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Overview
1
Finance
Finance is the study of how people and businesses
evaluate investments and raise capital to fund them.
Business
Forms
Sole Partnerships
Corporations Hybrids
Proprietorships
Business Organizational Forms
Founder-Owners
Family-Owned Firms
Corporations
SHAREHOLDERS Elect
BOARD
CORPORATION
Manages
MANAGEMENT
Corporations
Maximization of
Shareholder Wealth!
Value creation occurs when
we maximize the share price
for current shareholders.
Corporations
Corporations
Boeing
TO PURCHASE A
PRODUCTIVE ASSET WHICH 757 and
CREATES CASH FLOW IN 767 jets
(2) (1)
(3) (4b)
Key Terms
Agency relationship
Relationship which exists when one or more people
(principals) hire another person or people (agents) as
decision-making specialists to perform a service
Managerial opportunism
Seeking self-interest with guile (i.e., cunning or deceit)
An Agency Relationship
The Agency Problem
Key Terms
Agency costs
The sum of incentive costs, monitoring costs,
enforcement costs, and individual financial losses
incurred by principals, because governance mechanisms
cannot guarantee total compliance by the agent
Regulatory Oversight of Corporate
Governance
Key Terms
Ownership concentration
Governance mechanism defined by both the number of
large-block shareholders and the total percentage of shares
they own
Key Terms
Institutional owners
Financial institutions such as stock mutual funds and
pension funds that control large-block shareholder
positions
Influence of
Institutional Owners
Becoming more active in efforts to influence the
corporations strategic decisions
Initially focused on CEO performance and
accountability
Now targeting ineffective boards of directors and
executive compensation policies
Growing efforts to expand shareholders decision
rights
Board of Directors
Key Terms
Board of directors
Group of shareholder-elected individuals whose primary
responsibility is to act in the owners interests by
formally monitoring and controlling the corporations
top-level executives
Board of Director Responsibilities
Background diversity
Formal processes to evaluate board performance
Lead director role with strong agenda-setting and
oversight powers
Changes in compensation packages
Ownership stake requirements
Demand for greater accountability and improved
performance
Social networks with external stakeholders
Board Effectiveness
Key Terms
Executive compensation
Governance mechanism that seeks to align the interests
of top managers and owners through salaries, bonuses,
and long-term incentive compensation, such as restricted
stock awards and stock options
Executive Compensation Issues
High visibility and controversy
surrounding CEO pay
Downward pressure from shareholders
and activists
Relationship to performance
Long-term incentive plans
Effective governance mechanism for firms
implementing international strategies
Executive Compensation for
International Strategies
Key Terms
Market for corporate control
An external governance mechanism which is composed of
individuals and firms that buy ownership positions in or
take over potentially undervalued corporations so they
can form new divisions in established diversified
companies or merge two previously separate firms
Market for Corporate Control
65
Ethical Question