Chapter

2
Corporate Governance

Copyright © 2016 McGraw-Hill Education. All rights reserved.

 Chapter Overview

• The Corporate Firm

• The Agency Problem and Control of the Corporation
• The Governance Structure of Corporations
• The OECD Principles of Corporate Governance
• International Corporate Governance
• Corporate Governance in Action: Starbucks
 The Corporate Firm
Important Differentiating Features

Tax Dividends

Voting Liability

Liquidity Features Lifetime

The Corporate Firm
What are the main types of
corporate organizations?
 The Corporate Firm

Three Common Organizational Structures

Organizational
Structure

Sole Limited
Partnership
Proprietorship Corporation
 The Corporate Firm
Three Common Organizational Structures
Sole Proprietorship Partnership Limited Corporation

• One Owner • More than one • Articles and

• Very easy to form owner Memorandum of
• Profits taxed as • Partnership Incorporation
personal income agreement Required
• Unlimited liability • Limited and • Limited Liability
• Life of company unlimited partners • Profits taxed at
linked to life of • Partnership is corporate tax rate
owner terminated when a • Board of Directors
• Amount of funding partner dies or • Life of company
is limited by leaves the firm hypothetically
owner’s personal • Profits taxed as unlimited
wealth personal income
 The Corporate Firm
Cross-Cutting Important Features

Industry

Management Economy

Ownership Features Regulation

The Agency Problem and
Control of the Corporation
Ownership and Control
 The Agency Problem
Agency Issues

Managers

Agency

Minority Large
Investors Investors
 The Agency Problem
Type I Agency Problem

Managers Shareholders
 The Agency Problem
Managerial Incentives and Executive Pay
 The Agency Problem
Controlling Manager Behaviour – Voting Rights

Cumulative Straight
Voting Voting

Proxy Share
Voting Classes
 The Agency Problem
Percentage of Firms with One Share One Vote – Country Analysis
 The Agency Problem
Percentage of Firms with Dual Class Shares – Country Analysis
 The Agency Problem
Type II Agency Problem

Controlling
Owners
Minority
Shareholders
 The Agency Problem
How Common are Closely Held Companies?
The Governance Structure
of Organizations
Ownership Structures
 The Governance Structure of Organizations
A Typical Ownership Structure for a Multinational
The OECD Principles of
Corporate Governance
Six Main Principles
 The OECD Principles of Corporate Governance
Six Major Principles

Regulatory Shareholder Treatment of

Framework Rights Shareholders

Disclosure and Board of

Stakeholders
Transparency Directors
International Corporate
Governance
Differentiating Features
 International Corporate Governance
Investor Protection: The Legal Environment
 International Corporate Governance
The Financial System: Bank vs. Market Based Countries
 International Corporate Governance
Other Important Factors

Culture Ethics
 Corporate Governance in Action
Case Study: Starbucks

The Board of
Directors

Policies and
Practices

Managerial
Ownership
 Corporate Governance in Action
Case Study: Starbucks
The board is responsible for overseeing the exercise of corporate powers and
ensuring that the Company’s business and affairs are managed to meet its
stated goals and objectives. The Board recognizes its responsibility to engage,
and provide for the continuity of, executive management that possesses the
character, skills and experience required to attain the Company’s goals and its
responsibility to select nominees for the Board of Directors who possess
appropriate qualifications and reflect a reasonable diversity of backgrounds
and perspectives.
 Concept Quiz
How much do you understand?
Differentiate between sole proprietorships, partnerships and corporations. What

Quiz are the advantages and weaknesses of each?

Suppose you own shares in a company. The current share price is £2.50. Another
company has just announced that it wants to buy your company and will pay £3.50
per share to acquire all the outstanding equity. Your company’s management
immediately begins fighting off this hostile bid. Is management acting in the
shareholders’ best interests? Why or why not?

Why do partnerships require formal agreements among the main shareholders

when sole ownerships do not? Why are corporation articles and memoranda of
understanding so complex compared to partnership agreements?