Chapter 13 Notes

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University of Toronto Scarborough
Management (MGS)
Professor Constantinou

stChapter 13 Corporate Governance in the 21 Century NotesWhat is Corporate Governance y agency problemseparation of its ownership from managerial control of a firm y from shareholders perspectives the solution to the agency problem is to find ways to ensure that corporate resources and profits are not squandered that executives will not make choices that benefit themselves at shareholders expense and that shareholders will receive a positive return on their investment y corporate governancethe system by which owners of firms direct and control the affairs of the firm y corporate governance addresses distribution of rights and responsibilities among different participants in the organization such as board managers shareholders and other stakeholders and spells out rules and procedures for making decisions on corporate affairs Summary of Challenges 1 Describe what corporate governance means Corporate governance is the means and mechanisms used to ensure that managers act in accordance with investors best interests It encompasses the system by which organizations are directed and controlled by their owners Corporate governance is related to strategy formulation and the implementation in several ways Corporate governance ensures that the firms vision and mission are reflected in its strategy and the way that strategy is executed Governance mechanisms include monitoring and incentive devices such as pay and promotion that can bring managements actions in line with shareholders interests 2 Explain how corporate governance relates to competitive advantage Evidence suggests that shareholders favour good governance and that it can help firms outperform those with poor governance characteristics To the extent that governance helps firms maximize returns and minimize agency problems firms with good governance may have a competitive advantage over those lacking appropriate oversight and incentives Young firms with good governance outperform their counterparts with loose oversight and poor incentives Corporate scandals such as those at Enron Tyco and WorldCom are more likely to affect firms with inappropriate incentives and lax boards 3 Identify the roles of owners and different types of ownership profiles in corporate governance A public firm is one that has sold shares to the general investing public How those publicly traded shares are dispersed and traded in the stock market varies significantly Some firms have a few select owners who control significant stakes in the firm Consequently these parties have so much voting power that they can have significant influence and control over the firms strategy and governance Generally the presence of strong owners minimizes agency problems However the presence of a powerful owner does not remove all agency problems One specific type of problem arises when a single powerful owner uses that power to extract private benefits from the company at the expense of other less powerful owners 4 Show how board of directors are structured and explain the roles they play in corporate governance One of the chief monitoring devices available to shareholders is the board of directors The general responsibility of the board of directors is to ensure that executives act in shareholders best interests All publicly he
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