Exploring Factors Affecting Stakeholder Relationships and Corporate Governance | CFA Level I Corporate Issuers

Welcome back! Today, we’ll dive into the factors that affect stakeholder relationships and corporate governance. These factors can be divided into two categories: market factors and non-market factors.

Market Factors

Some of the key market factors that impact corporate governance include:

• Shareholder engagement: Companies that actively communicate with their shareholders often enjoy better relations. Engaged shareholders are more likely to support management’s proposals during challenging times.
• Shareholder activism: This involves shareholders trying to create change within the company. Tactics include proposing shareholder resolutions, rallying support, or pursuing legal actions such as shareholder derivative lawsuits.
• Competitive forces: Board members and managers may feel pressured to focus on shareholder wealth maximization. Underperformance could lead to being fired or voted out by shareholders, sometimes resulting in corporate takeovers.

Corporate Takeover Mechanisms

When it comes to corporate takeovers, there are various methods employed to gain control of a company. Let’s delve deeper into the three primary mechanisms:

• Proxy contest: Also known as a proxy fight, this strategy involves persuading shareholders to vote for a group seeking a controlling position on the company’s board of directors. The challenging group typically proposes an alternative slate of directors, promising improved performance and value for shareholders.
• Tender offer: In this approach, the group seeking control makes a public offer to purchase shares directly from the existing shareholders at a premium price. Shareholders then have the option to sell their shares to the bidder, and if enough shares are acquired, the bidder can gain control of the company.
• Hostile takeover: This occurs when the acquiring group attempts to gain control of the company without the consent of its management. It often starts with an unsolicited takeover bid, and if the management refuses the offer, the bidder can resort to other tactics like a proxy contest or a tender offer to acquire the company.

It’s worth noting that boards and management can adopt anti-takeover measures to protect the company from hostile bids. Some common defenses include:

• Staggered board: By staggering the terms of directors, only a portion of the board can be replaced each year, making it difficult for a hostile bidder to quickly gain control of the board.
• Shareholder rights plan (poison pill): This strategy involves granting existing shareholders the right to purchase additional shares at a discounted price, usually triggered when a hostile bidder acquires a certain percentage of the company’s shares. This dilutes the bidder’s ownership and makes the takeover more expensive.

However, these anti-takeover measures might not always sit well with shareholders, as they can limit shareholder rights and reduce the company’s attractiveness to potential bidders.

Non-Market Factors

Some non-market factors affecting stakeholder relationships and corporate governance include:

• Legal environment: Shareholders’ and creditors’ interests are better protected in common-law systems than in civil law systems.
• Role of the media: The media can shape public opinion and affect corporate governance. Advances in communication, especially through the internet and social media, have leveled the playing field for shareholders to voice their concerns and influence public opinion.
• Corporate governance industry: This industry advises companies on best practices and provides investors with ratings of companies’ corporate governance practices. The growth of this industry has helped promote better corporate governance.

And that wraps up this lesson on factors that affect stakeholder relationships and corporate governance. Next time, we’ll explore the risks and benefits of corporate governance. See you soon!