Professional Documents
Culture Documents
Financial Goals
and Corporate
Governance
Learning Objectives
Examine the different ownership structures for
businesses globally and how this impacts the
separation between ownership and management
the agency problem
Explore the different goals of management
stockholder wealth maximization versus stakeholder
capitalism
Analyze how financial management differs between
the public traded and the privately held firm
Evaluate the multitude of goals, structures, and
trends in corporate governance globally
4-2
4-3
Types of Ownership
A public enterprise is a business owned by a
government
A private enterprise is owned by a private
company or individual
A business owned by a private party is
privately held.
Becomes a publicly traded company if the owners
sell a portion of their ownership in the business
in the capital markets
4-5
Types of Ownership
Any business can go public by listing a
portion of its ownership in the public
marketplace via an initial public offering.
Conversely, some publicly traded firms go
private when a single investor or group buys
outstanding shares and ceases to trade.
Family-controlled firms may prove to be
more profitable.
4-6
4-7
4-8
4-9
Shareholder Wealth
Maximization
In a Shareholder Wealth Maximization model
(SWM), a firm should strive to maximize the
return to shareholders, as measured by the
sum of capital gains and dividends, for a
given level of risk.
Alternatively, the firm should minimize the
level of risk to shareholders for a given rate
of return.
4-10
Shareholder Wealth
Maximization
The SWM model assumes as a universal
truth that the stock market is efficient.
An equity share price is always correct
because it captures all the expectations of
return and risk as perceived by investors,
quickly incorporating new information into
the share price.
Share prices are, in turn, the best allocators
of capital in the macro economy.
4-11
Shareholder Wealth
Maximization
The SWM model also treats its definition of
risk as a universal truth.
Risk is defined as the added risk that a
firms shares bring to a diversified portfolio.
Therefore the unsystematic, or operational
risk, should not be of concern to investors
(unless bankruptcy becomes a concern)
because it can be diversified.
Systematic, or market, risk cannot however
be eliminated.
4-12
Shareholder Wealth
Maximization
Long-term value maximization can conflict
with short-term value maximization as a
result of compensation systems focused on
quarterly or near-term results.
Short-term actions taken by management
that are destructive over the long-term have
been labeled impatient capitalism.
This point of debate is often referred to a
firms investment horizon (how long it takes
for a firms actions, investments and
operations to result in earnings).
4-14
Shareholder Wealth
Maximization
In contrast to impatient capitalism is patient
capitalism.
This focuses on long-term SWM.
Many investors, such as Warren Buffet, have
focused on mainstream firms that grow
slowly and steadily, rather than latching on
to high-growth but risky sectors.
4-15
4-16
4-17
4-18
4-19
4-20
4-21
Public/Private Hybrids
Many firms are publicly traded but are still
heavily influenced or even controlled by
families.
Exhibit 4.3 illustrates how family businesses
on average out-perform indexes of public
companies in the United States France,
Germany, and Western Europe.
4-22
4-23
4-24
4-25
4-26
Corporate Governance
Although the governance structure of any
company domestic, international, or
multinational is fundamental to its very
existence, this subject has become a
lightning rod for political and business
debate in the past few years.
Spectacular failures in corporate governance
have raised issues about the very ethics and
culture of the conduct of business.
4-27
Corporate Governance
The single overriding objective of corporate
governance is the optimization over time of
the returns to shareholders.
In order to achieve this goal, good
governance practices should focus the
attention of the board of directors of the
corporation by developing and implementing
a strategy that ensures corporate growth
and improvement in the value of the
corporations equity.
4-28
Corporate Governance
The most widely accepted statement of good
corporate governance practices has been
established by the OECD:
Shareholder rights. Shareholders are the owners of
the firm, and their interests should take precedence
over other stakeholders.
Board responsibilities. The board of the company is
recognized as the individual entity with final full legal
responsibility for the firm, including proper oversight of
management.
Equitable treatment of shareholders. Equitable
treatment is specifically targeted toward domestic
versus foreign residents as shareholders, as well as
majority and minority interests.
4-29
4-30
Structure of Corporate
Governance
The modern corporations actions and behaviors are
directed and controlled by both internal forces and
external forces (Exhibit 4.5).
The internal forces, the officers of the corporation
and the board of directors, are those directly
responsible for determining both the strategic
direction and the execution of the companys
future.
The external forces include equity markets in which
the shares are traded, the analysts who critique the
companys investment prospects and external
regulators, among others.
4-31
4-32
Structure of Corporate
Governance
The board of directors is the legal body that
is accountable for the governance of the
corporation.
The senior officers of the corporation are
the creators and directors of the
corporations strategic and operational
direction.
4-33
Structure of Corporate
Governance
Equity markets should reflect the markets constant
evaluation of the promise and performance of the
company.
Debt markets should reflect the companys ability to
repay its debt in a timely and efficient manner.
Auditors and legal advisors are responsible for
providing an external professional opinion as to the
fairness, legality and accuracy of corporate financial
statements.
Regulators work to ensure, among other things,
that a regular and orderly disclosure process of
corporate performance is conducted so that
investors may evaluate a companys investment
value with accuracy.
4-34
Comparative Corporate
Governance
The need for a corporate governance process arise
from the separation of ownership from
management and from varying stakeholder views.
Corporate governance regimes may be classified by
the evolution of business ownership over time (see
Exhibit 4.6).
Exchange rate regimes are a function of:
the financial market development;
the degree of separation between management and
ownership;
the concept of disclosure and transparency; and
the historical development of the legal system.
4-35
4-36
4-37
4-38
4-39
4-40
4-42
4-43