Management Reviewer: Midterms

1. Chapter 4: Models of Corporate Governance

There is a need for a model to measure the quality of corporate

governance.

ANGLO-US MODEL

Characterized by share ownership of individual, and

increasingly institutional, investors not affiliated with the
corporation known outside shareholders or "outsiders".
Key players, (management, directors, shareholders
(especially institutional investors), government agencies,
stock exchanges, self-regulatory organizations. Major are:
Management, Shareholders, Board of Directors.
Share Ownership Pattern,
Composition of the Board of Directors includes both insiders
and outsiders. Insiders is a person who is either employed
by the corporation can be executive, manager, employee or
somebody who has significant personal and/or business
relationships with corporate management. Outsiders is a
person or institution which has no direct relationship with
the corporation
Regulatory Framework, Established in parliamentary acts
and rules established by self-responsible for oversight of
the securities market
Disclosure Requirements, a.) Quarterly corporate financial
data report, b.) Breakdown of the corporate capital
structure, c.) Substantial Information on each nominee to
the board of directors, d.) Aggregate and individual
compensation, e.) All shareholders holding more than 5% of
the corporation's total share capital f.) Information on
proposed mergers and restructurings, g.) Proposed
amendments to the articles of association and h.) Names of
individuals or companies proposed as auditors.
Corporate actions requiring shareholder approval, routine:
Elections of Directors and Appointment of Auditors, nonroutine: Establishment or Amendment of stock option plans,
Mergers and takeovers, Restructurings and Amendment of
the Articles of Incorporation.
Interaction among members, shareholders may exercise
their voting rights without attending the annual general
meeting in person and the proxy statements and
corporation's annual report and voting card are received by
the registered shareholders by mail.

JAPANESE MODEL
Characterized by a high level of stock ownership
by affiliated banks and companies; a banking
system characterized by strong, long-term links
between bank and corporation; a legal, public

policy framework designed to support and promote

"keiretsu" which refers to industrial groups linked
by trading relationships
Key Players, Main bank (a major inside
shareholder), Affiliated company or Keiretsu (a
major inside shareholder), Management and
Government
Share ownership pattern, financial institutions and
corporations firmly hold ownership of the equity
market, banks are key shareholders and
developed strong relationships with corporations,
due to overlapping roles and multiple services.
Composition of the Board of Directors composed
of almost completely of Insiders, that is executive
managers, usually head of major divisions of the
company and its central administrative body.
Japanese boards are generally larger than the
rest, average is composed of 50 members.
Regulatory Framework, government agencies
provide little effective, independent regulation of
the Japanese securities industry, regulatory
framework are modeled on the US system by US
occupation forces after the Second World War.
Disclosure Requirement, a.) Semi-annual
disclosure of financial data, b.) Aggregate
disclosure of executive and board compensation,
c.) Disclosure of the corporation's ten largest
shareholders holding more than 5% of the
corporation's total share capital, d.) Significant
difference between Japanese accounting
standards and US generally accepted accounting
practices
Corporate actions requiring shareholder approval,
routine: payment of dividends and allocation of
reserves and election of directors ; and
appointment of auditors, capital authorizations,
amendments to the articles of association and/or
charter, payment of retirement bonuses to
directors and auditors and increase of the
aggregate compensation ceilings for directors and
auditors.
Interaction among players, shareholders may
attend the annual general meeting, vote by proxy
or by mail.
GERMAN MODEL
Prescribes two boards with separate members, 1.)
Management Board, composed of entirely of
Insiders, 2.) Supervisory Board, composed of
labor/employee representatives and shareholder

representatives, set by law and cannot be

changed, voting right restriction are legal.
Key Players, German Banks and corporate
shareholders
Share ownership pattern, German banks and
corporations are the dominant shareholders in
Germany,
Disclosure requirement, a.) Semi-annual
disclosure of financial data, b.) Aggregate
disclosure of executive compensation and
supervisory board compensation, c.) No disclosure
of share ownership of supervisory board.
Corporate actions requiring shareholder's
approval, a.) Allocation of net income, Ratification
of the acts of the management board. c.)
Ratification of the supervisory board , Appointment
of auditors
Interaction among players, Corporations with
bearer share are required to announce their
annual general meeting in an official with
government bulletin and forward the annual report
and agenda for meeting, corporation sends the
meeting agenda and annuals report to its custody
bank.
2. Chapter 5: Agency Problems and Accountability of
Corporate Managers and Shareholders

Agency Problem in Corporate Governance

Agency theory suggest that a firm can be viewed

as a loosely defined contract between resource
providers and the resource controllers
A relationship that came into being occasioned by
the existence of one or more individuals called
principals, employ one or more other individuals,
called agents, to carry out some service and then
entrust decision making rights to the agents
Principal-Agent Specific Issues
Diversification vs. Dividends, managers prefer
funds to be invested in additional product
diversification while shareholders prefer funds to
be declared as dividends so long as it is backed
up by income
Managerial Opportunism, shareholders return will
not be maximized to the fullest because of the
unrelated diversification and growth which leads to
increase compensation for managers not to
mention that it reduces the employment risk to top
managers
Power Supremacy vs. Technical Expertise,

Institutional investors put their money with an

expectation of dividend at a certain time, which
make them rely only on the expertise of the
agents. What is left to the shareholders is supreme
power over the corporation
Trust, shareholders have more trust than doubts to
the agents and they are entrusting everything as
far as operation including the charting of the
corporation's future to its directors and officers
Identified Agency Problems
Adverse Selection, insufficient information that is
normally obtainable to the principals and agents
Agency Cost, resources to be sacrificed to keep
an eye on things that are perceived or need to be
closely controlled from the perception of the
principal are significant costs in a principal-agent
relationship
Conflict of Interest
Legal Requirements vs. Opportunistic Behavior,
Self-interested Behavior, in imperfect labor and
capital markets, executives and managers will
seek to make the most out of their own value at
the expense or corporate shareholders
Remedies Within Shareholders
Proxy Voting, an exercise of voting in behalf of
shareholders through the use of a special authority
given by the shareholder/principal
Benefits of Proxy Voting
1. Routine Decisions
2. Governance
3. Issues on Anti-takeover
proxies cannot modify their decisions on the
deliberation process
Derivative Suit, a lawsuit filed by a shareholder on
behalf of the corporation against a third party
(insider)
Specific Feature, derivative suit allows a
shareholder to bring an action in the name of the
corporation against parties and that cause harm to
the corporation
Process, shareholder must have a minimum value
of shares at a minimum duration of being a
shareholder and required to post a bond or their
fees whenever his action is unsuccessful
Takeover, general term referring to transfer of
control of a firm from one group of shareholders to
another group of shareholders
Types of Takeover
Friendly Takeover, inform board of directors

Hostile Takeover, board cast off offer but acquirerI. Role of Investment Bankers,
to-be is persistent to pursue it
1) Origination, Discovery- finding of potential issue of
Reverse Takeover, used by private companies to
securities, investigation- is the testing and analyzing of
become publicly-traded without passing through
the investment credit of the potential security issuer
an initial public offering
including the inherent reliability of the issue,
Tender Offer, public and open invitation, usually
negotiation- determination of the amount, the price, the
coursed through media by a prospective acquirer
terms of the proposed issue
to all stockholders of a publicly-traded corporation 2) Underwriting(Public Cash Offering), arrangement with
which is the target corporation
an investment banker whereby the banker agrees to
Financing a Takeover
buy the entire issue at a set price and a guaranty
o Debt Financing, a company acquiring another 3) Distribution, marketing the security issue
Stock Exchanges, an entity which offers trading
pays a specific amount of money for the merger
transaction to complete, leverage buyouts
services and facilitates for stock brokers and
o Partial or Fully Equity Conversion, giving
trader, to buy and sell shares of stock and others
shareholders of the target company offers that
securities
include a debt instrumental partial or in full
i) Role of Stock Exchanges
payment of shares
(1) Raise Capital
o Share/All Share Deal, management rights in the
(2) Mobilize Savings
merged companies, board and executive seats
(3) Facilitate Growth
and personnel contribution
(4) Distribute Profit
(5) Improves Corporate Governance
EXTERNAL FORCES AFFECTING GOVERNANCE
(6) Creates Opportunities for Small Investors
Competitors, corporations and other business
3. Chapter 6: Corporate Social Responsibility
entities, private or public, offering the same
Adam Smith, articulated the traditional of classical
product or services that the company is
offering
economical model of business
Financiers, person or entity who manages
Model suggest that the needs and desires of
routinely huge amount of money, lenders, fund
society could best be met by free-for-all Interaction
provider
of individuals and organizations in the marketplace
Regulatory Agencies, a public authority or
Social Darwinism, idea that the principles of
government agency responsibility for
natural selection and survival of the fittest are
exercising autonomous authority over some
applicable to the business and social policy.
Argument for and against corporate social
area of corporate activity in a regulatory or
supervisory capacity
responsibility
Watchdogs, independent organizations trying
- Economic
to police a particular industry or corporate
- Competitive
conduct to make certain that the activities of
- Capability
these companies are accordance with the
- Self interest
Basic Premises of CCS
acceptable standards and existing laws.
Information Enhancers, Providers and
- Business Leaders, understand that long-term
Gatekeepers, Gatekeepers is an independent
value is based on the capability of the enterprise to
third party persons or entity whose
respond to society's changing needs
cooperation is important because they have
- Consumers, search for products and services of
the capability to at least deter, if not prevent
companies they believe are doing the right thing
misconducts of corporations
- Employees, preference to work for companies
Investment Bankers, an individual or entity
they share similar mission and values
which acts as an agent for corporations
- Investors, look for companies that recognize and
issuing securities, offering is called a primary
manage their skills
issue
- Local Communities, want to know that

businesses are being good citizens

- Media, expose examples of best or worst
practices to spotlight
- NGO's, expose example of irresponsible
corporate conduct and campaign for greater
corporate accountability and transparency
- Regulators, make certain that business activities
not only generate business opportunities, jobs and
economic growth but also help solve serious
problems such as climate change and
environment
Specific Relevance of CSR
- Changing Social Expectations
- Competitive Labor Markets
- Disclosure Demands by Stakeholders
- Dwindling Government Role
- Globalization
- Pressure from Investors
- Supplier Relations
- Wealth and Vulnerability
Ethical Leadership is leadership connected in
leading in a manner that respects the rights,
dignity, and stake of others
Ethics in an organization refers to system, values,
philosophies and principles that govern the
behavior of organizational pronouncement
Ethical Decision Making is the process of trying to
establish organizational values from which ethical
decisions will be based from
Decision Making is an essential process for
organizational effectiveness
- withdraw
- be an archivist
- The option of doing nothing
- Be conscious of Long- Term Effects
- consider legalities and ethics
- ask around
- be comprehensively sensitive
- do not be a dangerous "alpha male"
- find a win-win solution
Myths about organizational Ethics
- being ethical is easy
- being ethical is not part of doing business
- being ethical brings no benefit
What ethics is not?
- Ethics is not the same with feelings
- Ethics is not religion
- Ethics is not just following the laws
- Ethics is not following culturally accepted norms

- Ethics is not science

Corporate Citizenship, refers to the acceptance by
business of a conscious effort in focusing and in
satisfying the economic, legal, ethical,
philanthropical and social responsibilities and
other acts expected from the corporation to do to
its stakeholders
Key Elements of Corporate Citizenship
- Commitment to quality
- Ethical legal compliance
- Stewardship and Governance
- Superior Employee Relation
- Social Advocacy
- Environmental Advocacy
- Community Involvement
Philanthropy is the practice of giving money and
time to help life better for other people
Corporate Philanthropy is the giving of the
company's profit directly to charitable
organizations or to individual in need with the
intention of helping and improving the quality of life
of the different corporate stockholders
Benefits of Corporate Philanthropy
Benefits to Business
- Enhance corporate reputation
- Improves relations to government
- Support a company's strategic goals
Benefits to Stakeholders
- Build employee morale and engagements
- Enlarge sense of community and social
obligations
Benefits to the Community
- Improves quality of life of the community
members
- Provides human and capital resources to nonprofit organizations
Social Screening Investment Strategies
- Scare-Off Strategy
- Impact Mitigation
- Whoever is the Best?
- Main or Derivative Connection
Corporate Greenwashing, the practice of
companies characterized by deceptively making it
appear that their products, services and policies
are environmentally friendly by projecting cost cuts
as reduction in use of resources or investments
can in "green concerns"
Greenwashing Sins
- Sin of hidden Trade-Off

- Sin of no proof
- Sin of Vagueness
- Sin of Irrelevance

- Sin of fibbing
- Sin of Lesser of Two Evils
- Sin of Worshiping False Labels