BWL (Fach) / Corporate Governance (Lektion)

Corporate Governance SS2019

Diese Lektion wurde von lncls erstellt.

Lektion lernen

Diese Lektion ist leider nicht zum lernen freigegeben.

zurück  |  weiter 1 / 3

• What is an agency relationship? - contract: principal engages an agent - some decision making authority delegated to agent
• Conflict of interest - agents interests diverge from the principals interests
• Opportunism - individuals aim to maximize their own utility even if its to the detriment of others
• Define Governance. When does it matter? - mechanisms regulating how individuals manage other individuals tangible and intangible property - relevant for incomplete contracts with imperfect information -> gaps and missing provisions in contracts -> set of mechanisms for makin decisions that have not been specified in the initial contracts
• Why are contracts incomplete? - Transaction costs: costs of initiating, closing, monitoring, and enforcing contracts Hart (1995): - cost of thinking about different eventualities and planning how to deal with them- cost of negotiating with others about these plans- cost of writing down plan in such a way that they can be enforced by a third party in the event of dispute
• What is corporate governance? - mechanisms mitigating agency problems between suppliers of capital (principals) and management or large shareholders (agents) who run the corporations - capital may come in the form of  - cash (debt/equity)  - human capital  - tangible or intangible assets
• Two definitions of corporate governance Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment (Shleifer and Vishny) Corporate governance encompasses the set of institutional and market mechanismsthat induce self interested managers (the controllers) to maximize the value of theresidual cash flows of the firm on behalf of its shareholders (the owners). (Denis)
• Main objective of corporate governance - maximize shareholder value
• Justification for shareholder orientation - stakeholder interests protected by contracts and laws- shareholders have no protection- get paid after everyone else in case of bankcruptcy - shareholder value quantifiable, stakeholder value not so much
• Types of agency problems Type 1: Owners (principals) vs. managers (agents) Type 2: Owners (agents) vs. other stakeholders (principals): e.g. Conflict of interest between shareholders and i) customers or ii) debtholders Type 3: Majority owners (agents) vs. minority owners (principals): e.g. founding families vs small shareholders
• Owner-manager agency problems Shirking: not working hard enough to maximize shareholder returns (-> non pecuniary income, e.g. leisure) Misinformation: Repealing part of the information or manipulation it Investment distortions: Incentives to invest in negative NPV projects from which they benefit personally
• Types of investment distortions - Empire building: Growing beyond optimal size - perk consumption (misappropriation): e.g. corporate jets, meals etc. - reputational concerns: leading to e.g. myopia, herding - risk aversion
• Agency problems of outside equity ...
• What are agency costs? The sum of: 1. monitoring expenditures by principal 2. bonding expenditures by agent 3. residual loss
• What is residual loss dollar equivalent of reductions in welfare experienced by the principal due to divergence between agents decisions and optimal, welfare-maximizing decisions, given optimal monitoring and bonding activities
• Agency problems of debt - Shareholders hold residual claim on firms CF- Asset substitution: the higher the level of debt, the more severe is the problem of risk shifting, i.e., the higher the incentives of borrowers to increase the volatility of cash flows ex post - Debt overhang: new capital providers (of debt and equity) would have to incur investment costs but are not willing to do so because the project’s cash flows will first be used to provide debt service to incumbent debtholders - Gambling for resurrection: owners and managers can have incentives to delay the liquidation of their company
• private benefits of control conflicts of interest between large shareholders and minority shareholders  -> Tunneling, Nepotism
• Tunneling + examples - transfer of assets and profits out of firms for the benefit of those wo control the firms e.g. - theft and fraud- consulting contracts for family members- assets sales or transfer pricing with overcharge of assets or services provided (e.g. shareholder owns two companies and sells overpriced assets from company with 51% ownership to company with 100% ownership)
• Nepotism Putting family members in mangement positions rather than the most competent person
• Types of informational asymmetries Hidden Characteristics: before contract -> adverse selection Hidden action and information: after contract- Hidden action: unobservable actions by agent- Hidden information: agent possesses decision-making relevant information Hidden intention: post-contractual intentions remain hidden -> hold-up problem
• Methods of mitigating the costs of adverse selection - Screening: evaluation of candidates (firms incur costs of information acquisition) - Signaling: candidate hands in information (candidate incurs cost of providing information) - Self-selection: both parties negotiate contract
• Moral hazard originates from the insurance industry because insurance companies worry that protecting their clients from risks (e.g., via health insurance) might encourage them to behave in riskier ways
• What is monitoring - act of information acquisition
• Hold-up problem - principal makes irreversible investment and ends up being dependent on the agent - once the contract has been made, the agent has the bargaining power to change contract terms (i.e., renegotiation) and the principal runs the risk of being exploited by the agent
• Tobins Q Q = (EquityM + DebtB)/TA
• Theory of efficient capital markets A market in which prices always fully reflect available information is called efficient.
• What is semi-strong form efficiency? Variation from theory of efficient capital market hypothesis: capital markets are semi-strong form efficient, i.e., asset prices comprise all publicly available information relevant for price formation
• What events are relevant for examination of stock market reactions acquisitions appointments and departures of CEOs and directors changes to legislation (e.g., amendments or introduction of governance codes) disclosure of new information about directors and governance choice insider trading restatements scandals regarding firms or management (e.g., managerial indiscretions, Panama papers) stock purchases by activists and other investors
• Measures to assess corporate governance Accounting based measures: CF etc. Market-based measures: Tobins Q, Abnormal stock returns from event studies Board meetings CEO turnover Regression analysis
• Measures to assess corporate governance Accounting based measures: CF etc. Market-based measures: Tobins Q, Abnormal stock returns from event studies Board meetings CEO turnover Regression analysis
• Corporate governance systems set of mechanisms, institutions, practices, and rules used in a given context - vary across countries (due to e.g. capital market development,investor protection, legal system) - these differences impact provision of capital, prevalence and types of agency problems -> shareholder value in some, stakeholder value in other countries
• Classification of corporate governance systems 1. Market-based vs. bank-based2. Insider vs. outsider3. legal systems4. other systems (e.g. cultural, political systems)
• Define market-based and bank-based systems Market-based:- rely on well-developed capital markets, issuance of public debt and equity- banks and insurance as financial intermediaries, rarely hold equity stakes- mostly US/UK etc. (here: banks cannot own equity) Bank-based:- markets for public debt, equity relatively small- banks play essential role as financiers to firms and potential monitors
• Pro/con bank based system Pros:- bank financing can create value from monitoring synergies- bank monitoring negates free-rider-problem of dispersed ownership Cons:- conflict of interest: powerful banks have interest to only finance beneficial investments at the detriment of shareholders- powerful banks might limit development of capital markets (and thus asset allocation to households)
• Free-rider problem of dispersed ownership Everyone small stakes -> no single shareholder has incentive to monitor managementReason: Monitorer has to bear all costs, while benefits are split between everyone-> No monitoring
• Outsider vs. insider systems Outsider (UK/US etc.): - financing via capital markets, dispersed ownership structure- governance focusses on manager-shareholder problem- market mechanisms key role for disciplining managers (e.g. active takeover market, institutional investors)Insider- bank-based financing, concentrated ownership- governance focusses on large-small shareholder problems- market mechanism minor, but increasing role for disciplining managers
• Pros/Cons insider system Pros:- free rider problem of dispersed ownership mitigated (large shareholders)- large shareholders may act as capital providers of last resort- large shareholders tend to promote long-terminismCons: - incetives to expropriate minority shareholders- lower stock liquidity, higher costs of capital, monitoring by potential blockholders
• Civil vs. Common law Shareholder protection stronger in common law Civil law- statutes and codes, scholars formulating its rules- judge interpreting only Common law- case-based law, judges sets precedents -> used for future cases- more flexible and reactive
• Shareholder protection across countries - shareholder protection has converged to overall relatively high levels
• Culture and societal values + dimensions - influence on managers and other stakeholders- influence on shareholder- or stakeholder-orientation Dimensions:- Trust- power distance- individualism vs. collectivism- long-term vs. short-term orientation
• Trust influence on governance - reduces agents concerns of being expropriated (discourages opportunistic behaviour)- discourages opportunistic behaviour due to social and psychological costs-> possibly less monitoring without being cheated (emprical evidence exists)
• Power distance and its influence on governance -  extent to which the lower ranking individuals of a society accept and expect that power is distributed unequally- hierarchical countries: CEOs power questioned less, dismissed less (turnover), more likely to move to director/chairman positions
• Variety of capitalism (VOC) approach - complimentarities: two institutions have complementarities if their joint existence increases the efficiency of one or both- substantially different sets of institutions may still generate very similar levels of economic output and wealth creation- e.g.: not just about investments in assets and technologies, but also about investments in human capital
• Areas of reforms in corporate governance rules - Audit and reporting rules for financial statements- Board structures and director responsibilities- Corporate disclosure and transparency- Executive and director compensation- Shareholder rights and voting
• Variants of compliance with governance codes - legal rules - comply or explain: one size may not fit all, if firms do not comply it may become mandatory - apply and explain: explain how mandatory principles are applied
• One-tier vs two-tier boards Two-tier:- supervisory board consists of non-executive directors- management board only executive directors- sometime employee representation in supervisory boards One-tier:- Board of directory managing and monitoring company- consists of executive and non-executive directors (inside/outside)- CEO can be chairman
• Corporate Governance in the UK and US - market-based outsider systems with common law- strong shareholder protection, developed capital markets- dispersed ownership, limited influence of banks/government- one-tier boards without employee representation- company purpose: generate profits, shareholder value
• Cadbury Report content, enforcement, further development - seperate chariman and CEO roles- sufficient number of independent expert non-exec directors- independent remuneration committee recommending exec pay- audit committee consisting of >3 non-exec directors- independent nomination committee, recommending (non)execs- institutional investors should be aware of their votes importance, disclose voting policy - comply or explain -> increase in mgmt turnover, turnover-performance sensitivity - evolution driven by crises and scandals, often based on regulatory arbitrage
• Sarbanes-Oxley Act (SOX) - auditor independence, rotation requirements- enhanced internal monitoring for fraud by board and execs- rules on conduct of firm insiders (no loans to execs)- rules to ensure security analysts independence from investment banking activities- increased criminal penalties
• Dodd-Frank Act - reaction to 2008 - customer protection, improving oversight and tackling financial crises - risk committee for bank holding companies- independent remuneration comittee for listed companies- regular advisory votes on managerial compensation

zurück  |  weiter 1 / 3