1. What is corporate governance ?
The primary objective of
corporate governance
The conflicts of interest area
include
Dramatic changes
Governance mechanisms
2. Separation of ownership and managerial
control
Agency relationships
product diversification as an example of an
agency problem
Agency costs and governance mechanisms
Enhancing the effectiveness of the board of
directors
3. Is the set of mechanisms used to manage the
relationship among stakeholders and to
determine and control the strategic direction
and performance of organization
At its core :
Corporate governance is concerned with
1. Identifying ways to ensure that strategic
decision are made effectively
2. Can also be as means to establish harmony
between parties ( the firm owners and its
top-level managers ) whose interests may
conflicts .
4. In modern corporation especially those in
united states and united king dome the
primary objective is to ensure that:
1. The interests of top-level managers are
aligned with the interests of the
shareholders .
2. Oversight in areas where owners ,
managers and member of boards of
directors may have conflicts of interests .
5. The election of directors
The general superposition CEO pay and more
focused superposition of director pay .
The corporation overall structure and
strategic direction .
6. Recent emphasis on corporate governance stems
mainly from ( the failure of corporate
governance mechanisms ) to ( adequately
monitor and control top-level managers decision
This situation result in changes in governance
mechanisms in corporations throughout the
world , especially with respect to efforts
intended to improve the performance of boards
of directors
A second and more positive reason for this
interests comes from evidence that ( a well
functioning corporate governance and control
system can create a competitive advantages for
an individual firm .
7. There are three internal and single external
governance mechanisms
The internal governance mechanisms :
1. Ownership concentration : represented by
types of shareholders and their different
incentives to monitor managers .
2. The board of directors .
3. Executive compensation .
8. Market for corporate control :
Which is a set of potential owners seeking to
acquire undervalued firms and earn above-
average returns on their investments by
replacing ineffective top-level management
team .
9. What is it ?
It’s the efficient separation of ownership and
managerial control .
What is the primary objective ?
Is to increase the corporation profit and
thereby , the financial gain of owners
(shareholders ).
10. 1. Allows shareholders to purchase stock,
which entitles them to increase (residual
returns ) from firms operations after paying
expenses .
2. This right requires that they also take a risk
that the firms expense may exceed its
revenues .
11.
12. In order to manage this investment risk
shareholders maintain diversified portfolio by
investing in several companies to reduce the
overall risk
13. In large number of family owned firms ,
ownership and managerial control are not
separated .
Family controlled firms face at least tow
critical issues :
1. As they grow , they may not have access to
all of the skills needed to effectively
manage the firms and maximize its returns.
2. As they grow, they may need to seek
outside capital and thus give up some of
ownership ( in these case minority owners
right should be protected ) .
14. The owner managers may contract with
managerial specialists , these managers
makes major decision in the owner’s firm
based on their ( decision making skills ) .
Main point :
Without owner (shareholders) specialization in
risk bearing and management specialization
in decision making , a firm may be limited by
the abilities of its owners to manage and
make strategic decision ,thus separation and
specialization of ownership and managerial
control should produce the highest returns .
15. Exists when one or more persons (the
principal or principals ) hire another person
or persons (the agent or agents ) as decision-
making specialists to perform a service .
In addition to shareholders and top level
managers , other example of agency
relationship are ( consultants , clients ,
insured and insurer ) .
We focus on the agency relationship between
firm’s owners and top-level managers
because these managers formulate and
implement the firm’s strategies .
16. 1. Agent have different interests and goals .
2. Shareholders lack direct control of large
publicly traded corporations .
3. Agent makes decisions that result in the
pursuit of goals that conflict with those of
principals .
17. Is the seeking of self-interest with guile ( i.e ;
cunning or deceit ) .
opportunism is both an attitude ( an inclination
) and a set of behaviors ( specific acts of self-
interests )
EX: the managerial decision to use free cash
flows to over diversify the firm is an example of
self-serving and opportunistic managerial
behavior .
Principals establish governance and control
mechanisms to prevent agent from acting
opportunistically .
18. product diversification can result in two
benefits to managers that shareholders do
not enjoy :
1. diversification usually increase the size of
firm and complexity of managing a firm and
both requiring more pay , thus its provide
an opportunity for top-level managers to
increase their compensation .
2. Reduce top-level managers’ employment
risk .
19. Agency cost : are the sum of( incentive costs
, monitoring costs , enforcement costs and
individual financial losses ) incurred by
principals because governance mechanisms
cant guarantee total compliance by the
agent.
In general managerial interests may prevail
when governance mechanisms are weak .
More intensive application of governance
mechanisms may produce significant changes
in strategies ( SOX 2002 ) .
20. Both the number of large-block shareholders
and the total percentage of shares they own
define ( ownership concentration ).
Large-block shareholders typically own at least
5 percent of corporation’s issued shared.
Research evidence shows that ownership
concentration is associated with lower level of
firm product diversification . Thus , with high
degrees of ownership concentration, the
probability is greater that mangers’ strategic
decisions will be designed to maximize
shareholders value .example Korea and America.
21. Institutional owners : are financial
institutions such as (stock mutual funds ) and
(pension funds ) that control large-block
shareholders position .
these ownership percentages suggest that as
investors , institutional owners have both the
size and the incentive to discipline
ineffective top-level managers and can
significantly influence a firm choice of
strategies and overall strategic decision .
22. Is a group of elected individuals whose
primary responsibility is to act in the owners
best interests by formally monitoring and
controlling the corporation top-level
managers .
Boards have the power to direct the affairs
of the organization , punished and reward
managers and protect shareholders rights
and interests ,
Thus an appropriately structured and
effective board of directors protect owners
from managerial opportunism .
23. 1- Insiders :
The firm’s CEO and other top-level managers
2 –Related outsiders
Individuals not involved with day-to-day
operations , but who have a relationship
with the company .
3- Outsiders
Individuals who are independent of the firm in
terms of day-to-day operations and other
relationship .
24. 1- increases in the diversity of the background
of boards members .
2- strengthening of internal management and
accounting control system .
3- the establishment and consistent use of
formal processes to evaluate the boards
performance .
4- the creation of “ lead director ” role that
has strong powers with regards to the board
agenda .
5- modification of the compensation of
directors .
