The relationship among various participants in determining the direction and performance of corporations.
The Tripod of Corporate Governance:
- Owners, Managers & Board of Directors.
Financing: - How a firm's money, banking, investments, and credit are managed.
Equity: - Stock in a firm -- usually expressed in shares - which represents the owners' rights to the value of the firm.
Shareholders: - Firm owners.
Debt: - A loan that the firm needs to pay back at a given time with an interest.
Cost of capital: - Rate of return that the firm needs to pay to capital providers. - Cost of capital is lower globally than domestically.
Cross-listing: - Listing shares on a foreign stock exchange.
Concentrated ownership and control: - When founders of a start up firm completely owns and control the firm.
Diffused ownership: - Numerous small shareholders but none with a dominant level of control.
Separation of ownership and control:
- Ownership is dispersed among many small shareholders and control is largely concentrated in the hands of salaried, professional managers who own little, or no, equity.
Owners: - The vast majority of large firms throughout continental Europe, Asia, Latin America, and Africa feature concentrated family ownership and control, which has both advantages and disadvantages.
Other than families, the state is another major owner of firms in many parts of the world. State-owned enterprises (SOEs) suffer from an incentive problem.
Top management team (TMT): - Team consisting of the highest level of executives of a firm led by the CEO.
Chief executive officer (CEO): - Main executive manager in charge of the firm.
Agency relationship: - Relationship between shareholders and professional managers.
Principal-agent conflicts: - When the interests of principals and agents do not completely overlap and result in a conflict of goals.
Agency costs: 1) principals' costs of monitoring and controlling agents. 2) agents' costs of bonding --signaling that they are trustworthy.
Information asymmetries: - Agents almost always know more about the property they manage than principals do.
Board compensation: - Insider/outsider mix on a board of directors.
Inside directors: - Top executives of the firm who are on the board of directors.
Outside directors: - Non-management members of the board.
Managerial human capital: - Top managers and directors are regarded as valuable, rare, and hard-to-imitate firm specific resources.
Stewardship theory: - "Pro-management" theory that suggests that most managers can be viewed as owners' stewards.
Implications for action: - Understand the rules affecting corporate finance and governance. - Develop firm-specific capabilities to differentiate a firm on corporate finance and governance dimensions.