LESSON 1 AND 2

Corporation

An artificial being created by operation of law, having the right to succession and the powers, attributes, and properties expressly authorized by law or its incident of existence.

Shareholders

They are artificial or natural persons that are legally regarded as owners of the corporation.

Bondholders

Holders of the currently outstanding bonds.

Board of Directors

The collegial body that exercises the corporate powers of all corporations formed under the Corporate Code (SEC Code of Corporate Governance); it conducts all business and controls or holds all the assets of such corporations.

Duties of the Board of Directors

They are responsible for setting broad organizational policies and objectives, appointing and evaluating the chief executive, ensuring adequate financial resources, approving annual budgets, and being accountable to stakeholders for the organization's performance.

Shareholders’ Rights

This encompasses the ability to vote on matters such as board elections and shareholder resolutions, receive dividends and liquidating dividends during cessation of business, and exercise pre-emption rights (right of first refusal) to maintain their percentage of company ownership.

Multinational Corporation

an enterprise that manages production or delivers services in more than one country; can also be referred to as an international corporation.

engages in foreign production through its affiliates located in several countries.

Transnational Corporation

Any corporation that is registered and operates in more than one country at a time; has its headquarters in one country and operates wholly or partially owned subsidiaries in one or more other countries.

Corporate Governance

A set of relationships between a company’s directors, its shareholders and other stakeholders; a structure through which the objectives of the company are set, and the means of obtaining these objectives and monitoring performance.

Governance

The leadership and direction given to a company so that it can achieve the objectives of its existence.

Cadbury Report of 1992

states that corporate governance is the system by which organizations are directed and controlled.

James D. Wolfensohn

states that corporate governance is about promoting corporate fairness, transparency, and accountibility.

Mervyn King

states that good corporate governance is about ‘intellectual honesty’ and not just sticking to rules and regulations, capital flowed towards companies that practiced thi type of good governance.

Corporate Performance

Enhanced Investor Trust

Better Access to Global Market

Combating Corruption

Easy Finance from Institutions

Enhancing Enterprise Valuation

Reduced Risk of Corporate Crisis and Scandals

Accountability

Agency Theory

The owners set the central obectives of the corporation. Managers are responsible for carrying out these objectives in day-to-day work of the company; the control of management through designing the structures and processes; the owners are principals. But principals may not have the knowledge or skill for getting the objectives executed.

Stockholder/Shareholder Theory

It is the corporation which is considered as the property of shareholders/stockholders; they can dispose off this property, as they like. They want to get maximum return from this property. The owners seek a return on their investment and that is why they invest in a corporation.

The role of managers is to maximize the wealth of the shareholders. They, therefore, should exercise due diligence, care and avoid conflict of interest and should not violate the confidence reposed in them.

Stakeholder Theory

The company is seen as an input-output model, and all the interest groups, which include creditors, employees, customers, suppliers, the local community, and the government, are to be considered. They tend to have self-interest. They are capable and willing to negotiate and bargain with one another. This results in long-term self-interest. Their roles are reduced in the corporation.

Steward

This word means a person who manages another’s property or estate. Here, the word is used in the sense of guardian in relation to a corporation.

Stewardship Theory

A value-based thery that makes use of the social approach to human nature. The managers should manage the corporation as if it is their own corporation. They are not agents as such but occupy a position of this.

Top Management Team

a group led by the chief executive officer (CEO), that represents another crucial leg of the corporate governance tripod.

Agency Relationship

a relationship between shareholders (principals) and professional managers (agents).

Principals

persons (such as owners) delegating authority.

Agents

persons (such as managers) to whom authority is delegated.

Information Asymmetries

dynamic between principals and agents; agents such as managers almost always know more about the property they manage than principals do.

principal-principal conflicts

conflicts between two classes: controlling shareholders and minority shareholders.

Expropriation

activities that enrich controlling.

Tunneling

form of corporate theft that occurs when managers from the controlling family divert resources.

Related Transactions

legal means whereby controlling owners sell firm assets to another firm they own at below-market prices or spin off the most profitable part of a public firm and merge it with another private firm of theirs.

principal-agent conflicts

occurs when the person or entity (agent) hired to act on behalf of another (principal) pursues their own self-interests rather than those of the principal.