Introduction to Corporate Governance and ESG (2021 Level I CFA® Exam – Reading 31)

AnalystPrep・2 minutes read

The text discusses corporate finance, focusing on corporate governance and ESG, detailing the importance of funding sources, asset placement, operating cash flow, and the role of stakeholders in promoting transparency and managing conflicts through proper governance principles. It highlights the critical duties and responsibilities of the Board of Directors, including oversight, decision-making, strategy approval, and ensuring the company's and shareholders' best interests are prioritized.

Insights

  • Corporate governance in business involves internal controls, processes, and procedures to manage the company, outlining rights, roles, and responsibilities of all stakeholders, aiming to transparently promote stakeholder interests.
  • The Board of Directors plays a crucial role in corporate governance by overseeing, linking shareholders and managers, ensuring proper governance principles, acting with duty of care and loyalty, guiding strategy, reviewing performance, and hiring/firing senior executives, with committees overseeing specific governance aspects.

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Recent questions

  • What is corporate governance?

    The term corporate governance refers to the internal controls, processes, and procedures put in place to manage a company effectively. It outlines the rights, roles, and responsibilities of all individuals within the organization, with the primary goal of promoting stakeholder interests transparently. This includes shareholders, creditors, managers, employees, suppliers, and the board of directors. Conflicts can arise between these stakeholders due to differing goals, leading to issues addressed by agency theory.

  • What are the responsibilities of a Board of Directors?

    The Board of Directors plays a crucial role in overseeing a company's operations and ensuring proper corporate governance principles are followed. Their responsibilities include oversight, acting as a link between shareholders and managers, and ensuring that decisions are made in the best interests of the company and its shareholders. Board members must adhere to a duty of care and duty of loyalty, making informed decisions and avoiding conflicts of interest.

  • How do shareholders engage in corporate governance?

    Shareholders engage in corporate governance through various means such as attending annual meetings, participating in analyst calls, and proposing changes through proxy statements. They can also influence decision-making through voting on key issues and electing board members. Shareholders play a vital role in holding the company accountable and ensuring that their interests are represented in corporate governance practices.

  • What are the factors affecting corporate governance?

    Several factors can influence corporate governance practices, including market and non-market forces, the legal environment, media influence, and the management of stakeholders. These factors can impact how a company is governed, the level of transparency in decision-making, and the overall effectiveness of corporate governance structures. It is essential for companies to consider these factors when designing and implementing their governance frameworks.

  • How do companies raise funds for assets?

    Companies can raise funds for acquiring assets through various sources such as pooling funds, bank loans, issuing bonds, or offering shares. These funds are essential for purchasing machinery, land, or other resources needed to start and operate a business. The choice of funding source can impact the company's financial structure, risk profile, and future growth potential. It is crucial for companies to carefully consider their funding options to ensure long-term sustainability and success.

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Summary

00:00

"Corporate Governance and ESG in Finance"

  • Corporate finance reading on corporate governance and ESG with five readings under corporate finance.
  • Businesses start with individuals or groups having an idea and needing assets like machinery or land.
  • Funding sources for assets include pooling funds, bank loans, bonds, or issuing shares.
  • Assets are placed on the balance sheet, generating a product line for revenue.
  • Operating cash flow can be reinvested or paid out as dividends.
  • Corporate governance involves internal controls, processes, and procedures for managing a company.
  • Corporate governance outlines rights, roles, and responsibilities of all persons in the organization.
  • Goal of corporate governance is to promote stakeholder interests transparently.
  • Primary stakeholders include shareholders, creditors, managers, employees, suppliers, and the board of directors.
  • Conflicts can arise between stakeholders due to differing goals, leading to agency theory issues.

17:42

"Board of Directors' Key Functions and Responsibilities"

  • Board of Directors' functions and responsibilities include oversight, serving as a link between shareholders and managers, and ensuring proper corporate governance principles.
  • Board members must act with duty of care and duty of loyalty, requiring informed decisions and acting in the company's and shareholders' interests.
  • Example of duty of care illustrated through Tylenol's response to product recall in the late 70s, leading to improved safety measures.
  • Duty of loyalty necessitates avoiding conflicts of interest, such as in takeovers where board members' connections may pose conflicts.
  • Board's responsibilities encompass guiding, approving, delegating strategy, reviewing performance, and crucially, hiring and firing senior executives.
  • Committees like audit, governance, compensation, nomination, risk, and investment oversee specific aspects of corporate governance and decision-making.
  • Shareholders engage through annual meetings, analyst calls, and can propose changes through proxy statements, with examples like poison pills as anti-takeover defenses.
  • Factors affecting corporate governance include market and non-market factors, legal environment, media influence, and the importance of stakeholder management.
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