Outline the main stakeholder groups and the governance tools that serve them
The idea
Corporate governance is the arrangement of controls that decides whose interests prevail when they conflict. The central problem is the separation of ownership from control: managers run the firm day to day, shareholders own it, and their incentives diverge. Stakeholders extend beyond shareholders to creditors, employees, customers, suppliers and regulators, and the classic conflicts are shareholder against manager and shareholder against creditor — the latter because a strategy that raises equity value by taking risk can destroy value for lenders. Mechanisms include an independent board, audit committees, voting rights, disclosure and the market for corporate control.
A practice question
The central problem corporate governance addresses is the separation of:
- ownership from control — correct
- revenue from profitWhy not: An accounting distinction, and not a conflict between parties that governance exists to manage.
- debt from equityWhy not: A capital structure question. Governance concerns who decides and on whose behalf.
Managers decide and shareholders own, and the two groups do not automatically want the same things.
A harder one
A conflict between shareholders and creditors most commonly arises when the firm:
- repays its debt earlyWhy not: Early repayment returns lenders' money and may cost them future interest, which is a pricing matter rather than the classic conflict.
- takes on risk at the lenders' expense — correct
- issues new equity to investorsWhy not: New equity adds a cushion beneath the lenders, which improves their position rather than harming it.
Shareholders hold the upside and lenders a fixed claim, so extra risk is asymmetrically attractive to one of them.
The hardest tier
A board whose chair is also the chief executive is a governance concern mainly because:
- it breaches listing rules everywhereWhy not: Many jurisdictions permit it, and codes generally require explanation rather than prohibition.
- it slows decision-makingWhy not: Combining the roles tends to speed decisions, which is part of the argument made for it.
- the body meant to monitor management is led by management — correct
Independent oversight is hard to exercise when the person being overseen sets the agenda.
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