BUSI 4500 Chapter Notes - Chapter 2: Supermajority, Financial Statement, Executive Compensation
7 May 2018
School
Department
Course
Professor
Corporate governance
Definition
- set of procedures and actions use to ensure company is managed in the
best interest of shareholder
- set of plan/strategies and rules that are developed within & outside a
corporation to reduce conflict between the different stakeholders and
align their interest to achieve value maximization
- a system whereby corporations are directed and controlled
Reason
- dispersion of ownership
- separation of ownership and control
- agency problem
- to ensure shareholders that company is managed in their best interest
Mechanism
2. internal control
- BOD
o Elect by shareholders to monitor management
o Ensure managers act in best interest of shareholders
o Role (Fama & Jensen, 83)
â–Ş Oversee appointment and assessment of offices
â–Ş Ratify/approve major managerial decisions
â–Ş Discuss and help implementing LT strategies
â–Ş Verify that the company fulfills its public responsibilities
and acts in the best interest of shareholders
â–Ş Fire management if not efficient
- Type of Board committee
o Corporate governance
â–Ş set criteria selecting new director
â–Ş recommend corporate governance principles
o HR :
â–Ş oversee selection/ evaluation/ development &
compensation of senior management
â–Ş Set performance obj for CEO and senior committee
- Type of Board committee
o Insider : employee, ties
o Outsider : x employee, x ties
o Grey : x direct connected but have ties to firm
o Audit : supervise quality & integrity of financial reporting
o Others : environment/health and safety/ risk/ corporate
responsibility
- Empirical evidence on BOD efficiency
o Independence
â–Ş more outsider better monitor effort
â–Ş make fewer value destroying acquisition decision
o compensation /ownership,
â–Ş perform better than fixed annual fee
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Document Summary
A system whereby corporations are directed and controlled. Agency problem to ensure shareholders that company is managed in their best interest. Type of board committee: corporate governance, set criteria selecting new director, recommend corporate governance principles, hr : oversee selection/ evaluation/ development & compensation of senior management, set performance obj for ceo and senior committee. Type of board committee: insider, outsider, grey, audit : supervise quality & integrity of financial reporting, others : environment/health and safety/ risk/ corporate. : x direct connected but have ties to firm responsibility. Empirical evidence on bod efficiency: independence more outsider better monitor effort, make fewer value destroying acquisition decision, compensation /ownership, perform better than fixed annual fee, size, smaller board, better performance, multiple committees perform better. Company debt structure: high debt and div decrease agency cost, work harder to pay debt, reduce incentive of asset misuse, reduce free cash flow, external control.
