Ch 6: Responsible Ownership & Governance

Who are investors in business?


• anybody who's an owner (a shareholder / sole proprietor)

What is the role of governance?


To listen to stakeholders & their needs

• must serve shareholders too

What are some ownership challenges?

Owning stock does not mean you always have a say in a corporation

Dual-Class stock

more than one type of stock issued by a corporation

Non-voting/restricted shares

restricted shared limit voting

What is a passive shareholder?


those who do not attempt to influence the affairs of a corporation

What is an active shareholder?


Those who participate in governance -> actively try to influence company

What is worker capitalism/employee ownership?


Where employees become part owners or investors through stock ownership

What are the pros & cons of worker capitalism/employee ownership?

Pros: increases morale, loyalty, motivation, productivity, can save failing firms

Cons: jobs, savings, pensions depend on firm performance, management may not give control to employees

What is socially responsible investing?


Investing that considers environmental, social, and governance (ESG) factors to better manage risk & create sustainable long-term results

What are the 3 approaches to responsible investing?


positive screening, negative screening, best of sector

Positive screening

investing in corporations with good records & stakeholder relations

Negative screening

identify objectionable corporations

What is corporate governance?

How one runs the business -> process & structure used to direct/manage a business

• the rights & responsibilities of a company's management, it's board, shareholder, stakeholders

What is the corporate governance hierarchy?

employees, management, Board of Directors, shareholders, Canadian Law

What is a board of directors

a group of individuals elected by shareholders to govern/oversee a company's affairs

What are fiduciary duties?

Directors' obligations to shareholders -> act in best interest of corporation

• granting (placing) trust of duties of an individual

1. Board structure & Membership?

Common for directors of companies to be members of the family

2. Board Diversity

Diverse boards avoid groupthink and better represent diverse concerns

• women, visible minorities, indigenous, LGBTQ, disabilities

3. Exec & Director compensation

Regulations require disclosing executive compensation -> to check for salary disparity

Say-on-pay

shareholder's ability to vote on executive pay

CEO pay ratio

ratio of CEO pay to employee pay

4. Disclosure & transparency

Board of directors must be transparent about information, performance assessments, compensation, ethical business conduct

5. Evaluation

Did they follow the law & fix things?

What is shareholder democracy?


Owners' exercise of power to ensure fair treatment & equally shared duties

What is shareholder proposal?


Resolution put forward by one or more shareholders to the board requesting an issue to be voted upon

What is ethical business conduct?

• Did you follow a sequence of steps that would be acceptable to a judge?

• part of the responsibilities of a board member

Insider trading

• buying/selling shares on basis of material information that has not been disclosed to the public

Material information

information that a reasonable investor would use to judge the value of a firm's share

What kind of pressures are placed on board members?

To be more:

• ethical

• social

• environmental

What are the adverse effects of governance failures?

Loss of money/jobs for:

• shareholders

• employees

• suppliers

• pension funds

• communities

• government

• civil society

What are the accountabilites of non-publicy traded entities?

• They are not subject to the same requirements as publicly traded companies

What are the 4 reasons boards need to pay attention to ethics?


1. Globalization: need to consider impacts on society & developing countries

2. Loss of trust: businesses have had several breaches

3. Civil society activism: NGOs & other civil society organizations highlight corporate misdeeds & mistakes

4. Investory interest: investors keen on responsible investing