Lecture 4 Flashcards
(14 cards)
How does ownership influence corporate governance?
Aligns manager and shareholder interests.
Encourages shareholder activism.
Can lead to takeovers, ensuring accountability.
What are the benefits of concentrated ownership?
✔ Strong incentives to manage well.
✔ Reduces moral hazard and agency problems.
✔ Encourages long-term strategic planning.
What are the risks of concentrated ownership?
❌ Risk aversion – hesitant to take bold business steps.
❌ Tunneling – transferring company value to majority owners.
❌ Minority shareholder exploitation.
What is a takeover in corporate governance?
Occurs when a new owner acquires a controlling stake in a firm.
Hostile takeovers happen against the board’s wishes.
How do companies defend against hostile takeovers?
Poison pills (making shares expensive for the acquirer).
Golden parachutes (large severance packages for executives).
Staggered boards (limiting board replacement).
Leverage buyouts
What are governance challenges in family-owned firms?
Nepotism (hiring based on family ties, not merit).
Conflicts between family & business interests.
Lack of external oversight.
How can family firms improve governance?
✔ Establish a family council for family issues.
✔ Independent board members for accountability.
✔ Implement external audits to ensure transparency.
What are institutional investors, and why are they important?
Organizations investing on behalf of others (e.g., pension funds, hedge funds).
Hold large stakes in companies and influence governance via voting power.
What are key types of institutional investors?
Pension Funds – Long-term investors seeking stable growth.
Hedge Funds – Short-term, high-risk investors.
Socially Responsible Funds – Invest based on ethical concerns.
What is shareholder activism?
When shareholders pressure management to make changes.
What are common activist strategies?
Voting at AGMs (approving/disapproving management decisions).
Filing shareholder resolutions (proposing changes).
Proxy battles (persuading shareholders to replace management).
Litigation (suing companies for governance failures).
Who are the key corporate stakeholders?
Creditors (banks, lenders).
Employees (worker rights, wages).
Suppliers (contracts, fair payments).
Customers (product quality, service).
Governments (taxes, regulations).
How do stakeholders influence governance?
Creditors can demand financial transparency & risk controls.
Auditors ensure accurate financial reporting.
Regulators enforce compliance with laws.
Why don’t all shareholders exercise their rights?
Free-rider problem – Small shareholders rely on larger ones to act.
Coordination problem – Investors may disagree on strategies.
