Corporate Finance I
Reading 31. Introduction to Corporate Governance and Other ESG Considerations
Learning Outcome Statements
i. describe factors relevant to the analysis of corporate governance and stakeholder management;
CFA Curriculum, 2020, Volume 4
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Subject 8. Analyst Considerations in Corporate Governance and Stakeholder Management
What is the company's ownership and voting structure among shareholders? Why do some shareholders own a small portion of a company's stock but get most of the voting power? Does the practice really insulate managers from Wall Street's short-term mindset? Dual-class structures create an inferior class of shareholders, and may allow management to make bad decisions with few consequences.
Board of Directors Representation
Analysts should assess whether the experience and skill sets of board members match the needs of the company. Are they truly independent? Are there inherent conflicts of interest?
Remuneration and Company Performance
What are the main drivers of the management team's remuneration and incentive structure? Does the remuneration plan reward long-term or short-term growth? Is it based on the performance of the company relative to its competitors or other peers? Equity-based remuneration plans can offer the greatest incentives. Are they linked to the long-term performance of the company? What is the impact on the income statement?
Investors in the Company
What is the composition of investors in a company? Are there any significant investors in the company? Any sizable affiliated stockholders that can block the votes of the majority? Any activist shareholders that could bring rapid changes for the company?
Strength of Shareholders' Rights
How robust are the shareholder rights at the company? How robust compared to those of peers?
Managing Long-Term Risks
How effectively is the company managing long-term risks, such as securing access to necessary resources, managing human capital, exhibiting integrity and leadership, and strengthening the long-term sustainability of the enterprise?