3. appointed individually by shareholders
4. on 4 year rotation
5. In theory independent - but many come from family companies or the lending banks
6. But some companies moving away from them
34
What is replacing statutory auditors in Japan
1. Board with committees structure with non-exec directors
2. Cause challenge as not tradition and culture of loyal and lifetime service to single companies
35
What is the focus of the Japanese Corporate Governance Code?
1. Independence of non-exec directors rather than value they can bring
2. Led to appointment of some whose value might be doubted
3. Also includes provisions that discourage the maintenance of cross-shareholdings
4. Requires two independent non-exec directors
36
Describe what happened with the Akzo Nobel rejected takeover bid by PPG
1. In 2017, AkzoNobel rejected a takeover bid from PPG despite shareholder support, citing broader stakeholder duties - Unusual in most countries would have led to active negotiations
2. Dutch courts backed the board’s refusal to negotiate or hold a vote to remove the chair.
3. Though the bid failed, AkzoNobel later sold assets and returned funds to shareholders.
37
What does stitching structure refer to in context of corporate governance?
1. usually refers to an organization that itself owns the shares in the underlying company and issues depositary receipts to the market.
2. Investors would buy these instead of shares, meaning that they would not enjoy all the rights of legal shareholders
3. A stichting separates economic ownership (held by investors via receipts) from legal control (held by the stichting), allowing companies to limit shareholder influence and protect themselves from takeovers.
38
What does the Akzo Nobel case demonstrate about Dutch corporate governance model?
1. Have supervisory boards which oversee management
2. Shareholders don't necessarily come first
3. Other stakeholder interests must be taken into account
39
hat is the most significant governance response to trying to lift up Historically Disadvantaged South Africans?
1. the process of Broad-Based Black Economic Empowerment (BBBEE)
2. Companies have been obliged to set aside around 15% of their shares (the precise percentage varies across industries) to be held by groups led by blacks and other HDSAs.
3. The “broad-based” element of the program emphasizes that the benefit cannot flow to just a few individuals4. BBBEEs are not only shareholders but provide 2 or more directors sitting on the boards
40
Describe structure of South Africa's boards
1. Single-tier
2. 2 Exec directors alongside non-execs
3. Non execs: the majority are independent, others acknowledged not to be independent as represent shareholders
4. Vote on board membership by directors but also approve the membership of audit committee - can raise concern over independence
41
What is South Africa's governance code and what does it focus on
1. King IV
2. emphasizes integrated reporting—linking sustainability and financial performance.
3. Companies are legally required to have a social and ethics committee to monitor ESG issues and report at the AGM.
4. This reflects the country’s focus on environmental and social responsibility in governance.
42
What is the main public investment company in Sweden?
1. Investor AB is a public investment company controlled by the Wallenberg family 0 two classes of shares with differential
2. It holds major stakes and voting rights in many top Swedish firms (Atlas Copco, ABB, AstraZeneca), using its influence to apparently promote long-term value creation.
43
how does Sweden mitigate against the dominance of Investor AB?
1. Sweden uses a shareholder-led nominations committee, populated by the largest shareholders.
2. This committee proposes a full board slate (majority independent non-executives) for AGM approval.
3. Shareholders vote on the board as a whole, helping maintain balanced and skilled governance despite powerful shareholders like the Wallenbergs, who still often provide the chair
44
What are the categories that the Uks corporate governance code set expectations of?
1. Board skill and structure
2. Audit and risk
3. Remuneration
45
What are the expectations from UK Corporate governance code around board skills and structure?
1. The UK discourages combined chair/CEO roles and expects chairs to be independent at appointment.
2. Independent non-executive directors should compose the majority of the board, although there should be at least two and preferably three or more executive directors.
46
What are the expectations from UK Corporate governance code around audit and risk?
1. the board is charged with considering the company’s emerging and principal risks, including ESG risks, and making a statement regarding the viability of the business over at least a three-year period from the date of the accounts
47
What are the expectations from UK Corporate governance code around remuneration?
1. The UK has detailed expectations around pay, in theory linking executive pay to performance and limiting the scope of payments for failure (long-term schemes need to be genuinely long term).
2. These expectations are layered, with extensive corporate law disclosure standards to apply to large UK-incorporated companies, which means that generally, UK annual reports are the most coherent and informative in the world.
48
What makes UK corporate governance code distinct?
1. deep focus on board behaviour and corporate culture.
2. It emphasizes that boards must align company purpose, values, strategy, and culture, and actively monitor and correct misalignments.
49
What are the three methods that the board must use to stay informed of workforce views in UK?
1. A workforce director
2. A formal advisory panel
3. A non-executive director liaison (most common)
50
What does remuneration committee in UK try do in regards to pensions?
1. take account of workforce pay and culture in its consideration of executive pay
2. there is a specific expectation that executive pension rates be aligned with those of the general workforce.
51
What are examples of best practice initiatives in Uk governance?
1. Hampton-Alexander Review: greater female representation on boards
2. Parker Review: each board to include at least one director from a minority ethnicity.
3. The initial goal of the former has nearly been reached (broadly, 30% female board membership); much progress has also been delivered on the latter.
52
What is the result of each state in US having its own corporate law?
1. led to a race to the bottom for company standards among the states, competing with one another for the tax revenue from incorporating businesses.
2. This race was comprehensively won by the small state of Delaware, which is now home to more than half of all publicly traded US corporations.
3. The decisions of the Delaware courts are therefore of disproportionate importance to US corporate life.
53
What happened with Elon musks pay deal?
1. The Delaware Court rarely questions board decisions, but it intervened in Musk’s $55 billion pay deal at Tesla because the process lacked independence and transparency, even though shareholders had approved it.
2. The court used the entire fairness doctrine to assess the fairness of both the process and outcome, marking an unusual challenge to board decisions in the U.S.
54
What are the leading attempts to establish market-led best practices in US?
1. The Commonsense Corporate Governance Principles: Created by coalition of company reps (JPMorgan, Blackrock) and representatives of US investors, focus on board effectiveness and accountability, and alignment through pay
2. The Investor Stewardship Group’s (ISG’s) Corporate Governance Principles for US Listed Companies: created by coalition of investors, focus on relationship between US companies and shareholders about internal governance. Proposed Stewardship Principles
3. The Corporate Governance Policies of the Council of Institutional Investors (CII): set out approach of CII to range of governance issues
55
What is CII?
1. the pre-eminent representative of long-term investors in the USA
56
What is the focus of federal governance regulation in US?
1. Securities law
2. U.S. Securities and Exchange Commission (SEC) playing a key role in setting rules for companies.
3. sets requirements for the independence and skills of members of the audit committees of companies listed in the USA - set by the Sarbanes–Oxley Act
57
What are examples of Dodd-Frank legislation?
1. Say-on-pay votes: A shareholder vote on executive remuneration must be held at least every three years. Shareholders can also vote to hold this vote more frequently, with most institutional investors favoring an annual vote.
2. Access to the proxy: Shareholders who meet certain criteria can propose candidates for the board without the need for a costly proxy fight.
3. These rights, though seldom used, has improved company-shareholder relations.
58
Describe the corporate governance structure in France:
1. Majority single-tier
2. Led by Combined chair/CEO (President-Directeur General (PDG))
3. Conflict of interest taken seriously- shareholders invited to vote on related-party transactions even if small value
59
What are diversity standards in board in France?
1. 40% directors female
2. 1/3 be employee representatives - so stakeholder voice is clearly heard in boardroom
60
What are two parts of French governance which are unusual
1. Requirement for joint auditors
2. Existence of double voting rights for some shareholders
61
Describe France's joint auditor requirement
1. Require two audit firms to look at financial statements rather than the usual one firm
2. Generally one of Big Four and one from next tier of firms
3. Controversial- some issues may fall between cracks
4. Proponents say likely to be fewer issues missed as more pairs of eyes considering key concerns
5. Duplication of work effort and cost is minimised: only top company and consolidated accounts are audited by both
6. Firm splits audit in rest of business units between them
62
Describe double voting rights in France:
1. Florange Act: unless 2/3 shareholders vote to the contrary, French companies awarded double voting rights to long-standing shareholders (held shares in certain way for 2 years)
2. Few international investors qualify
3. Change in management in pension fund or Insurance investors affects its double voting rights
4. In practice seen as mechanism to establish management control or control by majority shareholders
63
Give example of impact of Florange Act on Renault
1. Renault:
2. Gov 15% shareholder
3. Failed to persuade management and partner Nissan not to propose an opt-out from Florange Act
4. Instead just before AGM gov brought additional near-5% stake - enough to defeat the opt-out
5. Reverted back to 15%
64
Give example of impact of Florange Act on Vivendi
1. French media conglomerate
2. Bollore secured his control of company in 2015 by defeating resolution to opt out of act
3. At time share <15%
4. Majority shareholders supported opt-out, but failed to gain 2/3 majority
5. Bollore therefore had 20% of votes enough to gain control of company
65
What is India's stock market dominated by ^
1. New businesses dominated by founder or 2nd gen of founding family
2. Typically conglomerates or groups of companies in different industries with common major shareholder/founder
66
Describe Indian corporate governance
1. Major shareholders called promoters - carry certain obligations that constrain some related party transactions and trading of company's shares
2. 1 female director required
3. Need to meet 4 times a year
4. Annual reports typically legally driven docs, not helpful for shareholders
67
Describe expectation of Indian board independence
1. Expectation is significant portion of company's board is independent
2. If chair is not an exec or the promoter then 1/3 should be independent
3. If chair is not independent in these ways, 1/2 board members should be
4. Securities regulator tried to enforce independent chairs but delayed
68
Describe the emphasis on accountability of the board of directors and management for financial reporting and controls in India
1. The CEO and CFO of listed companies are required to
2. (a) certify that the financial statements are fair and
3. (b) accept responsibility for internal controls
69
What guidelines have the Ministry of Corporate Affairs released in India
1. voluntary guidelines for corporate governance in 2009, with the option to make them mandatory in due course.
2. These address a range of issues including board independence and responsibilities, the audit committee, auditors, and mechanisms to encourage and protect whistleblowing.
3. In 2019 - National Guidelines for Responsible Business Conduct (NGRBC), which sought to adopt the Gandhian principle of trusteeship, encouraging businesses to contribute toward wider development goals while seeking to maximize their profits.
70
What was the aftermath of the short-selling attack on the Adani group of companies by Hindenburg Research
1. there were significant related party transactions and that share prices in the groups were inflated through manipulation using investment vehicles from outside of India (in some cases, Mauritius, for example).
2. The close business links between a number of the group companies, and their dominance by the founding family and promoter, were simple truths and not denied
3. Supreme Court at the start of 2024 ruled that the investigation into Adani should not become a legal matter, and the share prices of the group companies have recovered around a half of their losses from the start of the short-seller attack.
4. Deloitte publicly resigned from the role of auditor of leading Adani company Adani Ports and Special Economic Zone (APSEZ) in August 2023, flagging concerns about an inability to gain sufficient understanding of the company's related party transactions.
71
Describe corporate governance in Italy
1. Single-tier
2. Single exec director and independent chair
72
What is an unusual part of Italy's governance structure?
1. Voto di lista approach
2. Statuatory auditors
73
What is the voto di lista approach?
1. Majority company shareholder bases have been dominated by single shareholder or group of shareholders
2. Could mean nominations and election of boards would be entirely in their hands- non-independent board nad shareholders unrepresented
3. Voto di lista approach: Designated portion of the board (30%) is reserved for minority shareholders
4. Shareholders with min level of shareholding have ability to propose slate of directors
5. Slate with most votes is dominant one and chair is appointed from it
6. Slate with next most votes is successful minority slate and fills board roles designated for minority investors
