Corporate Governance
Maximising companies value
Link between goal of shareholders and the goal of managers/executives
Stakeholders
Problem
Equity Holders: • disconnect between equity holders/investors
• Goal: increase of stock price (maximise and management of company and decision
by the management/executive in the
wealth/investment) company
• they want the price of company to grow = • = do they make good or bad decisions?
grow value of company • > what to do/how to organise the firm/ to
• cannot control decision making in company push to make best decision for company
• > take into account relationships with all
Managers/Executive: stakeholders (most important with investors
• Goal: increase personal wealth (stockholders))
• they want the value of the company to grow to
increase their own wealth/interest to support
life/pleasure Scandals
Board of Directors: Most of the time because of massive fraud
• Goal: control company, put in place strategy, schemes with fake accounting/embezzlement
and fake statements
validate decisions, follow KPIs • risk is known but not based on criminal
• = Control/monitor executives (actions) activities but risk of company activities
• are system of functioning to help equity • EX: ENRON, Parmalat, Wirecard
holders in controlling of the company • pushed different financial responsibilities
= New law: (SOX) Sarbanes-Oxley Act 2002 (to
Company: organise limited company (listed company))
• Goal: (satisfy goal of investors) = maximise
value of company
• management need to satisfy goal Incentive Conflicts
• when hesitate making decisions for company = interlink relationship among stakeholders
= put yourself in mind of equity holders • Management: directed by CEO
Institutional Investors: • board: present strategy, make most important
= investment fonds/insurance companies decisions
• money spent on insurance = they use to • Regulators: legal aspect = impact on
invest/buy other company company by regulations/laws
• large shareholders = high power • Auditors/accountants: analyse financial
• need to make sure they invest in good performance (audit company)
companies • > look for problems (fraud prevention)
• Analysts: analyse (financial) reports and
Why study? non financial documents
when one buys company they look at: • > make recommendations to buy/sell
• cost of capital = profitability in ratio
• how much I receive each dollar invested
companies on stock amrket
• Financial statements (how is the company doing? • Creditors: people/companies who borrow/lent
compare to competitors money to company (banks/bonds)
• capital budgeting: receive recommendations where to • > estimated risk of company
go/what to do/amount of investment needed to realise • > look at governance
• company cannot reach maximise value without new
investment
• Investment Banks: invest money, make
• capital structure (what level of debt/equity = financial recommendations, can buy ownership
engineering) • Consultants: give advise/recommendations
(on governance, captial budeting, strategy)
, Principal - Agent Model
Shareholders (principal) delegate running of company to Managers (agent)
Principal-agent relationships are part of daily
life. Asymmetric Information
= agents have all the information
• Principal: owner of an asset
• principal does not always have all information
• Agent: someone who can increase the value concerning agent action/effort
of that asset • knowledge that 1 party to transaction has that
The best person to “add value” to an asset may other lacks
• = hidden actions (moral Hazard)
not always be the person who owns that asset. So
it is common for an owner to employ agents as
opposed to everyone being self employed. Challenges
1. Principal and agent have conflicted
Managers and Shareholders interest
= most important relationship in corporate 2. Asymmetric information
governance = manager (might) act in own self-
• separation of ownership and control is most interest (rather than interest of
important characteristic of modern shareholders)
corporations • corporate governance mechanisms are
Benefits of seperation developed to solve/reduce problem
• Access to capital market (increase
capital/ less expensive than finding new A typical example is the relationship between an
employer and an employee
owners) • The employers (the principal) contracts with
• Specialisation and expertise (C-suite employee (the agent) to provide labor for
needs to be specialised/expertise) producing a good or service
Examples:
• Shareholders and managers
Solution • NEOMA and teachers
• An automaker and a parts maker
Monitor
• permit to see what manager is doing
• = see reality of actions (reduce asymmetric Agency Problem
information)
= Among all employees, executives have
• very costly
the greatest ability to steal from
• job of board of directors
shareholders.
Incentive compensation Examples of self-serving managerial
• put in place using special contract (between
actions:
agent and principal)
• shirking (avoid or neglect a duty or
• align goal of manager with goal of equity
responsibility)
holders
• hiring friends
• BUT makes agent’s pay riskier (most people
• consuming excessive perks
are risk averse)
• building empires
• > fixed salaries bear no uncertainty
• taking no risks or chances to avoid
• > incentive compensation is based on output
being fired
(volatility)
• having a short-run horizon if the
• = risk in compensation may change agents
manager is near retirement
strategy/decisions
Maximising companies value
Link between goal of shareholders and the goal of managers/executives
Stakeholders
Problem
Equity Holders: • disconnect between equity holders/investors
• Goal: increase of stock price (maximise and management of company and decision
by the management/executive in the
wealth/investment) company
• they want the price of company to grow = • = do they make good or bad decisions?
grow value of company • > what to do/how to organise the firm/ to
• cannot control decision making in company push to make best decision for company
• > take into account relationships with all
Managers/Executive: stakeholders (most important with investors
• Goal: increase personal wealth (stockholders))
• they want the value of the company to grow to
increase their own wealth/interest to support
life/pleasure Scandals
Board of Directors: Most of the time because of massive fraud
• Goal: control company, put in place strategy, schemes with fake accounting/embezzlement
and fake statements
validate decisions, follow KPIs • risk is known but not based on criminal
• = Control/monitor executives (actions) activities but risk of company activities
• are system of functioning to help equity • EX: ENRON, Parmalat, Wirecard
holders in controlling of the company • pushed different financial responsibilities
= New law: (SOX) Sarbanes-Oxley Act 2002 (to
Company: organise limited company (listed company))
• Goal: (satisfy goal of investors) = maximise
value of company
• management need to satisfy goal Incentive Conflicts
• when hesitate making decisions for company = interlink relationship among stakeholders
= put yourself in mind of equity holders • Management: directed by CEO
Institutional Investors: • board: present strategy, make most important
= investment fonds/insurance companies decisions
• money spent on insurance = they use to • Regulators: legal aspect = impact on
invest/buy other company company by regulations/laws
• large shareholders = high power • Auditors/accountants: analyse financial
• need to make sure they invest in good performance (audit company)
companies • > look for problems (fraud prevention)
• Analysts: analyse (financial) reports and
Why study? non financial documents
when one buys company they look at: • > make recommendations to buy/sell
• cost of capital = profitability in ratio
• how much I receive each dollar invested
companies on stock amrket
• Financial statements (how is the company doing? • Creditors: people/companies who borrow/lent
compare to competitors money to company (banks/bonds)
• capital budgeting: receive recommendations where to • > estimated risk of company
go/what to do/amount of investment needed to realise • > look at governance
• company cannot reach maximise value without new
investment
• Investment Banks: invest money, make
• capital structure (what level of debt/equity = financial recommendations, can buy ownership
engineering) • Consultants: give advise/recommendations
(on governance, captial budeting, strategy)
, Principal - Agent Model
Shareholders (principal) delegate running of company to Managers (agent)
Principal-agent relationships are part of daily
life. Asymmetric Information
= agents have all the information
• Principal: owner of an asset
• principal does not always have all information
• Agent: someone who can increase the value concerning agent action/effort
of that asset • knowledge that 1 party to transaction has that
The best person to “add value” to an asset may other lacks
• = hidden actions (moral Hazard)
not always be the person who owns that asset. So
it is common for an owner to employ agents as
opposed to everyone being self employed. Challenges
1. Principal and agent have conflicted
Managers and Shareholders interest
= most important relationship in corporate 2. Asymmetric information
governance = manager (might) act in own self-
• separation of ownership and control is most interest (rather than interest of
important characteristic of modern shareholders)
corporations • corporate governance mechanisms are
Benefits of seperation developed to solve/reduce problem
• Access to capital market (increase
capital/ less expensive than finding new A typical example is the relationship between an
employer and an employee
owners) • The employers (the principal) contracts with
• Specialisation and expertise (C-suite employee (the agent) to provide labor for
needs to be specialised/expertise) producing a good or service
Examples:
• Shareholders and managers
Solution • NEOMA and teachers
• An automaker and a parts maker
Monitor
• permit to see what manager is doing
• = see reality of actions (reduce asymmetric Agency Problem
information)
= Among all employees, executives have
• very costly
the greatest ability to steal from
• job of board of directors
shareholders.
Incentive compensation Examples of self-serving managerial
• put in place using special contract (between
actions:
agent and principal)
• shirking (avoid or neglect a duty or
• align goal of manager with goal of equity
responsibility)
holders
• hiring friends
• BUT makes agent’s pay riskier (most people
• consuming excessive perks
are risk averse)
• building empires
• > fixed salaries bear no uncertainty
• taking no risks or chances to avoid
• > incentive compensation is based on output
being fired
(volatility)
• having a short-run horizon if the
• = risk in compensation may change agents
manager is near retirement
strategy/decisions
