2. Shareholders & Corporate
Governance
S Changes on modern capitalism
S Shareholders X Managers
S Definition of Corporate Governance:
“Corporate governance describes the process by which
shareholders seek to ensure that ‘their’ corporation is run
according to their intentions. It includes processes of goal
definition, supervision, control, and sanctioning… It includes all
actors who contribute to the achievement of stakeholder goals,
inside and outside the corporation.” (Parkinson 1993: 157)
3. Corporate Governance Cont.
S Agency Relation
S Definition: Shareholders as the principal who contracts management as an
agent to act in their interest within the boundary of the firm.
S Conflict of interests between shareholders and managers.
S Information Asymetry
S Different Frameworks of Corporate Governance Globally
4. Ethical Dilemmas:
S Executive remuneration- High executive pay on the base of market
rates
S Problems directly occurring from this:
S Appropriate performance-related pay can not be delegated due to the
excessive salary levels
S This remuneration has influenced executive pay globally; there is a global
market for executive talent, so the standards of the highest level of pay
seem to be implied internationally, although performance-related pay is
already in place in regions such as Europe. This ultimately skyrockets pay
levels across the board
S The influence of the board is limited and often does not accurately reflect
the shareholder’s interests
5. Dilemmas Cont.
S Hostile takeovers- When an investor intends to purchase a majority stake
in a corporation against the wishes of its board.
S Two options for dealing with the takeover:
S The company can be seduced by the takeover, by being offered a large sum of
money or a, ‘golden parachute’.
S Managers can secretly send ‘greenmail’ (as opposed to blackmail) to the
potential hostile party and offer to buy back the shares for the company at a
higher price than the present market price in order to prevent themselves from
losing their jobs
S Faith stocks- Blind faith in the stock market ex: of this is the real estate
market in the early 2000’s, in which people blindly put their faith into, in
hopes that it would continue to rise. The market was much too complex for
anyone to understand and the amount of uncertainty that lay within was
almost criminal to put trust in.
6. Dilemmas Cont.
S Insider trading- When certain investors have superior knowledge of
the market before any other potential traders are aware.
S Ethical arguments against insider trading:
S Fairness- One party has an unfair advantage over the other when they
receive predictive information that the other is not able to receive
S Misappropriation of property- The information that is used is essentially the
property of the firm involved, to which they have no rights to
S Harm to investors and the market- The traders may benefit to the cost of
‘ordinary’ traders, making the market riskier
S Undermining of fiduciary relationship- Since the insider trading is driven by
self-interest, not the interest of the shareholders, trust is ultimately lost
between the managers and the shareholders
8. Shareholders as citizens of the
corporation
Governance
and control
National
security and
protectionism
International
speculation
Unfear
competition
Space for
illegal
transactions
Ethical
issues
Reforming corporate governance
Definition and implementation of new corporate
governance codes
by
Shareholder
democracy
A shareholder has a say in corporate
decisions
Scope of
activities
Mechanis
m for
change
Adequate
informatio
n
9. Shareholder Activism
Main objective:
S Have a voice at AGMs
S Create real change at management level
S Highlight unethical practises in the media
Disadvantages:
S Loss of integrity
S High financial cost
10. Socially Responsible
Investing (SRI)
S Profit driven investment
S Companies must comply with ethical, social and environmental
criteria
S Two main types;
- Market Led Funds
- Deliberative Funds
Criticisms: Quality of information, dubious criteria, too inclusive,
emphasize returns
11. Shareholding for sustainability
Indexes rating corporations according to their performance towards
the broader goal of sustainability:
1. DJSI
2. FTSE4Good
3. Cleantech Indexes
“A step in linking investors’ interests in financial performance
with the sustainability”
12. Shareholders and Globalization
Has exacerbated transparency and shareholder
control.
The ethics of private equity and edge funds
turned shareholders into actors in national
capital markets.
involved shareholders in global financial
markets.
Globalization has
Private equity (PE)
firms
Hedge funds (EF)
