ESG and corporate governance Flashcards
(69 cards)
1
Q
What is a shareholder?
A
- It provides capital to the company, and it is entitled to the company’s net value.
- They elect the board of directors and vote on important resolutions.
2
Q
What is a creditor?
A
- They have little influence on the company other than covenants and restrictions they can put in place as its banks or bondholders.
- They receive interest and principal repayments.
3
Q
What are the employees group?
A
They have a significant stake in the company’s operation, as they are paid salaries as well as other incentives and perquisites for their work.
4
Q
What is the board of directors?
A
- It acts in the best interest of the shareholders who elect them.
- They oversee the operations by monitoring the company and management performance while providing strategic decisions.
5
Q
What is the customer group?
A
- They like a product that is a good value for the price and is safe to operate
- They desire ongoing support.
6
Q
What are company suppliers?
A
They have a goal of being paid for their services and materials. They want stability.
7
Q
What are the government and regulators?
A
They wish to protect the economy and the interests of the general public.
8
Q
What are the 5 key relationships to consider for potential conflicts?
A
- Shareholder and manager/director relationships
- Controlling and minority shareholders
- Manager and board relationships
- Shareholder vs creditor interest
- Other stakeholder conflicts
9
Q
What is a straight voting structure?
A
There is one vote for each share owned.
10
Q
What are 2 most important aspects of stakeholder management?
A
- Effective communication
- Active engagement
11
Q
What is the legal structure?
A
It lays out the framework of rights established by law as well as the ease or availability of legal recourse.
12
Q
What is the contractual structure?
A
It is the means used to secure the rights of both parties through contractual agreements between the company and its shareholders.
13
Q
What is the organizational structure?
A
It is the manner in which the company manages its stakeholder relationships through its governance procedures, internal systems, and practices.
14
Q
What is the governmental infrastructure?
A
It is the regulations imposed on the company.
15
Q
What is corporate governance?
A
It is defined as the system of internal controls and procedures through which individual companies are managed.
16
Q
What are the 10 common elements used to manage shareholders?
A
- General meetings
- Board of directors
- Audit function
- Reporting and transparency
- Remuneration policies
- Say on pay
- Contractual agreements with creditors
- Employee laws and contracts
- Contractual agreements with customers and suppliers.
- Laws and regulations
17
Q
Describe what a general meeting is.
A
- Shareholders have the right to participate in these meetings and exercise their voting rights.
- Shareholders can see the financial position of the company to make decisions about its situation.
18
Q
What is a cumulative voting structure?
A
Shareholders have the ability to accumulate and vote all their shares for a single candidate in an election involving more than one director.
19
Q
What is proxy voting?
A
It is when a shareholder gives authorization to another shareholder to have their share voted.
20
Q
What is the audit function?
A
- It helps to provide assurances that financial statements are properly reported.
- It provides a service that evaluates the control environment within a company.
- It reviews and analyzes the various systems, controls, and policies/procedures that are in place to examine the operations and the manner in which financial information is accumulated.
21
Q
What are remuneration policies?
A
Aligning pay with shareholders’ interests helps to ensure that long-term strategies are implemented that will benefit the overall value of the company.
22
Q
What is the say on the pay concept?
A
It is a concept that helps to decrease potential conflicts and issues with shareholders by gaining their insights into the company’s remuneration policy.
23
Q
What is an indenture?
A
It is a legal contract that outlines the obligations and rights of the issuer and the bondholder.
24
Q
What are the covenants that come with an indenture?
A
They are covenants that identify actions that are both required and prohibited.
25
What is another way to increase the likelihood of repayment of a creditor?
By putting assets as collaterals for financial guarantee.
26
What are employment contracts?
They are for the individual and outline the employee's rights and responsibilities; they are not all-encompassing, leaving some discretion within the relationship.
27
What are the insights that the board of directors should have?
- Strategy
- Finance
- Audit
- Risk management
- Human resources
28
What is a one-tier structure?
It is made of executive directors (internal) and non-executive directors (external) who offer objective insight.
29
What is a two-tier structure?
It has a supervisory board and a management board that is independent of each other.
30
What are staggered boards?
- The board is broken into three classes and has separate elections in consecutive years.
- It provides a continuous implementation of strategy and oversight without constantly being reassessed by new board members.
31
What are the 6 common committees to provide feedback and recommendation?
- Audit Committee
- Governance Committee
- Remuneration Committee
- Nomination committee
- Risk committee
- Investment Committee
32
What is the principal role of the audit committee?
- Review information technology.
- Evaluate policies and procedures.
- Supervise the internal audit group.
- Appoint and evaluate the findings from the external auditors.
- Perform other necessary processes and procedures.
33
What is the governance committee?
It has the goal of monitoring the adoption and implementation of good corporate governance practices.
34
What is the remuneration committee?
- It will develop and propose policies ad present them for approval.
- It will include setting performance criteria and establishing human resource policies.
- It will also set and oversee the implementation of various employee benefits.
35
What is the nomination committee?
It will create the nomination policies and procedures for new board members and executive management.
36
What is the risk committee?
- It plays a critical role in establishing, implementing, and monitoring the appropriate level of risk within the company.
- The committee seeks to systematically manage existing and potential issues by identifying, assessing, and mitigating risk throughout the enterprise.
37
What is the investment committee?
The board is responsible for the strategic direction of the company.
- It will establish and regularly review and update the investment policies.
38
What are the 3 market factors that affect the stakeholder relationship and corporate governance?
- Shareholder engagement
- Shareholder activism
- Competition and takeover.
39
What is shareholder engagement?
It is a growing trend that companies engage with shareholders more frequently throughout the year.
40
What is shareholder activism?
- It is the second market factor that seeks to modify the behaviors within a company.
- The ultimate goal is to increase shareholder value.
- Hedge funds tend to draw the largest amount of activism due to their loosely regulated nature.
41
What are the 3 types of corporate takeover? Describe them.
- Proxy contest: shareholders are persuaded to vote for a group seeking to take positions that will control the company's board of directors.
- Tender offer: when there is an attempt to persuade shareholders to sell their shares to the group seeking to gain control.
- Hostile takeover: result when an entity acquires a company without the consent of company management.
42
What are nonmarket factors? Name the 3 most common.
They are factors present in an environment that can change governance and its relationship with stakeholders:
- Legal environment
- Media
- Corporate governance industry
43
What are the 4 potential issues of a weak control environment?
- weak control systems
- Ineffective decision making
- Legal, regulatory, and reputational risks
- Default and bankruptcy risks
44
What are the 4 benefits of effective governance?
- Operational efficiency
- Improved control
- Better operating and financial performance
- Lower default risk and cost of debt
45
What is the operational efficiency benefit?
It clarifies the organizational structure that outlines responsibilities, reporting lines, and the internal environment; employees will have a clear understanding of their perspective duties.
46
What is the improved control benefit?
It helps to minimize various risks, including regulatory, legal, and financial risks.
47
What is the better operating and financial performance benefit?
- The company can see better operating performance and better information gathering.
- This leads to improved decision-making and can decrease the response time to changes in the market.
48
What are the lower default risk and cost of debt benefit?
- business investment risk is reduced.
- It will help to protect creditors' interests and will ultimately reduce the company's cost of debt and default risk.
49
What are the 6 key areas that should be considered to have a good structure?
- Economic ownership and voting control
- Board of Directors representation
- Remuneration and company performance
- Investors in the company
- Strength of shareholders' rights
- Managing long-term risks.
50
Stranded assets are a specific concern about which sector?
Energy sector
51
What are examples of environmental factors?
- Climate change and carbon emissions
- Air and water pollution
- Biodiversity
- Deforestation
- Energy efficiency
- Waste management
- Water scarcity
52
What are examples of social factors?
- Human rights
- Labor standards
- Data security and privacy
- Occupational health and safety
- Customer satisfaction and product responsibility
- Treatment of workers
- Equity and diversity
- Community relations and charitable activities
53
What are examples of governance factors?
- Bribery and corruption
- Shareholder rights
- Board composition (independence and diversity)
- Audit committee structure
- Executive compensation
- Lobbying and political contributions
- Whistleblower schemes
54
Which law system offers bigger protection to the interests of the shareholders?
Common law system
55
What is responsible investing?
It is an umbrella term used to describe investment strategies that incorporate environmental, social, and governance factors into their approaches.
56
What is ESG integration?
It refers to the careful consideration of material ESG factors in the investment analysis and portfolio construction processes.
57
What is socially responsible investing (SRI)?
It refers to the practice of excluding investments in certain industries such as tobacco. It promotes positive environmental or social attributes.
58
What is thematic investing?
It refers to investment in themes or assets specifically related to ESG factors. It is based on economic or social trends.
59
What is the impact of investing?
It refers to investments made with the intention of generating positive, measurable social and environmental impact alongside a financial return.
60
What is sustainable investing?
It is a term used in a similar context to responsible investing, but its key focus is on factoring in sustainability issues while investing.
61
What is green finance?
It is a responsible investing approach that utilizes financial instruments that support a green economy.
62
What is a value-based approach?
- It aims to mitigate risks and identify opportunities by analyzing and incorporating material ESG considerations in addition to traditional financial metrics.
- It expresses the moral or faith-based beliefs of an investor.
63
What is negative screening?
It is excluding companies or sectors based on business activities or environmental or social concerns.
64
What is positive screening?
It is including sectors or companies based on specific ESG criteria, typically ESG performance relative to industry peers.
65
What is ESG integration?
Systematic consideration of material ESG factors in asset allocation, security selection, and portfolio construction decisions for the purpose of achieving or exceeding the product's stated investment objective.
66
What is thematic investing?
It is investing in themes or assets related to ESG factors.
67
What is engagement/active ownership?
It is using shareholder power to influence corporate behavior to achieve targeted ESG objectives along with the financial return.
68
What is impact investing?
It is investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
69
What are stranded assets (carbon assets)?
These items are at risk of no longer being economically viable because of changes in regulations or investor sentiment.
