Corporate Financial Strategy 4th edition Dr Ruth Bender. Chapter 6 Corporate governance and financial strategy. Corporate governance and financial strategy: contents. Learning objectives Illustrative stages in the ownership life cycle
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Corporate Financial Strategy4th edition Dr Ruth Bender Chapter 6Corporate governance and financial strategy
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
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.
Illustrative stages in the ownership life cycle Agency problems and accountabilities increase lower down the pyramid
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
High plc P2 Low plc Share price P1 P0 T1 Now Time EPS growth as a target in different growth scenarios eps growth of RPI+X% is a commonly used base measure eps growth does not necessarily lead to shareholder value!
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.
Control enhancement mechanisms (CEMs) CEMs which work by giving block-holders enhanced voting rights 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) • Shares with multiple voting rights • Non-voting shares • Pyramid structures Source: Report on the Proportionality Principle in the European Union Available via http://ec.europa.eu/internal_market/company/shareholders/indexb_en.htm
Controlling shareholder 51% Holding 2 51% Holding 1 51% Target Structures of control: the Pyramid Control is obtained through ownership of 13.3% of the shares
Controlling shareholder 90% Holding 15% 36% Target Structures of control: Indirect control Control is obtained through ownership of 47.4%of the shares
Case study 6.4: Hollinger control structure 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
Corporate governance mechanisms and the minority shareholder Reducingriskforminorityshareholders 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 • 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
Corporate governance mechanisms and the lender Reducingriskforlenders 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 • 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)