Corporate Finance Workbook

A Practical Approach

Michelle R. Clayman, Martin S. Fridson, George H. Troughton

• Publisher: Wiley
• Year: 2012
• Print ISBN: 9781118111970
• eBook ISBN: 9781118217283
• Edition: 2
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

The workbook to accompany Corporate Finance: A Practical Approach, Second Edition

PART I

LEARNING OUTCOMES, SUMMARY OVERVIEW, AND PROBLEMS

CHAPTER 1

CORPORATE GOVERNANCE

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

• Explain corporate governance, describe the objectives and core attributes of an effective corporate governance system, and evaluate whether a company’s corporate governance has those attributes.
• Compare major business forms and describe the conflicts of interest associated with each.
• Explain conflicts that arise in agency relationships, including manager-shareholder conflicts and director-shareholder conflicts.
• Describe responsibilities of the board of directors and explain qualifications and core competencies that an investment analyst should look for in the board of directors.
• Explain effective corporate governance practice as it relates to the board of directors, and evaluate the strengths and weaknesses of a company’s corporate governance practice.
• Describe elements of a company’s statement of corporate governance policies that investment analysts should assess.
• Explain the valuation implications of corporate governance.

SUMMARY OVERVIEW

• Corporate governance is the system of principles, policies, procedures, and clearly defined responsibilities and accountabilities, used by stakeholders to eliminate or minimize conflicts of interest.
• The objectives of a corporate governance system are (1) to eliminate or mitigate conflicts of interest among stakeholders, particularly between managers and shareholders, and (2) to ensure that the assets of the company are used efficiently and productively and in the best interests of the investors and other stakeholders.
• The failure of a company to establish an effective system of corporate governance represents a major operational risk to the company and its investors. To understand the risks inherent in an investment in a company, it is essential to understand the quality of the company’s corporate governance practices.
• The core attributes of an effective corporate governance system are:
  a. Delineation of the rights of shareholders and other core stakeholders

  b. Clearly defined manager and director governance responsibilities to the stakeholders

  c. Identifiable and measurable accountabilities for the performance of the responsibilities

  d. Fairness and equitable treatment in all dealings between managers, directors, and shareholders

  e. Complete transparency and accuracy in disclosures regarding operations, performance, risk, and financial position
• The specific sources of conflict in corporate agency relationships are
  a. Manager-shareholder conflicts—Managers may, for example:

  • Use funds to try to expand the size of a business even when this is not in the best interests of shareholders
  • Grant themselves numerous expensive perquisites that are treated as ordinary business expenses

  b. Director-Shareholder Conflicts—Directors may, for example, identify with the managers’ interests rather than those of the shareholders as a result of personal or business relationships with the manager.
• The responsibilities of board members, both individually and as a group, are to
  a. Establish corporate values and governance structures for the company to ensure that the business is conducted in an ethical, competent, fair, and professional manner

  b. Ensure that all legal and regulatory requirements are met and complied with fully and in a timely fashion

  c. Establish long-term strategic objectives for the company with a goal of ensuring that the best interests of shareholders come first and that the company’s obligations to others are met in a timely and complete manner

  d. Establish clear lines of responsibility and a strong system of accountability and performance measurement in all phases of a company’s operations

  e. Hire the chief executive officer, determine the compensation package, and periodically evaluate the officer’s performance

  f. Ensure that management has supplied the board with sufficient information for it to be fully informed and prepared to make the decisions that are its responsibility, and to be able to adequately monitor and oversee the company’s management

  g. Meet regularly to perform its duties and in extraordinary session as required by events

  h. Acquire adequate training so that members are able to adequately perform their duties
• An investor or investment analyst must assess
  a. Board composition and independence

  b. Whether the chairman of the board is independent

  c. The qualifications of the directors

  d. Whether the board is elected on an annual or staggered basis

  e. Board self-assessment practic...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Part I: Learning Outcomes, Summary Overview, and Problems
• Part II: Solutions
• About the CFA Program