1. CORPORATE GOVERNANCE
• Corporate governance is defined as the set of
rules and procedures that ensure that
managers do indeed employ the principles of
value-based management.
• Corporate governance involves the manner in
which shareholders’ objectives are
implemented
• It is reflected in a company’s policies and
actions

2. • TWO models of Corporate Governance:
– Shareholder model
– Stockholder model
• In its narrowest sense (shareholder model),
corporate governance often describes the
formal system of accountability of senior
management to shareholders.
• In its widest sense (stakeholder model),
corporate governance can be used to describe
the network of formal and informal relations
involving the corporation.

3. • According to the shareholder model the
objective of the firm is to maximize
shareholder wealth through allocative,
productive and dynamic efficiency i.e. the
objective of the firm is to maximize profits.
• The criteria by which performance is judged in
this model can simply be taken as the market
value (i.e. shareholder value) of the firm.

4. • The stakeholder model takes a broader view
of the firm.
• According to the traditional stakeholder
model, the corporation is responsible to a
wider constituency of stakeholders other than
shareholders.
• According to this model performance is
judged by a wider constituency interested in
employment, market share, and growth in
trading relations with suppliers and
purchasers, as well as financial performance.

5. • TWO primary mechanisms used in corporate
governance:
– Sticks : threat of removal of a poorly performing
management
– Carrots : type of plan used to compensate
executives and managers
• Corporate governance is closely connected
with shareholders’ welfare maximization

6. • Poorly performing managers can be removed
either by a takeover or by the company’s own
BOD
• Provisions in the corporate charter affect the
difficulty of a successful takeover
• The composition of BOD affects the likelihood
of a manager being removed by the board

7. MANAGERIAL ENTRENCHMENT
• Managerial entrenchment is most likely when
a company has a weak BOD coupled with
strong anti-takeover provisions in its corporate
charter
• In cases of managerial entrenchment, the
likelihood that badly performing senior
managers will be fired is low

8. NONPECUNIARY BENEFITS
• Nonpecuniary benefits are noncash perks
such as lavish offices, memberships at country
clubs, etc.
• Some of these expenditures may be cost
effective, but others are wasteful and simply
reduce profits.
• Such fat is almost always cut after a hostile
takeover.

9. • Targeted share repurchases, also known as
greenmail, occur when a company buys back
stock from a potential acquirer at a higher-
than-fair-market price.
• In return, the potential raider agrees not to
attempt to take over the company.
• Shareholder rights provisions, also known as
poison pills, allow existing shareholders to
purchase additional shares of a stock at a
lower than market value if a potential acquirer
purchases a controlling stake in the company.

10. • Restricted voting rights provision
automatically deprives a shareholder of voting
rights if the shareholder owns more than a
specified amount of stock.
• Interlocking BOD occur when the CEO of
Company A sits on the board of Company B,
and B’s CEO sits on A’s board.

11. • Stock option provides for the purchase of a
share of stock at a fixed price, called the
exercise price, no matter what the actual
price of the stock is.
• Stock options have an expiration date, after
which they cannot be exercised.
• An Employee Stock Ownership Plan (ESOP), is
a plan that facilitates employees’ ownership of
stock in the company for which they work.

12. Corporate Governance for Corporate
Performance and Growth
• It is useful to have a framework with which to
understand how corporate governance can affect
firm behavior and economic performance.
• An effective corporate governance framework
can minimize the agency costs and hold-up
problems associated with the separation of
ownership and control.
• There are a number of potential channels of
influence through which governance can affect
performance.

13. • The principle-agent model suggests that
managers are less likely to engage in strictly
profit maximizing behavior in the absence of
strict monitoring by shareholders.
• Therefore, if owner-controlled firms are more
profitable than manager-controlled firms, it
would seem that insider systems have an
advantage in that they provide better
monitoring which leads to better
performance.

14. • large shareholders are active monitors in
companies, and that direct shareholder
monitoring helps boost the overall profitability
of firms.
• This result is also borne out by studies of
managerial turnover.
• However, there are many cases where
manager-controlled firms significantly
outperform owner-controlled firms in terms of
profitability, but that owner-controlled firms
had higher growth rates.

15. • We must also keep in mind that corporate governance
structures are not static but dynamic in nature.
• Different owners will have different objectives, and it is
highly likely that the identity of owners will matter for
firm performance.
• For example, managers of corporations under
governmental or quasi-governmental control are likely
to have different incentives and will, therefore, behave
differently to managers of corporations in the private
sector.
• For this reason, ownership concentration and the
identity of owners should be viewed as variables that
exert a simultaneous, but different, influence on firm
performance.

16. • The finding that owner-controlled firms are more
profitable than manager-controlled firms is also
consistent with the life-cycle model of the firm.
• As firms grow and mature, this provides greater
incentives for the increasingly unmonitored
management to expropriate rents. The dilution
and dispersion of equity stakes in this case,
implies that as firms mature effective corporate
governance mechanisms become increasingly
important in assuring firm performance.
• Managerial incentives, market control and other
such factors of corporate governance also
influences a firm’s performance and growth.