Corporate governance Flashcards
(13 cards)
What do large corporations do?
‘Rule the world’ e.g. Trump backed my large companies like Tesla. 157 of the top 200 economic entities by revenue are companies not countries. Walmart, Apple and Shell earn more money than Belgium and Sweden
What are the leaders of large corporations?
The leaders are not democratically elected, yet countries have been known to change policy in response to corporate actions.
Power of corporations means they share actions and agendas beyond business e.g. climate change
What is corporate governance?
‘the determination of the broad users to which organisation resources will be deployed and the resolution of conflicts amongst the myriad participants in organisations’ Daily, Dalton and Camella, 2003.
It is essentially about conflict resolution between those who own the firm, shareholders and those to run the firm and the firms broader stakeholders. Its the study of power and influence on decision making in companies.
What does corporate governance consider?
- how to keep CEO interests in lines with those of shareholders
- shareholders interests
- stakeholder interests
- disclosure requirement
- transparency and accountability
Who are the internal and external participants in a firm?
internal - board of directors, management, (assets, debt, equity), good or service
external - shareholders, debt holders
also have - governments, communities, customers, natural environment, employees, trade association, suppliers and political groups.
Separation of capital providers and those who manage the capital creates the need for corporate governance.
What are a firm’s resources?
Physical assets e.g. manufacturing plant, offices, storage space, final goods.
Intangible assets e.g. corporate reputation, brand trust, relationships.
Human capital e.g. employees.
Money and financing e.g. shareholder funds, retained earnings, cash from borrowing.
How can firms resources be deployed?
- increased production offering new goods and services, change product offering and strategy.
- capital investment - buying more or new machinery, plant, stock etc.
- invest in tangible assets e.g. advertising campaigns.
- invest in people - attract, hire, develop, retain and invest in human capital.
What are agency problems?
‘the desires or goals of the principal and agent conflict’ (Eisenhardt 1989)
principal = the owner
agent = the CEO or manager
What is the CEO role?
CEO bought to improve their lot. Shareholder is looking for a return on his or her investment. The strategy that will satisfy the CEOs objectives may not satisfy the shareholders and vice versa.
‘its difficult or expensive for the principal to verify what the agent is actually doing. Problem is that the principal cannot verify that the agent behaved appropriately’ (Eisenhardt 1989).
What control does a shareholder have?
Main shareholders don’t have any day to day control of the CEO, so the CEO can work to satisfy his or her goals at the expense of the shareholder.
What are conflict resolutions?
- board meetings
- CEO pay alignment
- codes of conduct
- financial and non-financial reporting disclosure
- board committees
- shareholder resolutions.
Case study - Enron why was it successful?
American energy company founded in 1985 in Houston Texas. Under CEO Jeffery Skilling and chairman Kenneth Lay, Enron shifted its focus to energy trading using innovative financial instruments like derivatives - praised for aggressive growth, high earnings and supposed transparency, which led to its stock price soaring.
At its peak in 2000, Enron stock price was $90+ per share and it was valued at over 70 billion, ranked 7th on the Fortune 500
Why did Enron see a downfall?
Its success was build on accountancy fraud and off balance sheet entities used to hide debt and inflate profits. It used special purpose entities (SPEs) to shift the debt off its books.
In 2001 the truth unravelled and it led to - a loss of investor confidence, a collapse in stock prices from $90 to under $1, Enron filled for bankruptcy in December 2001, largest in US history at the time.
Auditor, Arthur Anderson was implicated and eventually dissolved.
