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ShareholdersBy: Marina Manzoni ,Erika Christy, Belen Sanchez, Lonan Carroll, &

Marina Konopelko

Shareholders & CorporateGovernance

Changes on modern capitalism

Shareholders X Managers

Definition of Corporate Governance:

“Corporate governance describes the process by which shareholders seek to ensure that ‘their’ corporation is run according to their intentions. It includes processes of goal definition, supervision, control, and sanctioning… It includes all actors who contribute to the achievement of stakeholder goals, inside and outside the corporation.” (Parkinson 1993: 157)

Corporate Governance Cont.

Agency Relation Definition: Shareholders as the principal who contracts management

as an agent to act in their interest within the boundary of the firm. Conflict of interests between shareholders and managers. Information Asymetry

Different Frameworks of Corporate Governance Globally

Ethical Dilemmas:

Executive remuneration- High executive pay on the base of market rates

Problems directly occurring from this: Appropriate performance-related pay can not be delegated due to

the excessive salary levels This remuneration has influenced executive pay globally; there is

a global market for executive talent, so the standards of the highest level of pay seem to be implied internationally, although performance-related pay is already in place in regions such as Europe. This ultimately skyrockets pay levels across the board

The influence of the board is limited and often does not accurately reflect the shareholder’s interests

Dilemmas Cont.

Hostile takeovers- When an investor intends to purchase a majority stake in a corporation against the wishes of its board.

Two options for dealing with the takeover: The company can be seduced by the takeover, by being offered a large sum

of money or a, ‘golden parachute’. Managers can secretly send ‘greenmail’ (as opposed to blackmail) to the

potential hostile party and offer to buy back the shares for the company at a higher price than the present market price in order to prevent themselves from losing their jobs

Faith stocks- Blind faith in the stock market ex: of this is the real estate market in the early 2000’s, in which people blindly put their faith into, in hopes that it would continue to rise. The market was much too complex for anyone to understand and the amount of uncertainty that lay within was almost criminal to put trust in.

Dilemmas Cont.

Insider trading- When certain investors have superior knowledge of the market before any other potential traders are aware.

Ethical arguments against insider trading: Fairness- One party has an unfair advantage over the other when

they receive predictive information that the other is not able to receive

Misappropriation of property- The information that is used is essentially the property of the firm involved, to which they have no rights to

Harm to investors and the market- The traders may benefit to the cost of ‘ordinary’ traders, making the market riskier

Undermining of fiduciary relationship- Since the insider trading is driven by self-interest, not the interest of the shareholders, trust is ultimately lost between the managers and the shareholders

Alternative models of ownership

Ex.

Shareholders as citizens of the corporation

Governance and

control

National security and

protectionism

International

speculation

Unfear competitio

n

Space for illegal

transactionsEthical issues

Reforming corporate governance

Definition and implementation of new corporate governance codes

by

Legal basis and

power vary

Role somewh

at ambivale

nt

Shareholder democracy

A shareholder has a say in corporate decisions

Force for wider social accountability and performance

Scope of activities

Mechanism for change

Adequate information

Shareholder Activism

Main objective:

Have a voice at AGMs

Create real change at management level

Highlight unethical practises in the media

Disadvantages:

Loss of integrity

High financial cost

Socially Responsible Investing (SRI)

Profit driven investment

Companies must comply with ethical, social and environmental criteria

Two main types;

- Market Led Funds

- Deliberative Funds

Criticisms: Quality of information, dubious criteria, too inclusive, emphasize returns

Shareholding for sustainability

Indexes rating corporations according to their performance towards the broader goal of sustainability:

1. DJSI

2. FTSE4Good

3. Cleantech Indexes

“A step in linking investors’ interests in financial performance with the sustainability”

Shareholders and Globalization

Has exacerbated transparency and shareholder control.

Financial crisis of 2000s

The ethics of private equity and edge funds

turned shareholders into actors in national capital markets.

involved shareholders in global financial markets.

Globalization has

Private equity (PE) firmsHedge funds (EF)

Bibliogrpahy