978-1305500891 Chapter 16 Lecture Note

Unlock access to all the studying documents.

View Full Document

CHAPTER 16

FINANCING AND GOVERNING THE CORPORATION

GLOBALLY

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

1. outline the two means of financing decisions, equity and debt.

2. differentiate various ownership patterns around the world.

3. articulate the role of managers in both principal–agent and principal–principal conflicts.

4. explain the role of the board of directors.

5. identify voice-based and exit-based governance mechanisms and their combination as a

package.

6. acquire a global perspective on how governance mechanisms vary around the world.

7. articulate how institutions and resources affect corporate finance and governance.

8. participate in two leading debates concerning corporate finance and governance.

9. draw implications for action.

GENERAL TEACHING SUGGESTIONS

Debate teams would be useful for some of the topics covered in this chapter. In particular,

debates could cover (1) the extent to which the CEO and the Chairman of the Board should be

separate and (2) the net value (positive or negative) of private equity takeovers.

OPENING CASE DISCUSSION GUIDE

High Drama at Hewlett-Packard (HP)

The CEO’s chair at HP has been a hot seat for several years. In 2005, the CEO (Carly Fiorina)

was fired after HP lost half of its value. In 2010, the CEO (Mark Hurd) quit suddenly after

allegations of sexual harassment were made against him. In 2011, the CEO (Léo Apotheker) was

fired after HP lost $30 billion in market capitalization. In 2011, another CEO (Meg Whitman)

was hired. In 2014, HP stock had recovered some of its value and plans were made to split HP

into two companies. In 2015, Whitman continued to serve as a leader at HP. Hopefully, HP will

continue to improve for employee and shareholders.

CHAPTER OUTLINE: KEY CONCEPTS AND TERMS

Sections I through IX of Chapter 16

I. FINANCING DECISIONS

1. Key Concept

Equity refers to the stock (usually expressed in shares) in a firm, and debt refers to the

loan that the firm needs to pay back at a given time with a prespecified interest. Tapping

into a larger pool of capital globally allows firms to lower their cost of capital.

2. Key Terms

Bond is a loan issued by the firm and held by creditors.

Bondholder is a buyer of bonds.

Corporate governance is the relationship among various participants in determining

the direction and performance of corporations.

Cost of capital is the rate of return that a firm needs to pay to capital providers.

Cross listing is listing shares on a foreign stock exchange.

Debt is a loan that the firm needs to pay back at a given time with interest.

Default is a firm’s failure to satisfy the terms of a loan obligation.

Equity is the stock in a firm (usually expressed in shares), which represents the

owners’ rights.

Financing is the management of a firm’s money, banking, investments, and credit.

Shareholder is a firm owner.

II. OWNERS

1. Key Concept

In the U.S. and UK, firms with separation of ownership and control dominate.

Elsewhere, firms with concentrated ownership and control in the hands of families or

governments are predominant.

2. Key Terms

Concentrated ownership and control is founders starting up firms and completely

owning and controlling them on an individual or family basis.

Diffused ownership is publicly traded corporations owned by numerous small

shareholders but none with a dominant level of control.

Separation of ownership and control is the dispersal of ownership among many

small shareholders, in which control is largely concentrated in the hands of salaried,

professional managers who own little (or no) equity.

III. MANAGERS

1. Key Concept

In firms with separation of ownership and control, the primary conflicts are

principal–agent conflicts. In firms with concentrated ownership, principal–principal

conflicts prevail.

Key Terms

Agency cost is the cost associated with principal–agent relationships.

Agency relationship is the relationship between principals (such as shareholders)

and agents (such as professional managers.

Agency theory is a theory that focuses on principal-agent relationships (or in short,

agency relationships)

Agent is an individual (such as a manager) to whom authority is delegated.

Chief executive officer (CEO) is the main executive manager in charge of the firm.

Expropriation is activities that enrich controlling shareholders at the expense of

minority shareholders.

Information asymmetry is asymmetric distribution and possession of information

between two sides.

Principal is an individual (such as an owner) delegating authority.

Principal–agent conflict is conflict between principals and agents.

Principal–principal conflict is conflict between two classes of principals:

controlling shareholders and minority shareholders.

Related transaction is controlling shareholders selling firm assets to another firm

they own at below-market prices or spinning off the most profitable part of a public

firm and merging it with another private firm they own.

Top management team (TMT) is the team consisting of the highest level of

executives of a firm led by the CEO.

Tunneling is a form of corporate theft that diverts resources from the firm for

personal or family use.

IV. BOARD OF DIRECTORS

1. Key Concept

The board of directors performs (1) control, (2) service, and (3) resource-acquisition

functions. Around the world, boards differ in composition and leadership structure.

2. Key Terms

CEO duality is the CEO doubling as a chairman of the board.

Inside director is a member of the board who is a top executive of the firm.

Outside (independent) director is a nonmanagement member of the board.

V. GOVERNANCE MECHANISMS AS A PACKAGE

1. Key Concept

Internal, voice-based mechanisms and external, exit-based mechanisms combine as a

package to determine corporate governance effectiveness. The market for corporate

control and the market for private equity are two primary means of external mechanisms.

2. Key Terms

Exit-based mechanism is a corporate governance mechanism that focuses on exit,

indicating that shareholders no longer have patience and are willing to “exit” by

selling their shares.

Leveraged buyout (LBO) is a means by which investors, often in partnership with

incumbent managers, issue bonds and use the cash raised to buy the firm’s stock.

Private equity is equity capital invested in private companies that, by definition, are

not publicly traded.

Shareholder capitalism is a view of capitalism that suggests that the most

fundamental purpose for firms to exist is to serve the economic interests of

shareholders (also known as capitalists).

Voice-based mechanism is a corporate governance mechanism that focuses on

shareholders’ willingness to work with managers, usually through the board, by

“voicing” their concerns.

VI. A GLOBAL PERSPECTIVE

1. Key Concept

Different combinations of internal and external governance mechanisms lead to four

main groups.

2. Key Terms

None

VII.INSTITUTIONS, RESOURCES AND CORPORATE FINANCE AND GOVERNANCE

1. Key Concept

Institution-based and resource-based views shed considerable light on finance and

governance issues.

2. Key Term

Managerial human capital is the skills and abilities acquired by top managers.

VIII. DEBATES AND EXTENSIONS

1. Key Concept

Leading debates consist of (1) opportunistic agents versus managerial stewards and (2)

global convergence versus divergence.

2. Key Terms

Stewardship theory is a “pro-management” theory that suggests that most managers

can be viewed as owners’ stewards interested in safeguarding shareholders’ interests.

IX. MANAGEMENT SAVVY

1. Key Concept

Understand the rules, anticipate changes, and be aware of differences. Develop

firm-specific capabilities to differentiate on corporate finance and governance

dimensions.

2. Key Terms

None