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Chapter 6 Corporate governance and financial strategy Corporate Financial Strategy 4th edition
Dr Ruth Bender<br>
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Corporate governance and financial strategy: contents Learning objectives
Illustrative stages in the ownership life cycle
Changing role of corporate governance over the ownership life cycle
Indicative attributes of lack of independence in a director
Problems with performance measures in executive pay
EPS growth as a target in different growth scenarios
Control enhancement mechanisms (CEMs)
Control enhancement mechanisms (CEMs)
Structures of control: the Pyramid
Structures of control: Indirect control
Case study 6.3: Hollinger control structure
Corporate governance mechanisms and the minority shareholder
Corporate governance mechanisms and the lender
Corporate responsibility and the drivers of value 2<br>
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Learning objectives Apply a model to determine which aspects of corporate governance are most relevant at different stages of a company’s life cycle.
Recognize the limitations of different types of executive remuneration plan, and evaluate how their performance measures link to the creation of value.
Understand and explain how differences in corporate governance regimes can affect the financing strategies of companies in those jurisdictions.
Contrast the different mechanisms by which block-holders can control a company, and explain the impact, positive and negative, that this can have.
Explain why stakeholders merit consideration in a discussion of financial strategy. 3<br>
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Illustrative stages in the ownership life cycle 4 Agency problems and accountabilities increase lower down the pyramid<br>
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Changing role of corporate governance over the ownership lifecycle 5<br>
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Indicative attributes of lack of independence in a director Has been an employee or executive of the company or a related company in the past X years.
Is a close family member of a director of the company or a related company.
Has had a significant business relationship with the company in the past Y years.
Is a professional adviser to the company, or has some other business relationship.
Represents a block shareholder or a major lender to the company, or has significant business transactions with same.
Holds cross-directorships with other members of the company’s board.
Participates in the company’s pension scheme or share option scheme.
Has served on the board continuously for more than Z years 6<br>
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Problems with performance measures in executive pay 7<br>
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EPS growth as a target in different growth scenarios 8 eps growth of RPI+X% is a commonly used base measure
eps growth does not necessarily lead to shareholder value!<br>
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Control enhancement mechanisms (CEMs) CEMs which work by giving block-holders enhanced voting rights
Shares with multiple voting rights
Non-voting shares
Pyramid structures
CEMS which lock in control
Priority shares with veto rights over certain decisions
Voting rights ceilings (which limit voting power regardless of how many shares are owned)
Ownership ceilings (which prevent transfer of shares to owners if they would take the holding above a certain percentage)
Golden shares (often used by governments in sensitive privatized companies)
Source: Report on the Proportionality Principle in the European Union Available via
http://ec.europa.eu/internal_market/company/shareholders/indexb_en.htm
At the time of writing, the EU is considering giving additional voting rights and dividends to investors holding shares for a period of years, with the aim of encouraging long-term investment. 9<br>
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Control enhancement mechanisms (CEMs) CEMs which work by giving block-holders enhanced voting rights Shares with multiple voting rights
Non-voting shares
Pyramid structures CEMS which lock in control Priority shares with veto rights over certain decisions
Voting rights ceilings (which limit voting power regardless of how many shares are owned)
Ownership ceilings (which prevent transfer of shares to owners if they would take the holding above a certain percentage)
Golden shares (often used by Governments in sensitive privatized companies) 10 Source: Report on the Proportionality Principle in the European Union Available via
http://ec.europa.eu/internal_market/company/shareholders/indexb_en.htm<br>
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Structures of control: the Pyramid 11 Control is obtained through ownership of 13.3% of the shares<br>
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Structures of control: Indirect control 12 Control is obtained through ownership of 47.4% of the shares<br>
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Case study 6.4: Hollinger control structure 13 Black and Radler together control 79.2% of Ravelston, which in turn owned 78.2% of HLG, so their combined indirect ownership interest in HLG was approximately 62%. In turn, HLG owned a 30.3% interest in Hollinger. Through HLG, Black and Radler’s indirect ownership interest in Hollinger was approximately 19%. Thus, every $100 transferred out of Hollinger and into HLG ‘cost’ Black and Radler $19 but gave them $62, thereby tripling their funds at the direct expense of the Hollinger common stockholders other than HLG. Extract and diagram are from page 8 of the Report of the Special Committee of Hollinger
http://www.sec.gov/Archives/edgar/data/868512/000095012304010413/y01437exv99w2.htm<br>
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Corporate governance mechanisms and the minority shareholder Reducing risk for minority shareholders Ability to vote on all resolutions, including voting directors onto or off the board
Ease of voting
Legal mechanisms for minority shareholders to take action against oppression by the majority or against expropriations by management
Laws or codes protecting the minority during a takeover
Laws protecting against insider trading
Requirement for independent non-executive directors on the board
Requirement for high levels of relevant financial and non-financial disclosures, for example details of transactions with related parties Increasing risk for minority shareholders Control enhancement mechanisms (CEMs) such as certain shares carrying multiple votes, or no votes, or ceilings on voting rights, or vetoes in certain situations 14<br>
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Corporate governance mechanisms and the lender Reducing risk for lenders Ease of ability of a lender to enforce their security to repossess assets if loan terms are breached
Strong legal protection over property rights, including intellectual property rights (so that the company’s assets cannot be expropriated) Increasing risk for lenders Bankruptcy laws that leave the existing executives in control of the company rather than letting creditors put in their own management
Bankruptcy laws that enable management to protect the company against creditor claims
Priority of social or government claims over the rights of secured lenders 15<br>
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Corporate responsibility and the drivers of value 16<br>
