Who are shareholders?
The legal owners of business corporations, also called stockholders or investors.
What are the types of shareholders?
Individual shareholders and institutional investors
Examples of institutional investors include pension funds, mutual funds, insurance companies, and university endowments.
What is the primary objective of stock ownership?
To produce a greater return over the long run than other investments, such as bonds or cash.
How do shareholders make money?
- When the price of the stock rises (capital appreciation)
- When they receive their share of the company’s earnings (capital dividends)
What are the different objectives of shareholders?
- Long-term appreciation
- Short-term returns
- Capital gains
- Dividend income
- Social or ethical objectives
What are the major legal rights of shareholders?
- To receive dividends, if declared
- To vote on board members, major mergers, charter changes, and stockholder proposals
- To receive annual reports on the company’s financial condition
- To bring shareholder suits against the company and officers
- To sell their own shares of stock to others
What is corporate governance?
The system by which companies are directed and controlled.
What is the role of the board of directors?
To establish corporate objectives, develop policies, and select top-level personnel.
What is the typical size of a corporate board?
Typically between 9 and 11 members.
What is a one-tier system in corporate governance?
A governance structure with one board that includes both executive and non-executive directors, common in the US.
What is a two-tier system in corporate governance?
A governance structure with two separate boards: an executive board and a supervisory board, common in many EU countries.
What are key functions of the board of directors?
- Approving salaries and benefits of top managers (Compensation committee)
- Recommending candidates for officers and directors (Nominating committee)
- Reviewing financial reports and appointing auditors (Audit committee)
What are key features of effective boards?
- Select outside directors to fill most positions
- Hold open elections for board members
- Appoint an independent lead director
- Diversify board membership
What is the agency problem?
The conflict arising from the separation of ownership and control in modern corporations.
What is an agency relationship?
A contract where the principal delegates authority to an agent to fulfill a task.
What are safeguard mechanisms in agency relationships?
- Contracts
- Controls
- Incentives
- Guarantees
What is pay-for-performance in executive compensation?
A method where executives are compensated based on company performance, often through stock options.
What regulates financial disclosure and insider trading?
Government agencies such as the Securities and Exchange Commission (SEC) in the US.
What is shareholder activism?
The rise of institutional investors advocating for changes to promote their economic and social objectives.
What are the learning objectives in this management course?
- Identifying different kinds of shareholders and understanding their objectives and legal rights
- Knowing how corporations are governed and the role of the board of directors
- Analyzing executive compensation and its implications
- Evaluating ways stockholders can promote their objectives
What were the reasons for Parmalat’s collapse?
Failures in business strategy, corporate governance mechanisms, and the CEO’s inability to separate family and company interests.
True or False: Individual shareholders only seek long-term capital gains.
False.
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