Transcript Chapter 11rev.ppt

Corporate Governance
Chapter Eleven
© 2006 by Nelson, a division of Thomson Canada Limited.
11-1
Agency Theory
An agency relationship exists when:
Shareholder
s
(Principals)
Firm Owners
Agency
Relationship
Hire
Managers
(Agents)
Decision
Makers
Risk Bearing Specialist
(Principal)
Managerial DecisionMaking Specialist
(Agent)
which creates
© 2006 by Nelson, a division of Thomson Canada Limited.
11-2
Governance Mechanisms
Ownership Concentration
-
Large block shareholders have a strong incentive to
monitor management closely.
In Canada such shareholders account for 65% to 70% of
publicly traded stocks (59% in the U.S.)
- Their large stakes make it worth their while to spend time,
effort & expense to monitor closely.
-
Institutional owners are financial institutions such as
stock mutual funds and pension funds that control largeblock shareholder positions.
© 2006 by Nelson, a division of Thomson Canada Limited.
11-3
Governance Mechanisms
Boards of Directors
-
-
Formally monitor & control the firm’s toplevel executives.
Set compensation of CEO & decide when to
replace the CEO.
May lack contact with day to day operations.
Insiders
A firm’s CEO & other top-level managers
Related
Outsiders
Individuals not involved with a firm’s day-today operations, but who have a relationship
with the company
Outsiders
Individuals independent of a firm’s day-today operations and other relationships
© 2006 by Nelson, a division of Thomson Canada Limited.
11-4
Executive Compensation
Executive compensation: A governance
mechanism aligning the interests of managers
& owners through salaries, bonuses and long
term incentives such as stock options.
Stock options: A mechanism which links the
executive’s performance to the performance of
the company.
© 2006 by Nelson, a division of Thomson Canada Limited.
11-5
Market for Corporate Control
An external governance mechanism that becomes
active when a firms internal controls fail which is
triggered by a firm’s poor performance, relative
to industry competition.
© 2006 by Nelson, a division of Thomson Canada Limited.
11-6