Management Unit 2: shareholders and corporate governance

What is the shareholders main goal?

To protect their rights and pursue their interests

What is market capitalization?

Total market value

What are the two main types of investors and what are their differences?

• Individual shareholders: bought stock through stockbroker and hold them in brokerage accounts. Known as “Main Street” or “Retail” investors

• Institutions: buy stock on behalf of investors/member “wall street”

What are brokerage accounts?

an account that allows individuals to buy, sell, and hold financial investments, such as stocks

What is a stock buyback?

When companies buy their own stock to drive stock prices up

What is capital appreciation?

When price of stock rises and shareholders make money

Stock alternate between two types of markets, what are they and what do they mean?

• Bear market: stocks fall

• Bull market: stocks rise

What is a proxy?

A vote by absence ballot

What is corporate governance?

process by which a company is governed

What is the main responsibility of the Board of Directors?

Legal duty of establishing, developing, reviewing and protecting the firm. Make sure the firm runs with the interests of everyone.

What is a two-tier system and what is it composed by?

A two-tier system is a Board of Directors that is composed by the:

• Supervisory board: outsiders and independent chairperson

• Executive board: CEO and insiders

What are some of the committees of the BOD and what are some of their characteristics (they are 5)?

• Compensation committee: by outside people

• Nominating committee: by outside people

• Executive committee

• ESG (environmental, social and government)

• Audit committee: Required by law to have outside director and be financially literate. It looks at integrity of financial reports and appointment of outside accountants.

What is a change that is starting to be observed in shareholders votes?

They vote on a ‘selected’ list due to rare alternative candidates so their vote doesn’t make such a difference

What is something that is missing from good corporate governance?

More AI disclosure

What are 5 features of good corporate governance in the BOD?

• Most outside/independent directors

• Diversity

• Having open elections for members

• Hold elections for all directors annually: going agains classified boards

• Appointing an independent lead director (non-executive chairperson of the board): separate management and chairperson duties

What is the agency problem?

The fact that if managers are simply hired agent, will they act on their interest or shareholders? Who is watching the managers?

What is used to solve the agency problem?

Executive compensation that aligns managers and corporations interests. The idea that executives will work to improve result so that stock wil go up and so does their compensations.

What is executive compensation?

Stock options (option to buy stock at a fixed price) and stock awards (give shares if goals are reached), so pay-for-performance.

What are the reasons for high executive compensation (they are 4)?

• influence over the pay-setting process (compensating committee wants to pay their executives above average)

• outstanding performance

• incentive for innovation and risk-taking

• shortage of labor (hard to find people for this job)

What are two issues with high executive compensation?

• resentment of lower-paid

• diverts resources

What is the government regulation towards executive pay?

Report the top 5 executives pay and explain why. Also include all benefits (perks) used and say-on-pay: shareholders vote on executive compensation.

What is do institutional investors do when they are not satisfied and why are they not satisfied?

They become more active due to difficulty to sell stocks

What do private equity firms and hedge funds do as activist investors?

They invest in public companies to intervene and dramatically improve shareholders returns

What are private equity firms and hedge funds made of and what is their main difference?

Both manage private pools of capital.

• Private equity firms: Invested by the very wealthy. Usually invest in private companies or buy public companies and take them private. They aim to improve the companies and eventually sell their investments for a profit.

• Hedge funds: Usually invest in publicly traded assets and use a wide range of investment strategies to generate returns. Have aggressive strategies for high returns

What is social investment (SRI)?

Use of stock ownership to promote ESG objectives

How is social investment done?

• Stock selection: looking at ESG risks of the company. Choosing good ESG choices and actions (as well as products)

• Social responsibility shareholder resolutions (sponsoring): a vote made by shareholders at the annual meeting on an issue of corporate social responsibility

What does the Securities and Exchange Comission (SEC) do?

It allows shareholders (who own an amount of shares) to place resolution regarding social issues.

What can’t be disclosed at the SEC?

Wages or advertising (managerial stuff)

What is the SEC?

The Securities and Exchange Comission, is a government branch that protects shareholder’s interests and regulates the public sales of securities. They make sure firms run fairly and have all information disclosed.

What are securities?

tradable financial assets like stocks

What is interesting about the SEC?

It generates its own revenue to pay for their operations

What are the three main things the SEC regulates?

• information transparency

• insider trading

• securities fraud

What is insider trading?

Access to confidential information about the financial condition of the firm that is used before it becomes public to buy or sell stock. It is against the law to trade stock based on nonpublic information.

What is a breach of trust?

A tip from someone who has the confidential information and has to keep it confidential