Portfolio Management - Governance

What is Corporate Governance?

Corporate governance is the process and structure for everseeing the business and management of a company.

What is the role of the board of directors

They are responsible for representing the owners of the company and holding mangement teams accountable for running the business.

The effectiveness of the board depens of whether good corporate governance practices are applied.

What does good corporate governance lead to?

What does corporate governance depend on?

Good governance ensures people in leadership exercise their responsibilities effectivley.

The two key principles of corporate governance

Accountability: Managers must be responsible for their decisions and performance.

Alignment: Managers’ incentives should be aligned with the interests of shareholders.

Risk of Power concentration (Accountability)

If the CEO is also the board chair, this may lead to too much power in one person.

Reducing the boards ability to:

• monitor the CEO

• challenge strategy and performance

• influence executive pay

Accountability and Financial Reporting.

Why do financial Statements matter?

Levels of accountability depends on reliable financial reporting.

Investors rely on financial statements to:

• Evaluate company performance

• Assess management decisions

• Hold executives accountable

• Allows investors to compare ESG peformance.

Alignment and the Agency Problem.

What is it and what do managers priotitise?

The agency probelm occurs because managers (agents) run the company and shareholders (principals) own the company.

Managers may prioritise:

• job security

• personal rewards

• short-term results

Instead of long-term shareholder value.

Alignmnet and Executive pay.

What does executive pay do, examples of it and what is it linked to.

Executive compensation design, to encourage managers to act in the interests of shareholders.

Long-term incetive palns such share-based compensation or stock options.

Executive pay is often linked to financial and non-financial KPIs.

Three Board Committees.

2 for Accountability and 1 for Alignment.

Nomintations Committee: ensure that the board overall is balanced and effective.

Aduit Committee: oversees financial reporting and audit.

Remuneration Committee: seeks to deliver alignment of interests through exceutive pay.