Stakeholder theory
ANSWER
considers conflicts among several groups that have an interest in the activities and perfor-
mance of the firm
Shareholder theory
ANSWER
primary focus of a system of corporate governance is the interests of the firm's sharehold-
ers, which are taken to be the maximisation of the market value of the firm's common equity
Shareholders
ANSWER
have residual interest in the corporation in that they have claim to the net assets of the cor-
poration after all liabilities have been settled. Also have voting rights for the election of the
board of directors and for other important corporate matters, which gives them effective
control of the firm and its management. They have an interest in the ongoing profitability
and growth of the firm, both of which can increase the value of their ownership shares
Board of directors
ANSWER
have a responsibility to protect the interests of shareholders; to hire fire and set the com-
pensation of the firm's senior managers; to set the strategic direction of the firm; and to
monitor financial performance and other aspects of the firm's ongoing activities
Employees
ANSWER
1
,also have an interest in the sustainability and success of the firm. They have an interest in
their rate of pay, opportunities for career advancement, training and working conditions
Senior managers
ANSWER
typically receive compensation that is made up of a salary, a bonus based on some measure
of company performance, and perquisites. Their interests can be expected to include contin-
ued employment and maximising the total value of their compensation. Executive bonuses
are typically tied to some measure of firm performance, giving senior managers a strong in-
terest in the financial success of the firm
Creditors
ANSWER
supply debt capital to the firm and are primarily owners of the firm's outstanding bonds and
banks that have made loans to the firm
Suppliers
ANSWER
have an interest preserving an ongoing relationship with the firm, in the profitability of their
trade with the firm, and in the growth and ongoing stability of the firm. As they are typically
short-term creditors of the firm, they also have an interest in the firm's solvency and ongo-
ing financial strength
Principal-agent conflict
ANSWER
agent is hired to act in the interest of the principal, but an agent's interests may not coincide
exactly with those of the principal
Stakeholder management
ANSWER
2
,management of company relations with stakeholders and is based on having a good under-
standing of stakeholder interests and maintaining effective communication with stakehold-
ers
Legal infrastructure
ANSWER
identifies the laws relevant to and the legal recourse of stakeholders when their rights are
violated
Contractual infrastructure
ANSWER
refers to the contracts between the company and its stakeholders that spell out the rights
and responsibilities of the company and the stakeholders
Organisational infrastructure
ANSWER
refers to a company's corporate governance procedures, including its internal systems and
practices that address how it manages its stakeholder relationships
Governmental infrastructure
ANSWER
comprises the regulations to which companies are subject
Annual general meeting
ANSWER
corporations holding AGM after the end of the firm's fiscal year
Proxy
ANSWER
3
, shareholder can assign their right to vote to another who will attend the meeting, often a
director, member of management, or the shareholder's investment advisor. A proxy may
specify the shareholder's vote on specific issues or leave the vote to the discretion of the
person to whom the proxy is assigned
Special resolutions
ANSWER
require a supermajority vote for passage, typically two thirds or three-fourths of the votes
cast
Extraordinary general meetings
ANSWER
can be called anytime there is a resolution about a matter that requires a vote of the share-
holders
Majority voting
ANSWER
candidate with the most votes for each single board position is elected
Cumulative voting
ANSWER
shareholders can cast all their votes (shares times number of board position elections) for a
single board candidate or divide them among board candidates
Two-tier board structure
ANSWER
supervisory board that typically excludes executive directors. The two boards operate inde-
pendently. Management board is typically led by the company's CEO
4
ANSWER
considers conflicts among several groups that have an interest in the activities and perfor-
mance of the firm
Shareholder theory
ANSWER
primary focus of a system of corporate governance is the interests of the firm's sharehold-
ers, which are taken to be the maximisation of the market value of the firm's common equity
Shareholders
ANSWER
have residual interest in the corporation in that they have claim to the net assets of the cor-
poration after all liabilities have been settled. Also have voting rights for the election of the
board of directors and for other important corporate matters, which gives them effective
control of the firm and its management. They have an interest in the ongoing profitability
and growth of the firm, both of which can increase the value of their ownership shares
Board of directors
ANSWER
have a responsibility to protect the interests of shareholders; to hire fire and set the com-
pensation of the firm's senior managers; to set the strategic direction of the firm; and to
monitor financial performance and other aspects of the firm's ongoing activities
Employees
ANSWER
1
,also have an interest in the sustainability and success of the firm. They have an interest in
their rate of pay, opportunities for career advancement, training and working conditions
Senior managers
ANSWER
typically receive compensation that is made up of a salary, a bonus based on some measure
of company performance, and perquisites. Their interests can be expected to include contin-
ued employment and maximising the total value of their compensation. Executive bonuses
are typically tied to some measure of firm performance, giving senior managers a strong in-
terest in the financial success of the firm
Creditors
ANSWER
supply debt capital to the firm and are primarily owners of the firm's outstanding bonds and
banks that have made loans to the firm
Suppliers
ANSWER
have an interest preserving an ongoing relationship with the firm, in the profitability of their
trade with the firm, and in the growth and ongoing stability of the firm. As they are typically
short-term creditors of the firm, they also have an interest in the firm's solvency and ongo-
ing financial strength
Principal-agent conflict
ANSWER
agent is hired to act in the interest of the principal, but an agent's interests may not coincide
exactly with those of the principal
Stakeholder management
ANSWER
2
,management of company relations with stakeholders and is based on having a good under-
standing of stakeholder interests and maintaining effective communication with stakehold-
ers
Legal infrastructure
ANSWER
identifies the laws relevant to and the legal recourse of stakeholders when their rights are
violated
Contractual infrastructure
ANSWER
refers to the contracts between the company and its stakeholders that spell out the rights
and responsibilities of the company and the stakeholders
Organisational infrastructure
ANSWER
refers to a company's corporate governance procedures, including its internal systems and
practices that address how it manages its stakeholder relationships
Governmental infrastructure
ANSWER
comprises the regulations to which companies are subject
Annual general meeting
ANSWER
corporations holding AGM after the end of the firm's fiscal year
Proxy
ANSWER
3
, shareholder can assign their right to vote to another who will attend the meeting, often a
director, member of management, or the shareholder's investment advisor. A proxy may
specify the shareholder's vote on specific issues or leave the vote to the discretion of the
person to whom the proxy is assigned
Special resolutions
ANSWER
require a supermajority vote for passage, typically two thirds or three-fourths of the votes
cast
Extraordinary general meetings
ANSWER
can be called anytime there is a resolution about a matter that requires a vote of the share-
holders
Majority voting
ANSWER
candidate with the most votes for each single board position is elected
Cumulative voting
ANSWER
shareholders can cast all their votes (shares times number of board position elections) for a
single board candidate or divide them among board candidates
Two-tier board structure
ANSWER
supervisory board that typically excludes executive directors. The two boards operate inde-
pendently. Management board is typically led by the company's CEO
4
