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Chapter 1- Goals and Governance of the Firm.docx

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Department
Finance
Course
FINE 2000
Professor
Mehdi Beyaghi
Semester
Winter

Description
CHAPTER 1: GOALS AND GOVERNANCE OF THE FIRM FINE 2000 Do Managers Really Maximize Firm Value?  In most large public companies the managers are not the owners and they might be tempted to act in ways that are not In the best interests of the owners  Agency Problems: conflict of interest between the firm’s owners and managers  Stakeholder: anyone with a financial interest in the firm  Arrangements that help ensure that the shareholders and managers are working toward common goals: o Compensation Plans:  Managers are spurred on by incentive schemes that provide big returns if shareholders gain but are valueless if they do not  Some criticize stock options for being too favourable for managers and for distorting management’s incentives  Stock options also draw the attention of securities regulators because of the practice of backdating  Backdating: occurs when the date on the options is not the actual date of the option grant but rather a date in the past when the stock price was lower o Board of Directors  Response to corporate scandals in early 2000, there’s increased balance toward greater independence  Sarbanes-Oxley Act requires that corporations place more independent directors on board (more directors who are not managers or not affiliated with management)  Boards now meet with CEO present, and institutional shareholders, particularly pension funds and hedge funds have become more active in monitoring firm’s performance and proposing changes to corporate governance  If shareholders believe that the corporation is underperforming and that the board of directors is not sufficiently aggressive in holding managers to task, they can try to replace the board of directors in the next election o Takeovers  Poorly performing companies are also more likely to be taken over by another firm  After the takeover, old management team may find itself out on the street o Specialist Monitoring  Managers are subject to the scrutiny of specialists  Their actions are monitored by the security analysts who advise investors to buy, sell or sell the company’s shares o Legal and Regulatory Requirements  CEOs and financial managers have a legal duty to act responsibly and in the interests of
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