Lecture 3 Flashcards
(29 cards)
Investor ownership
U,it ate control to shareholder tho they don’t care ab day2day operations, hence informations and coordination costs
Delegated management
Functional due to information and coordination cost, leading to agency principal problems
Types of jurisdiction
1 where common shareholders: appointment and and decision rights are usually stronger - direct influence over management
2 where dispersed ownership (lots of small investors): they don’t really know wtf are managers doing, so as a solution managers gets rewards and trusteeship roles for non management roles + standard of conduct and affiliation rights
Delegated management and corporate boards
Law on public corporations: fundamental rdefisions to shareholders, decision making power to bod (whose main obj is to manage the company’s business - in many jurisdictions trusteeship role)
Less cost of infos nd cord
One tier vs two tier board
One tier: one board manages and supervises management and corporation (directly or via committees) - us, Japan
Two tier: sperated management and monitoring functions
Management: made of executives (ceo, cfo…), appointed by supervisionary board and run the daily business (design and implement strategy)
Monitoring: elected supervisory board of non management directors and they monitor managers, supervise the strategy and protect the shareholders - Germany and belgium
Case of Germany two tier
Reduces cost of infos and coord between shareholders and employees
W 20 min supervisory boards and other jurisdictions 9-12 members
Appointment and decision rights
Shareholder power to appoint and remove from bod
When delegated management leads to suboptimal outcomes, law grants shareholders decision rights
Appointing directors
Shareholders power to select directors (they can nominate ppl for election)
Tho may be preferable to have the board do the research and shareholders just vote on them (to avoid coord costs)
Cases for appointing directors
Mostly: board proposes nominees
Brazil and Italy: shareholders x nominees + minority special rules of representation
Delaware (plurality vote): no majority as long as u get more votes than others, but u can switch to majority
Almost all jurisdictions: shareholders simply add nominees to the list
Proxy materials and proxy access (us)
Material that everyone gets before the annual meeting, you get infos on nominees, what issues, and how to vote (or to delegate ur vote= proxy)
If shareholders want to propose and insurgence they should send all docs (expensive) but w proxy you just add them to voting material (you can vote for anybody on the same paper)
With proxy being a delegation of ur vote (them being legally obligated to vote for who u want on ur behalf)
Removing directors
Shareholder majority right to remove a director regardless of cause or duration of their term - uk, Italy, France, Brazil, Japan, belgium
+power to request a shareholder meeting
Very useful for checks on agency
German case on removing boards + us (similar)
Remote on w/ cause only on 75% majority
Can’t remove labor representatives
Supervisory boards can’t remove the members of management boards w/ a cause
Us can’t remove directors w/ a cause
In Delaware possible if corporation has an unstable board
If removal without a cause is not possible
Drop the slate (don’t reelect them)
Different length of directorial term tho (the longer, the more protected the director)
Us and uk 1 year, Japan 2, ita and Brazil 3, Germany 5, far and bel 6
Decision right
Shareholder mandatory decision rights when: directors have conflicts of interest, call for basic changes in structure, fundamental transactions that potentially restructure the firms
Actions that need shareholder approval
Us: mergers and charter amendments
Other jurisdictions: boroader range of decisions rights (ex dividend distribution)
Eu: appoint and dismiss auditors of publicly listed companies
Uk: statutory default - 75% of the shareholders will overrule the board even if its board competence
Brazil’s simple majority controls important business decisions (unless requires bod specifically)
Other jurisdictions: routine business decisions ab managing to bod exclusively
Continental Europe and Japan: shareholders initiation and approve a wide range of matters including important matters of management and strategic decisions
Us (Delaware): shareholder ratify but can’t initiate I,portent decisions(mergers and amendments)
Private companies and shareholders
More power
GmbH (Germany) approve financial statements and dividend payments + any company policy
+ derivative actions= sh suing on behalf of the firm and obligated managers to take responsibility if the firm itself doesn’t (maybe managers control the board or case not taken seriously)
Shareholders coordination
Collective action proble. : dispersed shareholders not being motivated to take action
Helped by the law: vote by mail, proxy solicitation, custodial institution ( banks holding shares), electronic meetings
Hence less coordination problems and enhanced democracy
Agent incentives
Trusteeship strategy: independent directors
Reward strategy: executive compensation
Trusteeship: independent directors
Inclusion of independent directors in bod
Compensation less linked to performance (more freedom from high power incentives) - motivated by ethical and reputational concerns
No day2day management decision (less identification w management)
Does not necessarily mean that all non executives directors in bod are independent (cause independent directors have no relationship w corporation beyond board membership) - often part of board committees
Rules on independent directors
Us: encouraged by court, stock exchange rule mostly require a majority of them (esp key committees)
Eu: audit directive requires at least one, promoted by soft law (non legally binding) -they should have them or explain why they dont
Reward strategy: executive compensation
Pay to align interest of managers to interest of shareholders
Sometimes reflect agency problems
Law does not directly set amount
Usually equity based compensation: stock option (by share at fixed price), restricted stock (given but w conditions), appreciation right (bonus based on stock price increase)
cases for reward strategy (this needed to protect rights of dispersed shareholders)
Us: high power equity incentives, but requires disclosure + compensation committees made by independent directors only
Other jurisdictions: smaller rel payment and performance
Uk: dispersed ownership but strong sh rights - less need to pay
Japan: focus on unity managements x employees
Other countries: sh use power to manage pay and performance, lower ceo compensation
Legal constraints and affiliation rights
Managerial and bod decisions are constraint by general fiduciary norms (ex duty of care)
Affiliation rights=rights of shareholders to monitor o influence company
1 mandatory disclosure: it gives a way to board and sh to judge how well are managers doing + affects shareholder prices
2 right to exit: sell ur shares or withdraw your investment
