Corporate Finance Chapter1

8/9/2019 Corporate Finance Chapter1

http://slidepdf.com/reader/full/corporate-finance-chapter1 1/29

CORPORATE GOVERNANCE

CHAPTER 1Presenter’s name

Presenter’s title

dd Month yyyy



1. INTRODCTION!HAT I" CORPORATE GOVERNANCE#

$ Corporate governance is the system o% &rin'i&les( &oli'ies( &ro'ed)res( and'learly de%ined res&onsi*ilities and a''o)nta*ilities )sed *y sta+eholders to

o,er'ome the 'on%li'ts o% interest inherent in the 'or&orate %orm.

Hen'e( the im&ortan'e o% )nderstandin- the di%%erent %orms o% *)siness.

$ Cor&orate -o,ernan'e a%%e'ts the o&erational ris+ and( hen'e( s)staina*ility o%

a 'or&oration. The )ality o% a 'or&oration’s 'or&orate o% -o,ernan'e a%%e'ts the ris+s and

,al)e o% the 'or&oration.

E%%e'ti,e( stron- 'or&orate -o,ernan'e is essential %or the e%%i'ient

%)n'tionin- o% mar+ets.

Co&yri-ht / 012 C3A Instit)te 0



0. CORPORATE GOVERNANCE4 O56ECTIVE"

AND GIDING PRINCIP7E"

$ There are inherent 'on%li'ts o% interest in 'or&orations in 8hi'h the o8nershi&and mana-ement are se&arate.

$ O*9e'ti,es o% 'or&orate -o,ernan'e4

To eliminate or miti-ate 'on%li'ts o% interest.

: Parti')larly those *et8een 'or&orate mana-ers and shareholders; and

To ens)re that the assets o% the 'om&any are )sed e%%i'iently and

&rod)'ti,ely and in the *est interests o% its in,estors and other sta+eholders.




CORE ATTRI5TE" O3 AN E33ECTIVE

CORPORATE GOVERNANCE "<"TEM

Clearly de%ined mana-erand dire'tor -o,ernan'e

res&onsi*ilities

Identi%ia*le andmeas)rea*le

a''o)nta*ilities

3airness and e)ita*letreatment in dealin-s

Trans&aren'y and a'')ra'yin dis'los)res

Delineation o% ri-htso% shareholders andother sta+eholders

Co&yri-ht / 012 C3A Instit)te =



2. 3ORM" O3 5"INE""

AND CON37ICT" O3 INTERE"T

Co&yri-ht / 012 C3A Instit)te >

The %orm o% *)siness 8ill di'tate( in &art( the relationshi& *et8een the o8ners o%the *)siness and mana-ement.

The de-ree o% se&aration may *e minimal ?e.-.( sole &ro&rietorshi&@( or

si-ni%i'ant ?e.-.( lar-e 'or&oration@.

!hen there is a se&aration *et8een o8ners and mana-ers( there is a

&otential %or a-en'y &ro*lems( 8hi'h may a%%e't the ,al)e o% the *)siness. !e 8ill eamine three *)siness %orms4 the sole &ro&rietorshi&( the

&artnershi&( and the 'or&oration.



"O7E PROPRIETOR"HIP

$ A sole proprietorship is o8ned and o&erated *y a sin-le &erson

$ "ole &ro&rietorshi&s are the most n)mero)s in terms o% n)m*er o% *)sinesses.

$ !ho *ears -o,ernan'e ris+ in a sole &ro&rietorshi&#

There are %e8 ris+s 8ith res&e't to -o,ernan'e %rom the &ers&e'ti,e o% the

o8ner.

Creditors( in'l)din- trade 'reditors( ha,e the hi-hest ris+ 8ith res&e't to

-o,ernan'e.

Co&yri-ht / 012 C3A Instit)te B



PARTNER"HIP

$ A partnership has t8o or more o8nermana-ers.

$ !ho *ears -o,ernan'e ris+ in a &artnershi&#

There are %e8 ris+s 8ith res&e't to -o,ernan'e %rom the &ers&e'ti,e o% the

o8ners( 8ith o8nershi& ri-hts and res&onsi*ilities detailed in the &artnershi&

a-reement.

Creditors( in'l)din- trade 'reditors( ha,e the hi-her ris+ 8ith res&e't to

-o,ernan'e.

Co&yri-ht / 012 C3A Instit)te



CORPORATION

$ A corporation is a le-al entity that has ri-hts similar to an indi,id)al.

3or eam&le( a 'or&oration 'an enter into 'ontra'ts.

$ Cor&orations a''o)nt %or most *)siness re,en)e aro)nd the 8orld.

Cor&orations aro)nd the 8orld4 7imited Com&any ?..@( Gesells'ha%t

?German@; "o'ietF Anonyme ?3ran'e@( 公司 ?China@; ir+et ?T)r+ey@; บรษท

?Thailand@




ADVANTAGE" O3 THE CORPORATE 3ORM

1. A 'or&oration 'an raise 'a&ital.

Grant o8nershi& sta+es ?that is( iss)e sto'+@ or *orro8 ?that is( iss)e *onds@.

0. O8ners need not +no8 ho8 to r)n the *)siness.

The 'or&oration hires e&erts to mana-e the *)siness.

2. O8nershi& interests are trans%erra*le.




DI"ADVANTAGE" O3 THE CORPORATE 3ORM

1. Cor&orations are more hi-hly re-)lated than are &artnershi&s or sole&ro&rietorshi&s.

3or eam&le( in the .". there are "tate la8s &ertainin- to 'or&orations and

the "e')rities and E'han-e Commission re)ires s&e'i%i' dis'los)res.

0. "e&aration o% o8ners and mana-ers.

This is the agency relationship( in 8hi'h someone ?the a-ent@ a'ts on

*ehal% o% another &erson ?the &rin'i&al@.

The &otential 'on%li't *et8een o8ners and mana-ers is the a-en'y &ro*lem

or &rin'i&al:a-ent &ro*lem(

: Prin'i&als4 shareholders

: A-ents4 Mana-ement and mem*ers o% the *oard o% dire'tors

There are 'osts to this a-en'y relationshi& arisin- %rom 'on%li'ts o% interest.




2. 3ORM" O3 5"INE"" AND

CON37ICT" O3 INTERE"T

Characteristic Sole Proprietorship Partnership Corporation

Ownership "ole o8ner M)lti&le o8ners nlimited o8nershi&

Legal requirements andregulation

3e8; entity easily%ormed

3e8; entity easily%ormed

N)mero)s le-alre)irements

Legal distinction betweenowner and business

None None 7e-al se&aration*et8een o8ners and

*)sinessLiability nlimited nlimited *)t sharedamon- &artners

7imited

Ability to raise capital Very limited 7imited Nearly )nlimited

Transferability of ownership Non:trans%era*le?e'e&t *y sale o%entire *)siness@

Non:trans%era*le Easily t rans%era*le

Owner expertise in business Essential Essential nne'essary


Ehi*it 1:1( &a-e =



=. "PECI3IC "ORCE" O3 CON37ICT4

AGENC< RE7ATION"HIP"

anagers!oard ofdirectors

Shareholders


Mana-ementJ"hareholder 'on%li'ts

Dire'torJ"hareholder 'on%li'ts



MANAGEMENTJ"HAREHO7DER CON37ICT"

$ "hareholders entr)st mana-ement 8ith %)nds %rom rein,ested earnin-s orne8ly iss)ed sto'+( 8hi'h mana-ement in,ests.

$ The o,erar'hin- o*9e'ti,e is to maimiKe shareholders’ 8ealth.

$ Iss)e4 Mana-ers are h)man

Mana-ers may *e more interested in e&andin- the siKe o% the *)siness(

*on)ses *ased on earnin-s( ta+in- on e'essi,e ris+s( or 9o* se')rity.

Mana-ers may 'ons)me e'essi,e &er)isites( or in e%%e't( ta+e ad,anta-e

o% their &osition to s&end e'essi,ely on thin-s %or themsel,es.

5ottom line4 there may *e a-en'y 'osts in terms o% the e&li'it and im&li'it

'osts 8hen mana-ers do not a't in the *est interest o% shareholders.

$ E%%e'ti,e 'or&orate -o,ernan'e -)ards a-ainst a-en'y 'osts.




DIRECTORJ"HAREHO7DER CON37ICT"

$ The *oard o% dire'tors are an intermediary *et8een the shareholders andmana-ement( and re&resent shareholders’ interests *y4

Monitorin- mana-ers;

A&&ro,in- strate-ies and &oli'ies;

A&&ro,in- mer-ers and a')isitions;

A&&ro,in- a)dit 'ontra'ts;

Re,ie8in- a)dit 'ontra'ts and %inan'ial 'ontra'ts;

Esta*lishin- mana-ement 'om&ensation;

Dis'i&linin- &oorly &er%ormin- mana-ers.

$ A 'on%li't may arise i% the *oard mem*ers ali-n 8ith mana-ement.

Co&yri-ht / 012 C3A Instit)te 1=



RE"PON"I5I7ITIE" O3 THE

5OARD O3 DIRECTOR"

$ Esta*lish 'or&orate ,al)es and -o,ernan'e str)'t)res %or the 'om&any;

$ Ens)re that all le-al and re-)latory re)irements are met and 'om&lied 8ith

%)lly and in a timely %ashion;

$ Esta*lish lon-:term strate-i' o*9e'ti,es %or the 'om&any;

$ Esta*lish 'lear lines o% res&onsi*ility and a stron- system o% a''o)nta*ility and

&er%orman'e meas)rement;

$ Hire the 'hie% ee')ti,e o%%i'er( determine the 'om&ensation &a'+a-e( and

&eriodi'ally e,al)ate the o%%i'er’s &er%orman'e;

$ Ens)re that mana-ement has s)&&lied the *oard 8ith s)%%i'ient in%ormation %or

it to *e %)lly in%ormed and &re&ared to ma+e the de'isions that are its

res&onsi*ility( and to *e a*le to ade)ately monitor and o,ersee the 'om&any’smana-ement;

$ Meet re-)larly to &er%orm its d)ties;

$ A')ire ade)ate trainin-.

Co&yri-ht / 012 C3A Instit)te 1>



>. CORPORATE GOVERNANCE EVA7ATION4

5OARD O3 DIRECTOR ATTRI5TE"

$ The *oard sho)ld *e 'om&rised &rimarily o% inde&endent dire'tors ?that is( notinsiders@

$ The Chairman o% the 5oard sho)ld *e inde&endent;

$ Dire'tors sho)ld *e )ali%ied;

$ There sho)ld *e a re-)lar ele'tion o% mem*ers o% the 5oard;

$ There sho)ld *e a re-)lar sel%:assessment o% the 5oard;

$ The *oard sho)ld hold se&arate meetin-s o% the inde&endent dire'tors;

$ The *oard sho)ld re)ire a)dit o,ersi-ht *y inde&endent dire'tors 8ho ha,e

s)%%i'ient e&ertise in %inan'e( a''o)ntin-( and the la8.

Co&yri-ht / 012 C3A Instit)te 1B



$ The nominatin- 'ommittee sho)ld *e 'om&rised o% inde&endent dire'tors;

$ The 'om&ensation 'ommittee sho)ld *e 'om&rised o% inde&endent dire'tors;

$ The *oard sho)ld *e a*le to hire o)tside 'o)nsel;

$ The *oard sho)ld dis'lose -o,ernan'e &oli'ies;

$ The *oard sho)ld ens)re ade)ate dis'los)re and trans&aren'y;

$ The *oard sho)ld re)ire dis'los)re o% any related:&arty transa'tions;

$ The *oard sho)ld res&ond to shareholders’ non:*indin- &roy ,otes.


>. CORPORATE GOVERNANCE EVA7ATION4

5OARD O3 DIRECTOR ATTRI5TE" ?CONTINED@



MONETAR< ATHORIT< O3 "INGAPORE

GUIDELINES AND REGULATIONS

ON CORPORATE GOVERNANCE

Prin'i&le 14 E,ery Instit)tion sho)ld *e headed *y an e%%e'ti,e 5oard.

Prin'i&le 04 There sho)ld *e a stron- and inde&endent element on the 5oard

8hi'h is a*le to eer'ise o*9e'ti,e 9)d-ment on 'or&orate a%%airs

inde&endently %rom mana-ement and s)*stantial shareholders.

Prin'i&le 24 The 5oard sho)ld set and en%or'e 'lear lines o% res&onsi*ility and

a''o)nta*ility thro)-ho)t the Instit)tion.Prin'i&le =4 There sho)ld *e a %ormal and trans&arent &ro'ess %or the

a&&ointment o% ne8 dire'tors to the 5oard.

Prin'i&le >4 There sho)ld *e a %ormal assessment o% the e%%e'ti,eness o% the

5oard as a 8hole and the 'ontri*)tion *y ea'h dire'tor to the

e%%e'ti,eness o% the 5oard.Prin'i&le B4 In order to %)l%ill their res&onsi*ilities( 5oard mem*ers sho)ld *e

&ro,ided 8ith 'om&lete( ade)ate and timely in%ormation &rior to

*oard meetin-s and on an on:-oin- *asis *y the mana-ement.




GUIDELINES AND REGULATIONS ON

CORPORATE GOVERNANCE ?CONTINED@

Prin'i&le 4 There sho)ld *e a %ormal and trans&arent &ro'ed)re %or %iin- therem)neration &a'+a-es o% indi,id)al dire'tors. No dire'tor sho)ld

*e in,ol,ed in de'idin- his o8n rem)neration.

Prin'i&le 4 The le,el and 'om&osition o% rem)neration sho)ld *e a&&ro&riate

to attra't( retain and moti,ate the dire'tors to &er%orm their roles

and 'arry o)t their res&onsi*ilities.Prin'i&le 4 The 5oard sho)ld esta*lish an A)dit Committee 8ith a set o%

8ritten terms o% re%eren'e that 'learly sets o)t its a)thority and

d)ties.

Prin'i&le 14 The 5oard sho)ld ens)re that there is an ade)ate ris+

mana-ement system and so)nd internal 'ontrols.




Prin'i&le 114 The 5oard sho)ld ens)re that an internal a)dit %)n'tion that isinde&endent o% the a'ti,ities a)dited is esta*lished.

Prin'i&le 104 The 5oard sho)ld ens)re that mana-ement %orm)lates &oli'ies to

ens)re dealin-s 8ith the &)*li'( the Instit)tion’s &oli'yholders and

'laimants( de&ositors and other ')stomers are 'ond)'ted %airly(

res&onsi*ly and &ro%essionally.

Prin'i&le 124 The 5oard sho)ld ens)re that related &arty transa'tions 8ith the

Instit)tion are made on an arm’s len-th *asis.


GUIDELINES AND REGULATIONS ON

CORPORATE GOVERNANCE ?CONTINED@



ORGANI"ATION 3OR ECONOMIC CO:OPERATION AND

DEVE7OPMENT ?OECD@

PRINCIPLES OF CORPORATE GOVERNANCE

I • The ri-hts o% shareholders

II • The e)ita*le treatment o% shareholders

III • The role o% sta+eholders in 'or&orate -o,ernan'e

IV • Dis'los)re and trans&aren'y

V • The res&onsi*ilities o% the *oard




B. ENVIRONMENTA7( "OCIA7( AND

GOVERNANCE 3ACTOR"

"S# ris$ exposure

$ "nvironmental% social% and governance &"S#' ris$ is the ris+ asso'iated

8ith the mana-ement o% en,ironment( so'ial( and -o,ernan'e iss)es.

: In,ol,es miti-atin- ris+s and mana-in- these ris+s 8hen they arise.

$ E"G ris+ a%%e'ts the 'om&any’s s)staina*ility and ,al)ation.


En,ironment

• Poll)tion•

Dis'los)res

"o'ial

• !or+&la'e

iss)es• Prod)'t )ality

and sa%ety• Comm)nity

intera'tion

Go,ernan'e

• E%%e'ti,e

-o,ernan'e



ELAMP7E" O3 E"G RI""

$ 7e-islati,e and re-)latory ris+ ?that is( the role o% -o,ernments@

$ 7e-al ris+ ?%or eam&le( la8s)its@

$ Re&)tational ris+

$ O&eratin- ris+

$ 3inan'ial ris+




. VA7ATION IMP7ICATION" O3 CORPORATE

GOVERNANCE

5ene%its %rom a stron-'or&orate -o,ernan'e

Ris+s o% 8ea+'or&orate -o,ernan'e

Co&yri-ht / 012 C3A Instit)te 0=



RI"" O3 !EA CORPORATE GOVERNANCE

A''o)ntin- ris+

• The ris+ that a

'om&any’s%inan'ialstatementre'o-nition andrelateddis'los)res arein'om&lete(misleadin-( ormateriallymisstated.

Asset ris+

• The ris+ that the

%irm’s assetsmay *emisa&&ro&riated*y mana-ers ordire'tors.

7ia*ility ris+

• The ris+ that

mana-ement8ill enter intoe'essi,eo*li-ations thatdestroy the,al)e o%shareholders’e)ity.

"trate-i'&oli'y ris+

• The ris+ that

mana-ers mayenter intotransa'tions orin')r other*)siness ris+sthat are sel%:ser,in- and maynot *e in the*est lon-:terminterest o%shareholders.

Co&yri-ht / 012 C3A Instit)te 0>



5ENE3IT" 3ROM "TRONG GOVERNANCE

E,iden'e s)--ests that4 'om&anies 8ith stron- -o,ernan'e had -reater in,estment &er%orman'e.

'om&anies 8ith stron- shareholders’ ri-hts o)t&er%ormed those 8ith 8ea+

&rote'tions.

Co&yri-ht / 012 C3A Instit)te 0B



. "MMAR<

Cor&orate -o,ernan'e is the system o% &rin'i&les( &oli'ies( &ro'ed)res( and'learly de%ined res&onsi*ilities and a''o)nta*ilities.

The o*9e'ti,es o% a 'or&orate -o,ernan'e system are ?1@ to eliminate or

miti-ate 'on%li'ts o% interest amon- sta+eholders( &arti')larly *et8een

mana-ers and shareholders( and ?0@ to ens)re that the assets o% the

'om&any are )sed e%%i'iently and &rod)'ti,ely and in the *est interests o% the

in,estors and other sta+eholders.

The %ail)re o% a 'om&any to esta*lish an e%%e'ti,e system o% 'or&orate

-o,ernan'e re&resents a ma9or o&erational ris+ to the 'om&any and its

in,estors.




$ The s&e'i%i' so)r'es o% 'on%li't in 'or&orate a-en'y relationshi&s are mana-er:shareholder.

$ The res&onsi*ilities o% *oard mem*ers( *oth indi,id)ally and as a -ro)&( are to

esta*lish 'or&orate ,al)es and e%%e'ti,e -o,ernan'e str)'t)res %or the

'om&any.


"MMAR< ?CONTINED@



$ Com&anies 'ommitted to 'or&orate -o,ernan'e o%ten &ro,ide a statement o%'or&orate -o,ernan'e &oli'ies. Analysts sho)ld assess4

the 'ode o% ethi's; statements o% the o,ersi-ht( monitorin-( and re,ie8

res&onsi*ilities o% dire'tors;

statements o% mana-ement’s res&onsi*ilities 8ith res&e't to in%ormation and

a''ess o% dire'tors to internal 'om&any %)n'tions; re&orts o% dire'tors’ eaminations( e,al)ations( and %indin-s;

*oard and 'ommittee sel%:assessments; mana-ement sel%:assessments; and

trainin- &oli'ies %or dire'tors.

$ !ea+ 'or&orate -o,ernan'e systems -i,e rise to ris+s in'l)din- a''o)ntin-

ris+( asset ris+( lia*ility ris+( and strate-i' &oli'y ris+.

Co& ri-ht / 012 C3A Instit te 0

"MMAR< ?CONTINED@

Corporate Finance Chapter1

Documents

Transcript of Corporate Finance Chapter1