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march 23 class 20 Corporate Governance (1)

march 23 class 20 Corporate Governance (1) - Corporate...

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Corporate Governance
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Definition of Corporate Governance Corporate governance is the system by which business corporations are directed and controlled. The whole system of laws, rights, processes and controls established internally and externally over the management of a business entity providing a structure through which company objectives are set; the means of attaining those objectives; and the monitoring and reward of performance. What are a corporations objective?
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Agency Theory - Corporate Finance Agency Problem exists when an principal must hire an agent to act on the principal’s behalf (e.g., real estate agent) Problem arises because agent may not have same incentive or goals as the principal Corporate Finance argues that senior management should be the agent of shareholders. (Others argue for stakeholder focus.) Some mergers occur because management compensation may depend more on size than performance or management wants to protect their jobs (acquire of be acquired). Agency Theory underlies motivation for hostile takeovers
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Agency Theory – Solutions (Problems) Product Market Competition (Sunk Cost) Competition for Managers (Evaluating Performance) Managerial Ownership (Entrenchment) Performance Based Compensation (Who Decides) Board of Directors (Just New Level to Agency Problem) Active Large Investors (Information, Minority Shareholders) Hostile Takeover (Acquiring Firm Agency Problem) Debt (Bankruptcy and Internal Funding Needs) Gatekeepers: auditors, analyst, credit rating agencies (funded by mng) Legal System (Can protect management)
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