Read 31. Introduction to Corporate governance and other ESG considerations
31a.Describe corporate governance.
the system of internal controls and procedures by individual companies are managed.
provide a framework defines the rights,roles and responsibilities of various groups within an organization.
to minimize and manage the conflicting interests between insiders and external shareowners.
Under shareholder theory,
the primary focus is interests of firm's shareholders
-take maximization of the market value of firm's common equity.
-conflict of interest between firm's managers and owners(shareholders).
Under stakeholder theory is broader,
conflicts among groups have an interest in activities and performance of firm.
include shareholders,employees, supplier and customers.
31b. Describe a company's stakeholder groups and compare interests of stakeholder groups.
shareholders-residual interest in the corporation and claim to net assets of corporation after all liabilities settled.
board of directors-to protect the interests of shareholders
In a one-tier board structure,
both company executives and non-executive board members serve on a single board of directors.
In a two-tier structure, non-executive board members serve on a supervisory board-oversee a management board, made up pf company executives
senior managers
employees
creditors
suppliers
31c. Describe principal-agent and other relationships in corporate governance and the conflicts that may arise in these relationships.
principal-agent conflict
Conflicts of interest between shareholders and managers or directors
the risk of company managers and directors is more dependent of firm performance
directors who are managers favor management interests at the expense of shareholders
directors favor one group of shareholders at the expense of another.
information asymmetry
-more information about functioning of the firm and strategic direction
-decreases the ability of shareholders or non-executive directors to monitor and evaluate whether managers are acting in the best interests of shareholders
Conflicts between groups of shareholders
related party transactions
Conflicts of interest between creditors and shareholders
Conflicts of interest between shareholders and other stakeholders
31d.Describe stakeholder management
31e. Describe mechanisms to manage stakeholder relationships and mitigate associated risks.
stakeholder management
-management of company relations with stakeholders
-based on having a good understanding of stakeholder interests
-maintain effective communication with stakeholders
stakeholder relationships based on 4 types of infrastructures:
a.legal infrastructure
b.contractual infrastructure
c.organizational infrastructure
d. governmental infrastructure
annual general meeting
-provide shareholders with audited financial statement
-address the company's performance and significant actions
corporate laws
proxy
special resolutions
extraordinary general meetings
majority voting-most votes for each single board position is elected
cumulative voting-cast all votes(shares times number of board position elections) for a single board candidate or divide among board candidates.
minority shareholders-special rights by law-company is acquired by another company.
31f.Describe functions and responsibilities of a company's board of directors and its committees.
Board structure
one-tier board
chairman of board叫company CEO
lead independent director-ability to call meetings of independent directors, separate from meetings of full board
-a single board of directors that includes both internal and external directors.
internal directors(又叫executive directors)
-typically senior managers employed by the firm
external board members(non executive directors)-not company management.
independent directors
-Non-executive directors have no other relationship with company
employee board representatives may be a significant portion of non-executive directors.
two-tier board structure,
a supervisory board that excludes executive directors
supervisory board and management board operate independently.
management board is led by the company's CEO.
staggered board
limits the ability of shareholders to replace board members in any one year and used less now
Board responsibilities
BoD is elected by shareholder to act in interest.
BoD is not involved in day-to-day management of company
-responsibility rests with senior management
duties of board include responsibility for
Board committees
audit committee
governance committee
nominations committee-proposes qualified candidates for election to the board,manages the search process and attempts to align the board's composition with company's corporate governance policies.
compensation committee/remuneration committee
-responsible for oversight of employee benefit plans and evaluation of senior managers.
risk committee-appropriate risk policy and risk tolerance of organization,
oversee the enterprise-wide risk management processes of organization
investment committee
-acquisition or projects, sale and disposal of company assets or segments, large capital expenditures
the number and size of board committees will depend on the size, complexity and nature of business.
31g. Describe market and non-market factors that can affect stakeholder relationships and corporate governance.
activist shareholders-pressure companies to hold a significant number of shares for changes and 他們認(rèn)為這些改變是increase shareholder value
proxy fight-seek the proxies of shareholders to vote in favor of alternative proposals and policies
tender offer-for specific number of shares of a company to gain enough votes to take over the company.
hostile takeover-not supported by company's management
act as incentive to influence company management
boards to pursue policies more interests of shareholders
oriented toward increasing shareholder value.
common-law system
civil law system
in general, the rights of creditors are more clearly defined than shareholders ,
not difficult to enforce through the courts.
overall, firms 1.advises funds on proxy voting and corporate governance matters.
2.provides ratings of companies' corporate governance offer practices offer another avenue to influence managements to better address the interests of shareholders.
31h. Identify potential risks of poor corporate governance and stakeholder management and identify benefits from effective corporate governance and stakeholder management.
Risks of poor governance and stakeholder mgt
corporate governance is weak, control functions of audits and board oversight is weak as well.
accounting fraud and poor record-keeping -negative implication for company performance and value.
Benefits of effective governance and stakeholder mgt
operational efficiency/formal policies/ reduce the risk of debt default or bankruptcy/
31i. Describe factors relevant to the analysis of corporate governance and stakeholder mgt
company ownership and voting structure
composition of a company's board
management incentives and remuneration
composition of shareholders
relative strength of shareholders' rights
management of long-term risks
31j. Describe environmental and social considerations in investment analysis.
ESG investment
environmental,social and governance factors in making investment decisions
-sustainable investing/ responsible investing/socially responsible investing
31k. Describe how environmental,social and governance factors may be used in investment analysis.
Negative screening
-exclude specific companies or industries regarding human rights,environemtnal concerns or corruption.
Positive screening
-attempt to identify companies have positive ESG practices.
relative/best-in-class approach
-seek to identify companies within each industry group with the best ESG practices.
Full integration
-inclusion of ESG factors or ESG scores in traditional fundamental analysis.
Thematic investing
-invest in sectors or companies to promote specific ESG-related goals
Engagement/active ownership
-using ownership of company shares or other securities as a platform to promote improved ESG practices
Green finance-produce economic growth in a more sustainable way by reducing emissions and better managing natural resource use.
green bonds-funds raised are used for projects with positive environmental impact
overlay/portfolio tilt strategies
-used by fund and portfolio managers to manage the ESG characteristics of overall portfolios.
Risk factor/ risk premium investing
-treatment of ESG factors as an additional source of systemic factor risk