CHAPTER 4
FINANCIAL GOALS AND CORPORATE GOVERNANCE
1. Business Ownership. What are the predominant ownership forms in global business?
2. Business Control. How does ownership alter the control of a business organization? Is the control of
a private firm that different from a publicly traded company?
3. Separation of Ownership and Management. Why is this separation so critical to the understanding
of how businesses are structured and led?
4. Corporate Goals: Shareholder Wealth Maximization. Explain the assumptions and objectives of
the shareholder wealth maximization model.
5. Corporate Goals: Stakeholder Capitalism Maximization (SCM). Explain the assumptions and
objectives of the stakeholder capitalization model.
Continental European and Japanese markets are characterized by a philosophy that all of a
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to earn as much as possible in the long run, but to retain enough to increase the corporate wealth for
the benefit of all. This model has also been labeled the stakeholder capitalism model.
6. Management’s Time Horizon. Do shareholder wealth maximization and stakeholder capitalism have
the same time-horizon for the strategic, managerial, and financial objectives of the firm? How do they
differ?
7. Operational Goals. What should be the primary operational goal of an MNE?
Financial goals differ from strategic goals in that the former focus on money and wealth (such as the
present value of expected future cash flows). Strategic goals are more qualitative-operating
8. Financial Returns. How do shareholders in a publicly traded firm actually reap cash flow returns
from their ownership? Who has control over which of these returns?
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and then distributes those profits to ownership in the form of dividends. Capital gains, the change in
the share price as traded in the equity markets, is much more complex and reflects many forces that
are not in the direct control of management. Despite growing market share, profits, or any other
traditional measure of business success, the market may not reward these actions directly with share
price appreciation.
A privately held firm has a much simpler shareholder return objective function: maximize current and
sustainable income. The privately held firm does not have a share price (it does have a value, but this
is not a definitive market-determined value in the way in which we believe markets work). It
therefore simply focuses on generating current income, dividend income, to generate the returns to its
ownership. If the privately held ownership is a family, the family may also place a great emphasis on
the ability to sustain those earnings over time while maintaining a slower rate of growth that can be
managed by the family itself.
9. Dividend Returns. Are dividends really all that important to investors in publicly traded companies?
Aren’t capital gains really the point or objective of the investor?
10. Ownership Hybrids. What is a hybrid? How may it be managed differently?
11. Corporate Governance. Define corporate governance and the various stakeholders involved in
corporate governance. What is the difference between internal and external governance?
Corporate governance is the control of the firm. It is a broad operation concerned with choosing the
board of directors and with setting the long run objectives of the firm. This means managing the
12. Governance Regimes. What are the four major types of governance regimes and how do they differ?
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13. Governance Development Drivers. What are the primary drivers of corporate governance across the
globe? Is the relative weight or importance of some drivers increasing over others?
14. Good Governance Value. Does good governance have a “value” in the marketplace? Do investors
really reward good governance, or does good governance just attract a specific segment of investors?
15. Shareholder Dissatisfaction. What alternative actions can shareholders take if they are dissatisfied
with their company?
Disgruntled shareholders may do the following:
a. Remain quietly disgruntled. This puts no pressure on management to change its ways under both
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much more difficult, in part because nonshareholder stakeholder wishes are considered in any
board action. (One can argue as to whether the long-run interests of nonshareholding stakeholders
are served by near-term avoidance of unsettling actions.) Moreover, many firms have
disproportionate voting rights because of multiple classes of stock, thus allowing entrenched
management to remain.
16. Emerging Markets Corporate Governance Failures. It has been claimed that failures in corporate
governance have hampered the growth and profitability of some prominent firms located in emerging
markets. What are some typical causes of these failures in corporate governance?
17. Emerging Markets Corporate Governance Improvements. In recent years, emerging-market
MNEs have improved their corporate governance policies and become more shareholder-friendly.
What do you think is driving this phenomenon?