Strategy - Ch. 10

corporate governance

the set of mechanisms used to manage the relationships among stakeholders and to determine and control the strategic direction and performance of organizations

agency relationship

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

managerial opportunism

the seeking of self-interest with guile (ex: cunning, deceit)

agency costs

the sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals because governance mechanisms cannot guarantee total compliance by the agent

ownership concentration

defined by the number of large-block shareholders and the total percentage of the firm’s shares they own

large-block shareholders

typically own at least 5 percent of a company’s issued shares

institutional owners

financial institutions, such as mutual funds and pension funds, that control large-block shareholder positions

patient capital

comes from investors who are willing to invest over the long term rather than seeking immediate returns

shareholder activism

refers to actions shareholders take with the intent of influencing corporate policy and practice

board of directors

group of elected individuals who oversee managers to ensure that the corporation operates in ways that will best serve stakeholders’ interests

benefit corporation

similar to a traditional corporation regarding its legal and tax status, but its approved corporate bylaws state that its top managers and directors must consider other public benefits besides profits

insiders

active top-level managers in the company who are elected to the board because they are a source of information about the firm’s day-to-day operations (the firm’s CEO and other top-level managers)

related outsiders

individuals not involved with the firm’s day-to-day operations but who have a relationship with the company

outsiders

individuals who are independent of the firm in terms of day-to-day operations and other relationships

executive compensation

a governance mechanism that seeks to align the interests of managers and owners through salaries, bonuses, and long-term incentives such as stock awards and options

market for corporate control

an external governance mechanism that is active when a firm’s internal governance mechanisms fail

hostile takehover

an acquisition of a target company that is unwanted by the company’s top executives and board of directors