Ch01 Governance 2ed

7/31/2019 Ch01 Governance 2ed

1/19

1

Corporate Governance

Kenneth Kim

&

John Nofsinger

2th Edition

Pearson Prentice Hall


2/19

2

Chapter 1

Corporations andCorporate Governance


3/19

3

Chapter overview:

Forms of Business Ownership

Separation of Ownership and ControlCan Investors Influence Managers?

An Integrated System of Governance

International Monitoring


4/19

4

Forms of Business Ownership

Three general types of business ownership:

Sole proprietorship

Partnership

Corporation


5/19

5

Comparison of three forms

Sole proprietorship Partnership Corporation

Business owner Single owner Partners Shareholders

Owners liability Unlimited Unlimited Limited

Easy access to capitalmarket?

No No Yes

Is management and

ownership separate?

No No Yes

Are business ownersexposed to doubletaxation?

No No Yes


6/19

6

Pros and Cons of Corporations

Pros:

Easy access to capital markets

Infinite life unless go bankrupt or merged by others

Owners have limited liability

Liquid corporate ownership

Cons:Shareholders are exposed to double taxation

Costs of running a corporation is relatively high

Corporations suffer from potentially serious

governance problems.


7/197

Separation of Ownership and Control

The thousands, or more, investors who own

public firms could not collectively make thedaily decisions needed to operate abusiness. Therefore:

The shareholders are owners of the firm

The officers (or executives) control the firm


8/198

Principal-agent problem

Principalshareholders

Agentmanagers Principal-agent problem represents the

conflict of interest between management andowners. For example if shareholders cannot

effectively monitor the managers behavior,then managers may be tempted to use thefirms assets for their own ends, all at theexpense of shareholders.


9/199

Solutions to Principal-agent problem

Incentivesaligning executive incentives

with shareholder desires.e.g. stock, restricted stock, and stock options.

Monitoringsetting up mechanisms formonitoring the behavior of managers.


10/1910

Can Investors Influence Managers?

Some inactive shareholders will go along

with whatever management wants.

Some active shareholders have tried toinfluence management, but they are often

met with defeat.


11/1911

Monitors

Monitors are called for because managers

may not act in the shareholders bestinterest.

Figure 1.1 shows that monitors exist:

inside the corporate structure

Board of directors

outside the structureAuditors, analysts, bankers, credit agencies, and attorneys

in government

SEC, and IRS


12/19

12

Figure 1.1


13/19

13

Inside monitors-Board of directors

Oversee management and are supposed to

represent shareholders interests. Evaluates management and design

compensation contracts to tie managements

salaries to the firms performance.


14/19

14

Outside monitors

Interact with the firm and monitor manager

activities Auditors

Analysts

Bankers

Credit agencies Attorneys


15/19

15

Government monitors

The SEC regulates public firms for the

protection of public investors The SEC also makes policy and prosecutes

violators in civil courts.

The IRS enforces the tax rules to ensure

corporations pay taxes.

The Sarbanes-Oxley Act of 2002


16/19

16

Other monitors

Market forces

Stakeholders Creditors

Employees

Society


17/19

17

An Integrated System of Governance


18/19

18

International Monitoring

Important differences occur between the

types of monitoring and incentive used inother capitalist countries and the U.S. due to:

Different compensation contracts

Different accounting standards

Different institutional investing environment Bank-oriented or capital markets-oriented

Different legal environment


19/19

19

Summary

The corporations, probably the most importantbusiness form, generate approximately 90 percent of

the countrys revenue.

Separation of ownership and control causes theagency problem.

Possible solutions to Principal-agent problem are

incentives and monitoring.

The corporate system has interrelated incentives.

Ch01 Governance 2ed

Documents

Transcript of Ch01 Governance 2ed