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PHIL 2600 (22)
Lecture 6

Lecture 6 - Chapter 6

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PHIL 2600
Aaron Massecar

Lecture 6 - Chapter 6 Crucial problem: Separation of ownership and control  Peculiarities of corporate ownership ◦ Locus of control ◦ Fragmented ownership ◦ Divided functions and interest Rights and Duties in Firm-Shareholder Relations  Rights of shareholders ◦ The right to sell their stock ◦ The right to vote in the general meeting ◦ The right to certain information about the company ◦ The right to sue the managers for misconduct ◦ Certain residual rights in case of the corporations liquidation  Duties of managers ◦ Duty to act for the benefit of the company ◦ Duty of care and skill ◦ Duty of diligence Corporate Governance  Describes the process by which shareholders seek to ensure that “their” corporation is run according to their intentions. It includes processes of goal definition, supervision, control and sanctioning. In the narrow sense it includes shareholders and the management of a corporation as the main actors; in a broader sense it includes all actors who contribute to the achievement of stakeholder goals inside and outside the corporation Corporate Governance: Principle – Agent Relation Principal: Shareholder – Seeks profits, rising share price, etc →Agent: Manager ← Seeks remuneration, power, esteem etc – Features of Agency Relations  Inherent conflict of interest  Informational asymmetry Shareholder and Stakeholder Relations  Look at chart ExecutiveAccountability and Control (I)  Aseparate body of people that supervises and controls management on behalf of shareholders  Dual structure of leadership ◦ Executive Directors: Are actually responsible for running the corporation ◦ Non-Executive Directors: Are supposed to ensure that the corporation is being run in the interests of the shareholders  Anglo-Saxon model: single-tier board  European Model: Two-tier boards, lower tier = executive directors, and upper tier = supevisory board ExecutiveAccountability and Control (II)  The central ethical issue here is the independence of the supervisory, non-executive board members  No directly conflicting interests ensured by: ◦ Typically drawn from outside the corporation ◦ No personal financial interest in the corporation ◦ Appointed for limited time ◦ Competent to judge the business of the company ◦ Sufficient resources to get information ◦ Appointed independently Executive Remuneration  “Fat cat” salary accusations ◦ E.g. Average CEO salary in Britain 6.5m euro ◦ E.g. Average annual pay rise for CEOs 11% ◦ CEO increases outstrip shareholder returns  Ethical problems with executive pay: ◦ Performance-related pay leads to large salaries that cause unrest within corporations ◦ Influence of globalization on executive pay leads to significant increases ◦ Board often fails to reflect shareholder interests EthicalAspects of Mergers andAcquisitions  Acceptable if results in transfer of assets to owner who uses them more productively  Central concern is managers who pursue interests not congruent with shareholder interests ◦ Executive prestige vs. profit and share price ◦ Two ethically – questionable options for managers ▪ Seduced with golden parachute for cooperations ▪ Greenmailing to secure post-merger job  Hostile takeovers- concerns when shareholders do not want to sell  Intentions and consequences of mergers and acquisitions ◦ Restructuring and downsizing The Role of Financial Markets and Insider Trading  Speculative “Faith stocks” ◦ “dot-com” bubble (companies not made any profit but worth billions on the market) ◦ Ethical issues: Bones based entirely on speculation without always fully revealing amount of uncertainty  Insider trading ◦ Insider trading occurs when securities are bought and sold on the basis of material non- public information ◦ Ethical arguments ▪ Fairness ▪ Misappropriation of property ▪ Harm to investors and the marketplace ▪ Undermining of fiduciary relationship  Insider trading can erode trust in the market in the long term; hence its illegality The Role of Financial Professional and Market Intermediaries  Two crucial professions:Accountants & credit ratings agencies  Tasks is to provide a “True and fair view of the firm – i.e. bridge informational asymmetry  Five main problematic aspects of financial intermediary's jobs: ◦ Power and influence in markets ◦ Conflict of interest (e.g. cross-selling) ◦ Long-term relationships with clients ◦ Size of the firm ◦ Competition between firms (danger of corner-cutting) Private Equity and Hedge-Funds  rise of private equity and hedge funds exacerbate issues around transparency and shareholder control  Most general concern: ◦ There are no longer many obligations for public information about a company once it has been taken private  Hedge funds do not have to report to regulators in the same way as other investments firms ◦ Don't even have to report fully to own investors ◦ Suggestions is this lack of transparency hides systemic risk Global Financial Markets  Global financial markets
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