CORPORATE GOVERNANCE

Corporate Governance: it means studying how and who is exercising the power in a corporate, in a firm. The
focus is on who are the owners and who are the Chief (CEO) to which generally is delegate the power. It is
different in a small firm (pizzeria) in which the owner run it and in a big company (Morgan Stanley) in
which the power is in the hand of someone else.
A company also needs a control body, in which controllers look at the operate of who has the power.

The differences in CG systems are mainly due to the dissimilar institutional and cultural contexts. The
efficiency of CG mechanism in solving corporate agency problems and conflicts of interests depends mostly
on the type of CG system adopted.

Corporate Governance is different all over the world, every Country has its own.
There are some differences because of
- different legal systems followed (common law that has some rules whose interpretation is focused on
substance and then the form and civil law focused on the respect of the law itself and not on the
interpretation);
- culture differences;
- differences in financial markets (when the family business is predominant the financial market are not so
important- the more are the public companies the more important is the financial market);
- the main one is the ownership structure

OWNERSHIP STRUCTURE:
The ownership structure of a firm is the distribution of ownership rights among the various stakeholders.
There are two ownership rights, the right to control the firm that involves decision making on key issued like
the nomination of board members, the approval of M&A and spin-off (control or voting rights) and the right
to receive the net income or to cover the net loss (residual income or cash flow rights). These two rights
must go to the same person, because generally the residual income must go to those who make decisions
about its amount. They can be possessed by any category of stakeholder. The assignment of ownership rights
to a category of stakeholders, does not exclude the others from the governance and the participation in the
residual income.

SIZE OF THE COMPANY AND DISPERSION OF SHAREHOLDING STRUCTURE

The size and the concentration of a company are two variables that are negative correlated: the larger is the
company, the lower is the concentration of the ownership.

- FAMILY FIRMS: family firms includes both companies in which control is in the hand of one
entrepreneur and those in which control is shared by several members or branches of the same family.
These companies are owned by one or few family members but sometimes they may also include other
shareholders such as private equity funds to finance their investments or small shareholders. They are
typically small and medium enterprise located in fragmentated industries where the size is not a key
driver in building a competitive advantage. They have, by definition, a limited competitive scope. Those
operating in medium or large industries pursue a focus strategy which leads them to serve very specific
customer needs or niches. Those operating in fragmentated or small industries may serve a larger number
of market segments.
They are characterized by a closed and concentrated ownership structure, they typically do not access the
capital market and are run by one or few entrepreneurs linked by family ties. They have, generally, an
overlap between ownership and control, so that the people who own the equity is the same involved in
the day-to day business management.
The governance structure is usually simple and the board of directors is made by a limited number of
people and they are generally the company’s shareholders. Governance bodies plays a formal role, so
that the board exist just on a paper, the so-called paper board, as there are no formal meeting or
decision-making processes.
As a response to the more complex managerial challenges, family companies may nominate non-family
directors or managers to run the business. The board reinforces family control on managers operations,
legitimize the firm’s corporate governance and brings external advice and experience to insiders.
 These companies put a strong emphasis on emotions that affects decision-making process that tends to
non-economic objective. The socio-emotional wealth (SEW) is the utility that family shareholders
receive from non-economic elements of the business. Less inclined to pursue diversification,
internationalization, acquisition and so on.

- PUBLIC COMPANY->whose main shareholders are institutional investors such as an investment fund
who raise money from people and invest them in commodities, shares, bunds to give people profits
(blackrock the main shareholder of the big companies of all the world) and pensions fund typical of
those country that have not a public pension system. This type if company is present in large competitive
industries where it is important to increase the size to benefit the economies of scale and scope. It is
generally the structure of listed companies located in countries, as US and UK, characterized by high
investors protection and efficient capital market. The degree of dispersion of the ownership structure of
these companies increases with its size. Large Anglo-American public companies have its capital
dispersed between millions of small investors that buy and sell their shares on the basis of future
expectations. These shareholders have no direct influence on the management of the company, which is
run by professional managers.
The dispersion of the capital in the hand of more shareholders lead to managerial opportunism
because the investors are not interested in exercising control over the operate of the management
taking in consideration their low shares and managers who do not receive residual income are
tempted to maximize their own interests.

- SOE- State Owned Enterprise are companies owned by the State and that are characterized by the
opportunity for the producer to reduce costs by lowering the quality of the goods in a way that is difficult
for consumers to perceive; limited possibility of innovation; low level of market competition and little
ability of the consumer to choose the best goods; low reputation as a tool to solve the above listed
problems. In all these situations the free competition between the private companies do not produce a
satisfactory result so that it is necessary the intervention of the State to improve the overall efficiency of
the business. (public utilities, defense, infrastructure and transport). These companies are relevant in
emerging economies and may be both private or public (part of the shares are in the hand of private
shareholders but the majority remains in the hand of the state). The importance of these companies
within the system depends on the power and the control they can exercise. SOE are generally medium-
large size because they operate both in the capital-intensive industries or in natural monopolies. The
ownership structure is generally concentrated because the State wants to maintain strict control over its
businesses. The State’s will is exercised by political parties who nominate and influence top managers,
so that the control rights is exercised by people who have no cash-flow rights, this leaves managers to
pursue their political objectives. large separation between ownership and control, since control rights are
exercised by members of political parties, while the cash flow rights belong to national community and
are channeled into the public budget. Partially protected from market competition since the State could
support their inefficiencies. Governments may sacrifice business profitability for political purpose,
offering goods and services to lower prices.
They underperform private companies, but good governance practices may contribute to attenuating this
gap.

COMMON LAW VS CIVIL LAW

COMMON LAW: no codified and general rules, solution case by case. Accounting regulations is in the
hands of private agencies.(England, US, Australia, Canada, Ireland, New Zeland, Singapore)
shareholders – outsider system: companies rely on equity provided by millions of private shareholders

CIVIL LAW: codified rules, applicable to several cases. Accounting regulations is in the hands of
government.(Scotland, France, Italy, Belgium. Netherlands, Portugal, Spain, Japan)
Bank oriented– insider system: companies rely on debt provided mainly by banks or the state
SHAREHOLDER VS STAKEHOLDER
A shareholder is a person who owns a stake in the company and, therefore, holds an ownership stake in the
company. On the other hand, a stakeholder is a party interested in the performance of the company for
reasons other than capital appreciation. In general, a shareholder is a stakeholder and not the contrary (a
stakeholder not always is a shareholder)

- SHAREHOLDER ->A shareholder is any party, natural person, company or institution, which owns at
least a share of a company and, therefore, has a financial interest in its profitability. Shareholders can be
individual investors or large companies hoping to cast a vote in the management of a company. If the
company's share price increases, the shareholder value increases, while if the company behaves badly
and the share price decreases, the shareholder value decreases. Shareholders would prefer that the
company's management take actions that increase the share price and dividends and improve their
financial position. The main purpose of the firm is to create value for only one category of people, the
shareholders
- STAKEHOLDER -> A stakeholder is a party interested in the success or failure of the company. A
stakeholder can influence or be influenced by the company's policies and objectives. Stakeholders can be
internal or external. Internal stakeholders have a direct relationship with the company through
employment, ownership or investments. Examples of internal stakeholders include employees,
shareholders and managers. On the other hand, external stakeholders are subjects who do not have a
direct relationship with the company but can be influenced by the actions of that company. Examples of
external stakeholders include suppliers, creditors, and community and public groups. the purpose of the
firm is not only to create value for the shareholders but for all the people with whom the firm has
contacts.

As a consequence of different view (stake-shareholder) we can find different model of CG in the world.

COMPARATIVE CORPORATE GOVERNANCE

In the last decade, the characteristics of the different forms of “Capitalism”, also called “Systems of
Corporate governance”, typical of the main industrialized countries have been described in many articles and
books. Although it is not possible to find two countries that have the same CG model, comparatives studies
have identified three majors models within the industrialized countries:

- 1) ANGLO-AMERICAN GOVERNANCE MODEL common in US and UK

The anglo-american model is also called market-oriented or outsider system because of the strong influence
of the financial markets, mostly the stock exchange, as mechanism of control and incentivize top managers
to pursue shareholders value creation. The typical enterprise operating in these system is the widely held
public company.The ownership structure has been characterized by a high level of dispersion of shares
among a large number of investors, ownership is divided among a large number of shareholders, managers
have control of the firms and the market for corporate control reallocates the control of firms badly managed
through hostile take-overs. The transfer of residual control rights from shareholders to managers lead to
managerial opportunism because the investors are not interested in exercising control over the operate of the
management because of their low shares and managers who do not receive residual income are tempted to
maximize their own interests. Private shareholders prefer not to have a high volume of shares, in order to
invest in more companies and diversify their portfolio. The largest shareholders of these companies are
institutional that holds a significant level of shares therefore they have the power to control or influence top
managers decisions.

The absence of a controlling shareholders makes that no individual shareholder can have a significant impact
on corporate governance. Companies go public in order to raise share capital and issue bonds in order to
finance business growth over long-term horizon. In these countries debt and equity capital markets play an
important role in transforming investors’ savings into financial resources available to companies. High level
of liquidity of the market is reflected in the high level of free float and short-term orientation of investors.
The market is efficient because of the behavior of market operators is regulated and monitored by a
supervisory body (SEC). Moreover the legal system assigns a high level of protection to investors that allows
controlling them to sell their shares on the markets and thus favor the emergence of widely held companies.

The owners are represented in a body that is the general shareholder meetings has the power to nominate the
board of directors that have all the power. The board of directors must nominate some people and delegate
them the day-by-day management, normally there is one Chairman and one CEO, the biggest power lies in
CEO (the power is of the board of directors, but they delegate to the CEO, generally in the US the Chair and
the CEO is the same person). It is clear who have the power, the CEO, who have to pursue the value creation
for shareholders. The control comes from the market that judge the operate of CEO. (In UK there is a similar
situation but it is mandatory that the CEO and the Chair are different person to limit the CEO power).

Outsider system

Dispersed ownership
Separation between those who own the company and those who manage it o Liquid market
High relevance of market for corporate control
Information: necessary condition to make the market function properly

the main corporate governance problem relies on the conflict of interests between managers and
shareholders, which is solved, through mechanisms such as the managerial compensation system, the market
for managers and the market for corporate control.

RESOLUTION OF CORPORATE CRISIS: in this model the main mechanism for replacing poor managers
are board of directors and market for corporate control. The board is the first mechanism because it is
responsible for nominating, controlling and firing top managers. While the market for corporate control is the
second solution, in case the board is too friendly with the managers, the market can act through hostile
takeovers, mergers and proxy fights.

2) RHINELAND OR GERMAN MODEL which characterized Germany and Japan

The Rhineland model is called network-oriented or insider system because of its strong emphasis on the
relationships between industrial and financial companies and the presence of a coalition of controlling
shareholders. The typical enterprise operating in these systems is the industrial and financial business group.
Regarding the degree of ownership concentration, these companies present the average percentage of voting
rights held by the largest shareholders. The top sharheodlers have, usually, a majority shareholding while the
second and third shareholders have a smaller percentage of voting rights. The largest shareholders are
industrial companies, while the weights of individuals/families and institutional investors are pretty lower. In
general, relations between companies operating in the same industry are more cooperative than in the ango-
american model. The board of directors in Germany is composed by two separate and hierarchical
subordinate bodies (two-tier board). The supervisory board responsible for appointing, monitoring,
dismissing and determining the remuneration of the member of the management board and the management
board entrusted to run the company with the support of the former for difficult decisions. Employees have
the right to elect a representative on the supervisory board, which give them some substantial power of
influence the decision-making process. The board of directors in Japan is, on average, larger than the
European one. It consists of managers with few outside directors which includes representatives of the main
banks and other group companies. Even if there is no applicable law to allow the participation of the
employees within the board, the country culture encourage top managers to reconcile the interests of all the
stakeholders. The role of the financial markets is not developed as in the Anglo-American model, indeed the
finance of the business, generally comes from corporate self-financing as to say cash-flow generated and
reinvested in the busieness. The control of these companies is in the hand of few shareholder, mostly
financial intermediaries or other group companies through a dense network of cross-shareholdings. The
lower legal protection of investors discourages them from selling their shares on the market favoring
ownership concentration.Low level of investors protection is related with the absence of a dynamic and large
stock market and the presence of one or more controlling shareholders. banks and in general financial
institutions finance a large part of the firms’ investments (through both debt and equity) and for this reason
they play a large role, directly or through the election of managers, in the management of the firms.

The owners are represented by the general shareholder meeting that nominates a body called supervisory
board in which there are representors of shareholder, employees and banks, it nominates a management
board with the ceo and some executives. The supervisory board have the power to control the management
board and can change any members of that whenever they want. The financial statement is approved by the
supervisory board. In France they can choose between the previous systems. Holland is particular because
they follow the german model but at the same time the shareholder view. Italy can choose between America,
German or Italian tradional system:

- General shareholders meeting that nominate the board of directors

- Board of directors
- Collegio sindacale (board of statutory auditors) whose aim is to control the board of directors

The board of directors gives information to collegio sindacale but this one can ask for information whenever
it wants, so it has a very strong power.

Insider system

Concentrated ownership
• Control exercised by the majority shareholders
• Low relevance of market for corporate control - illiquid market
• High relevance of banks or State
• Presence of important informal relationships among the different stakeholders • Low information
transparency

the main corporate governance problem relies on the misalignment of interest between the large shareholders
and those who have interests in the company because of the resources invested in it.

minority shareholders cannot exercise their interests easily, neither control the management.

RESOLUTION OF CORPORATE CRISIS: because of the absence of the market for corporate control, the
more common way to gain corporate control is the acquisition of minority shareholdings and trying to built a
dominant coalition with others shareholders. Large banks play an active role both purchasing shares and
providing financial advisory service to acquiring companies. they are linked by long term market relations
with industrial companies to which they provide financial resources in the form of debt and equity. They are
highly involved in the companies crisis, so that they can facilitate the resolution by replacing top managers
and preparing a recovery plan.
3) LATIN MODEL typical of countries like France, Italy and Spain

This model is characterized by the presence of a controlling shareholder, strong links among companies,
weak role of the financial market. It may be considered a variant of the network-oriented model. The typical
enterprise is the industrial business group.

The ownership is highly concentrated in the hand of few top shareholders, the controlling ones, that are
generally wealthy families who control the firm through holding companies. The control is achieved through
the Control Enhancing Mechansims that are mechanism such as the multiple voting shares, shares with
limited or no voting rights, pyramidal groups which are aimed at amplifying the shareholders’ influence over
corporate assets. The State holds controlling shareholdings in some large groups that operates in strategic
segments.The presence of a controlling shareholder has prevented the separation between ownership and
control, the boar represents the controlling sharheolders and tends to pursue their interests to the detrminet of
minority shareholders. The typical model is the one-tier board *(typical of common law). At the top of the
group there is the holding company controlled by a family or the state, at the intermediate level there are
financial companies (sub-holdings) and at the lower level the operating one. As in the german and Japan
model, the largest Business groups are connected by mutual agreements and shareholdings which has the
dual effect of consolidating the control at the top of the group and of making the residual income partially
independent.

*The one tier board is a model in which the board of directors functions as a collectively appointed corporate
body (please see the term “ board of directors” for the overall characteristics). There are executive and non-
executive directors who are elected to work together for long-term sustainable value of the company. In other
words, the one tier board includes top management team (e.g., Chief Executive Officer, Chief Financial
Officer) whose role is to manage the company on a daily basis and non-executive directors who are supposed
to fulfill the oversight and monitoring functions.

RESOLUTION OF CORPORATE CRISIS: the high ownership concentration has the effect of keeping the
power in the hands of a coalition of controlling sharheolders. In this case is necessary the intervention of the
State or some banks and industrial groups coordinated by investment banks.

ITALY

The Italian case differs from both: in fact in Italy there is no market for corporate control developed in the
way it is in Anglo-Saxon countries and, due to the previous Banking Law, banks do not own large
shareholdings in industrial companies. A description of the shareholding structure and the company structure
of large firms in Italy now follows with the purpose of pointing out the main peculiarities of the Italian
system of Corporate governance.

In short, large Italian firms are characterised by a greater concentration of shares in the hands of the main
shareholder and, moreover, this shareholder is, in the majority of the cases, a coalition of people belonging to
the same family.

UNITED STATES
Is the country in which the shareholder view has been stronger, invented in US, all the professionals in US
were convinced that the shareholder value creation is the main aim of a company. Apparently it has changed
because most of companies are still following this as the primary aim.
In US there are a very strong body of law. There are big corporate and a large percent of SME, in the big
there are institutional investors as shareholder (public company), the SME are family business similar to the
Italian one.
In the US there are a mix of structure you can find all over the world. Economy is strongly imported-
oriented. In other countries when you want to list a company you have to follow some American rules for its
strong in market.
 GERMANY
Typical model of stakeholder view country, the main characteristic of German system is the strong role of
employees indeed in the board it is mandatory to insert a member of the employees. They care of
shareholders but also of the employees and a strong role played by the banks. It comes out form the 2 W.W.
and so the issue was to rebuild the country, in order to do that a political agreement was found between
entrepreneur, banks and .. to make a stronger country so everyone was involved in this challenge. In it
predominates civil law systems with a strong role of families strongly helped by the banks. In the last 20
years this model the listed firms have to search for funds and institutional investors that are mainly in the US,
recently German firms have to adopt a mix of the two models only for listed companies.

JAPAN
Dominated by stakeholder view-> keiretsu it is like a network in which every stakeholder is involved in.
predominate the civil law system, block holders like Germany with a weak role of the financial market. In
japan listed companies have to raise money from US but unlike Germany is very hard to convince the
company to become closer to the American investors. They quite never disclose information about the
company.

RUSSIA
Stakeholder but there are few people with power and a weak role of the financial market. Many have block
holders, culture of little disclosure. The strong role of SOE is similar to the role of the State in China, that
reduce the size and the power of private companies.

FRANCE
Stakeholder view with a big role of families. The typical characteristic is that the state is a strong role as
banks. There is a strong role of employees that are not in the board but through associations.

UK
Shareholder view country, it is similar to the US because of the role of institutional investors and it is
different from US because there are few SME and few family firms. The common law with an extreme
model of public company.

As a consequence of different view (stake-shareholder)we can find different model of CG in the world.

CHAPTER 1: CORPORATE GOVERNANCE

At the beginning of 19th century, entepreneurs conduct their businesses through various legal form, none of
which allowed the guarantee of limited liability for the company’s debt, that limited the possibility for
investors to buy shares. During this period the role of shareholder and manager came together in the figure of
managing partner or the entrepreneur.

- Mid-19th century the legal system admits to create companies with legal rights and responsibilities with their
own personality, separated from that of the sharholders.
Limited liability assignet to sharheolders some rights that includes the limited liability in the amount of their
invested capital, the right to vote and to receive a share of the net profit.
- At the beginning of the 20th century some companies go public listing their shares on the capital market, so
the ownership become widely held generating a breakdown between ownership and control( agency
problem). This lead to the debate on the aim of the company, some followed the idea that a company should
produce profits for their shareholders (shareholder primacy- Berle and Dodd) and others argued that they are
economic institutions with both social and economic purposes.
- In 1960 The separation between ownership and control that characterize large Ango-American public
companies, gives rise to the managerial theory of the firm according to which the companies are run by
managers that wants to satisfy their interests and not to maximize profit. The market for corporate control
regulates the behavior of top managers, allocating the control of a company to the people who attribute the
greatest value to it.
- In 1970 the attention is focused on 3 themes:
 1. In the US and Great Britain the director’s independence and to introduce audit committees after the
failure of a number of large companies.
2. In Europe the process of harmonizing the corporate law across EU countries
3. In the most industrialized countries, broaden corporate social responsabilities and establishing a broad
concept of stakeholders that includes in addition to sharheolders, employees, suppliers, customers and
financial institutions also the State and the community at large.
- In 1980 liberal economic policy affirms the director’s responsabilities towards shareholders and the objective
of profit maximization (the debarte on CG during these years is fueled by the loss of competitiveness of US
economic system, high number of M&A, increase in CEO compensation and restructuring process affecting
several large companies).
These events have the effect to restart the debate on the composition of the boards of directors, highlighting
the excessive influence of the CEO and the top management on board decision-making. All of that gives rise
to the need for check and balances to empower non-executive directors. The solution proposed is to increase
the number of non-executive directors introducing board committees with specific resposnabilties.
- The beginning of the 21th century the debate on CG is fueled by some events such as some corporate
scandals, excessive risk-taking and misconduct by large financial institutions and the debate on the purpose
of a firm.
*** After all these scandals the US government in 2002adopts the Sarbanes-Oxley Act (it introduces the
Lead Independent Director) applied to all the listed companies on the NY Stock exchange (NYSE) and
contains measures regarding director’s and managers’ responsibilities, information flow to the financial
markets and the independent monitoring role of external auditors.

BROAD AND NARROW VIEWS OF CORPORATE GOVERNANCE

All the definitions about CG differs both for the interests to satisfy and the number and type of governance
mechanism adopted.
Among interest pursued by corporate governance, the range extends from definition is focused on satisfying
or maximizing the shareholders’ interests to definitions supporting the balance of all interests converging
within the firm, including all the stakeholders’ interests.
- The first approach is the dominant view in the Anglo-American countries
- The second one is more widespread in northern continental European countries or in some Asian ones.

Definitions:
1. Narrow: Only the interests of shareholders are relevant, and the board of directors is the key corporate
governance mechanism. Stakeholder do not have the right to participate in CG since their relationship
with the company is governed by contracts, corporate law and market forces. The shareholders provide
the firm with financial resources and in return they do not obtain any steering power over the resources
provided. The board of directors is the governing body responsible for regulating the conflict of interest.
Between sharheolders and managers.
2. Broad: firms should satisfy the interests of a number of stakeholders and that to use a bundle of
corporate governance mechanism to reach this purpose. According to this approach the board of
directors plays an important role in resolving conflicts of interests but it should be integrated with others
mechanism such as market mechanisms, institutions, firm-level structures and processes.
3. Intermediate case:
- Companies should satisfy the interests of different categories of stakeholders and the board of directors
is the key corporate governance mechanism to reach this goal
- The firm should pursue the shareholder interests and several corporate governance mechanism should be
used.

CHAPTER 2: THE PURPOSE OF A CORPORATION

Companies produce value thanks to the contribution of stakeholders who supply the resources necessary to
run the business. At the same time, companies distribute value to the stakeholders who receive intrinsic and
extrinsic rewards. The firm is the center of a set of relationships with all the stakholders (customer, suppliers,
debtholders, employees, shareholders, State and the public administration).
In order to nurture the long-term success, the company should create a system of contributions and rewards
which allow them to attract and retain stakeholders with the necessary resources and competencies and to
motivate them to supply these resources efficiently.
THEORY OF SHAREHOLDER VALUE CREATION
This theory argues that residual control rights should be assigned to shareholders and firms should pursue the
maximization of shareholders value.
Sharehodlers are the only stakeholders that are remunerated on a residual basis, they only receive residual
income. In exchange for the risk capital they provide to the company, they obtain shares which give them the
right to receive a percentage of the company’s earnings after all other stakeholders have been remunerated.
They assume the risk and allow the other stakeholders to receive periodic and contractually established
remuneration. In addition, they cover the company’s loss if the residual income is negative. The fact that
they obtain a residual income is related to the right to control, so they bear the consequences of the decisions
they take.
They are the only one that cannot use any type of contractual protection and so they must obtain high-risk
premium. It is in the interests of the stakeholders to adopt a. mechanism of corporate governance that protect
shareholders from expropriation by managers.

Implicit assumptions:
1. Maximization of the firm value: to maximize the shareholder value means to maximize the overall
value of the firm, and therefore this is the objective pursue by the point of view of the stakeholder.
2. Efficiency of financial markets: if financial markets are efficient, they properly measure the shares
value and so the shareholder value creation.
3. The discipline of top managers: the maximization of shareholder value allows firms to discipline the
top managers because encourages them to pursue a single performance measure oriented toward the
future.
4. Equity incentive plans: according to the homo oeconomicus theory, people pursue their own interests
and are mainly motivated by monetary incentives. Managers will maximize the company’s value
only if their compensation is strongly linked to share value through stock options or stock grants.
5. Market for corporate control: regulates top manager’s behavior because in the event of low
performance, external investors may launch an hostile takeover.
6. Corporate law: corporate law, except for few norms, is based on the shareholder supremacy over the
stakeholder.

ADVANTAGES AND DISADVANTAGES

A corporate governance model based on the shareholder supremacy has some advantages:
- Selecting to which class of stakeholders the company wants to allocate the control rights it is possible to
avoid the problem of defining which interests to pursue in a specific decision.
- Ownership costs ( costs of managerial control, collective decision making, risk taking..) are usually
lower when ownership rights are assigned to stakeholders other than shareholders, mainly because they
follow the same objective. In addition, shareholders can efficiently control top managers even when the
ownership is dispersed, a set of institutions and structures can incentivize managers to act in the
shareholders’ interest.
- The allocation of control rights to shareholders allows the incorporation of voting and cash-flow rights in
a security instruments that can be traded on the financial market.
The possibility to buy and sell control rights has some positive consequences (encourages those who
think to well-use them to buy these instruments, the financial market punishes those who exercise
them over a given period).
Despite all these advantages, there are also some disadvantages:
- The fact that the allocation of control rights to shareholders ignore that the other classes of stakeholders
implicitly receive a residual income and bear a part of the enterprise risk.

The theory of shareholder value creation leaves unresolved the question of how to protect the interests of the
other stakeholders.

THEORY OF STAKEHOLDER VALUE CREATION

Companies should meet their social responsibilities toward all stakeholders and society. The theory of
stakeholder value creation is based on three complementary approaches:
 1. Business Ethics. Each business decision has an impact on costs and benefits for the firm and for the
stakeholders. According to business ethics, managers should not maximize shareholder value, but
take right and fair decisions based on sound moral principles. Business ethics is intrinsically
normative. Managers must take decisions that are consistent with their social responsibility toward
employees, suppliers, consumers and others. They have a moral obligation to not impose negative
externalities on stakeholders, even when they affect shareholder’s value creation.
Solutions. To develop codes and ethics defining their corporate values, appoint leaders who identify
with these values and embody them through their behavior, create an organizational culture,
mechanism for monitoring and sanctioning non-compliance with these values.
2. Corporate Social Responsibility. Compromise 4 areas of responsibility. The company must create
products in quantity and quality to meet consumer needs and generate profits for shareholders.
Companies must comply with the law. Ethical responsibility implies making decisions in line with
the expectation of the Community. Finally, the discretional. Responsibility involves firms’
initiatives, in favor of the community or the stakeholder.
According to the triple bottom line or triple P’a (Planet, People, profit) the company should report
their performance on three dimensions, the social, the environmental and the economic performance.
3. Stakeholder theory. The term stakeholder can be used in a broad and narrow way.
- Broad: any group of people or any person who may influence the achievement of the organizations’
objectives, or who is influenced by its behavior. Based on the idea that. Company can be affect or can
affect by many people or groups.
- Narrow: any group or single person linked to the firm’s business, on whom the organization depends for
its survival. It. Is based on the assumption that managers do not have all the sources to meet external
demands.

UNDERLYING ASSUMPTIONS
- Maximization of firm value: the maximization of shareholders value does not lead to the maximization
of the firm value. Shareholders are just another class of stakeholders. Because contracts are not perfect
and incomplete, managers and shareholders can increase their private benefits.
- Efficiency of financial market: markets use public information to increase short term performance. The
firm’s market price has fluctuations and deviates from its real value, because of the overreact of the
market to positive or negative information about the company.
- Discipline of top managers: firm’s market price fluctuations may deviate from the real value in the short
term and reflect it in the medium-term. Top managers can manipulate stock prices, according to
empirical evidence, by releasing partial or false information about the company.
- Equity incentive plans: equity incentive can incentive managers to manipulate share price and take high
risks.
- Market for corporate control: may induce managers to pursue shareholders value, but most of the value
is created by the sale of non-related businesses or the renegotiation with other stakeholders.
- Corporate law: does not posit the supremacy of shareholders over stakeholders, it gives decision
authonomy to directors.

CHAPTER 3: CORPORATE GOVERNACE MECHANISM

AGENCY THEORY
An agency relationship is the one in which a person acts for, or is representative of a second person. The
principal delegates an activity to the agent and establishes the rules that oversees the relationship. The agent
carries out the activity delegated by the principal and chooses a course of action among different
possibilities.

The agency theory assumes that people are rational actors who want to maximize their interests, so that agent
are inclined to adopt opportunistic behaviors to pursue their utility instead that of the principal.

The agency relationship become difficult when there is:

- Information asymmetry, when the agents actions are not directly observable by the principal.
- Uncertainty, when the outcome of the agents’ actions is influenced by events beyond her control.
The presence of information asymmetry and uncertainty gives rise to some agency costs such as the control
costs incurred by the principal to control the operation of the agent; reassurance costs incurred by the agent
to assure the principal that its interests are maximized; residual loss given the impossibility of reconciling the
divergent interests of the parties.

Type of agency problem

1. Between top managers and shareholders: the dispersion of the shareholding structure leads to two
problems that may allow top managers to pursue their own benefits at the expense of shareholders’
interests.
- Shareholders delegate key company decisions to the board of directors, which may be influenced by top
managers and the CEO.
- The limited size of the shares does not incentivize the investors to devote enough time and resources to
control the firm’s top management.

2. Between controlling and minority shareholders: outside US and UK, large listed companies have a more
concentrated ownership structure. Large shareholders or blockholders own a high volume of shares of
the company which aloe them to influence shareholder’s assembly meeting decisions, to nominate them
or some representatives to the board and to take managerial responsibilities.
It can be considered as a solution for the agency problem, because the shareholders have a high interests
in maximizing the firm’s profit having high volume of shares. In addition, they can use their residual
control rights to influence the most important decision of the company and some time to play active role
at the top of the firm. Top managers’ opportunism is limited.
But small investors are unable to affect companies’ decision, controlling shareholders can be tempted to
pursue their own interests by promoting decisions that distribute all benefits to them while the costs are
shared proportionally by all the shareholders. Incentive to deviate from shareholder value creation is
very high since it reduces the costs for large shareholders for any increase of their benefits. Monitoring
costs for the minority shareholders are stronger when the investor protection in the country is poor.
Large and minority shareholders have limited information and interests.

3. Between shareholders and stakeholders: minority shareholders are not the only stakeholders thatmay be
expropriated by top managers or controlling interests. Shareholders can make decisions aimed at
pursuing their personal interests at the expense of the others stakeholders.
- Asset substitution, is a negative consequence for debtholders, it is the tendency of shareholders to
substitute low-risk and low-return assets with high risk and high returns ones. If the company is heavily
indebted, the shareholders have incentive to undertake very risky investments.
- Debt overhang, related to the excessive weight of financial debt, it happens when the company despite
having a high return future projects, doesn’t have enough liquidity to pay its maturing debt. (Inability of
a leveraged firm to finance additional profitable investments).

Finally, agency problems affect all listed companies and in general companies that have more than one
shareholder or stakeholder who provide critical contributions. To minimize agency problem, the company
should design corporate governance mechanisms aimed at limiting controlling shareholders or top managers
from pursuing their own interests.

- External mechanism includes market, laws, regualtions or external subjects controlling the company’s
behavior (market for corporate control, managerial labor market, investor protection, good
governance codes, external auditors, tating agencies, media)
- Internal mechanism consists of company’s governance bodies or actors (large shareholders, board of
directors, incentive plans, internal control systems, high financial debt).

- Monitoring mechanisms aimed at guiding or controlling the company behavior

- Aligning mechanisms aimed at incentivize expected behavior and decisions.
(ho messo alcuni meccanismi di CG)
External auditors
External auditors play an important governing role, as they promote companie’s transparency and
accountability. They certifies companies’ financial statements and so ensure that the board and the
stakeholders receive reliable and accurate information. They monitor the appropriate use of accounting
principles, checks for discrepancies and errors and review the presentation of financial statements.
They write a letter to the board in which they present any significant issues they recorded and make
recommendations.
The role of external auditors differ across countries, they typically perform periodic risk assessment by
reviewing the internal process aimed at preventing corporare fraud or corruption.
Even if they are paid by the company they audit, they are independent figures so that they should be
objective. They cannot provide non-audit services to audit clients.

Incentive plans
Shareholders and stakeholders can discipline top management through compensation plans that link the
CEO’s wealth to company performance. compensation systems and incentive plans are one of the internal
mechanisms that can contribute to addressing agency problems such as the hidden action or moral hazard.
To create motivation, the board should link the CEO compensation to the results that is under their control.
As top managers may influence the most important company’s decision, their remuneration should be linked
to company outcomes that are measured by different paramethers.
Incentive plans not only align ceo’s interests with those of the company, but they also distribute risk among
the parties.
The optimal incentive plans must balance the shareholder value creation with the top managers’ desire to
have their income partially isolated from the risk of the company.
The most used incentive plans are long term equity ones:
- Stock option plans: gives top managers a number of options to buy or subscribe the company’s shares at
the exercise price in a certain period.
- Granting plans, assigns managers a certain number of shares when they reach predetermined goals.
This incentive create a link so that id the share value increase, also the managers personal wealth increases.
The equity plans can also integrate ESG metrics to create link between top managers rewards and and the
firm’s social, environmental and financial performance.

Internal control and risk management systems

The internal control of a listed company consists of a set of rules, processes and structures aimed at
contributing to firm management, safeguarding corporate assets, ensuring the reliability of accounting and
management information an the compliance with internal processes and external laws and regulation.
The internal control system consists of 3 elements: objectives, components and organizational structure. The
objectives represents what the firm would like to achieve with the system. Components are what should be
put in place to achieve this objectives.

CHAPTER 6

RELATIONSHIP BETWEEN OWNERSHIP STRUCTURE AND COMPANY PERFORMANCE

The ownership structure of a firm significantly influences its corporate governance.

- The concentration or dispersion of the shareholding determines who has the power to influence the most
important corporate decisions. When there are controlling shareholders or a coalition of controlling ones,
they, usually, exercise their control or voting rights and make the key corporate decisions. When the
ownership structure is highly fragmentated, shareholders become more passive, and the decision-making
power shift into the hand of managers.
The separation between ownership and control determine a separation between residual income rights
and residual control rights.
- The identity of shareholders is important when there are large or controlling sharheolders, who are able
to exercise their voting or control rights so as to influence board composition and company decision-
making. The identification is important to understand the objective and the intersts of sharheolders.
- CEMs are characteristics of an ownership structure because can amplify the influence that large
shareholders exert on key corporate decisions. They are used by shareholders to increase their voting
power without increasing the investment in the share capital. They create a divergence between the
voting and the cash-flow rights and so between ownership and control. It positive consequence is in term
of stability of control, the negative one is about the incentive of the shareholders to expropriate minority
shareholders and other stakeholders.

CHAPTER 7
BOARD OF DIRECTORS

According to corporate law around the world, the decision-making power within a joint-stock company is
distributed among several governance bodies. The most important are the shareholders’ assembly meeting
and the board of directors.
- Shareholders’ meetings retain decision-making power in different areas, as approving amendaments to
the corporate by-laws, making large investments, issuing or buying back company shares, distributing
dividends, approving company reports and accoutns, appointing board members and auditors.
Shareholders can vote in person or by proxy, for ordinary resolution it is needed the simple majority
(more than50%), for extraordinary ones the suoer-majority (more than 75%). Legislation impose a
minimum number of shareholders meeting and the company should notify, through direct
communications, stock exchange’s electronic platform, or publishing on the company website or on a
newspaper, all shareholders of the meeting and its agenda at least 2 or 3 weeks in advance. The
shareholder that have passed the threshold of 5% can requests meetings or add items to the agenda.

- Board of directors, whose members are appointed and delegated to manage the company and carry out
all the operations necessary for the implementation of the corporate purpose. Directors should act in
accordance with company bylaws and fulfill their fiduciary duties with loyalty and prudence. They are
responsible for promoting company’s success by exercising independent judgement and avoiding
conflict of interests. If thei fail in doing so, the shareholders can bring a legal action against them.
Although the board, generally, delegates some powers to top managers, it retains decision-making power
that require a quorum. It requires the majority of votes (one head, one vote) to approve director’s
proposal, it takes place by showing hands or saying “yes”, but in case of sensitive information it involves
secret ballot.

BOARD OF DIRECTOR’S ROLES:

1. STRATEGIC ROLE: consists of actively contributing to the strategic decision-making process that
can include define objectives and corporate governance guidelines, identify mission and vision,
analyze strategic plans. Important when the company has to redefine vision, mission and strategic
plan.
2. CONTROL or MONITORING ROLE: to safeguard the shareholders’ or, in a broader view,
stakeholders’ interests. They have to supervise top management bahavior to prevent or penalize
opportunism. (supervising internal control and risk management system’s effectiveness, guarantee
soundness of financial reporting, ensuring accountability of top managers, compliance with law).
Critical when the company is facing financial problems or when there is the risk of accounting fraud.
3. RESOURCE DEPENDENCE or NETWORKING or INSTITUTIONAL ROLE: establishing and
managing relations with external stakeholders and promote company’s legitimacy and reputation.
The board must ensure that the company has the resources necessary to grow.Important when the
company’s future depends on external stakeholder’s contribution, such as when government or
authorities are redefining the rules of the game.
The board of Directors (slides)
There are two main groups of CG systems:
- The outsider systems
- Insider systems

There are several definition of CG:

1. Larcker et al., 2007 -> “The set of mechanisms that influence the decisions made by managers when there
is a separation of ownership and control”

2. Rezaee, 2002 -> “The set of legal and institutional mechanisms having the aim to protect the
shareholders’ interests and to reduce the agency costs due to the separation between ownership and
control”- focusing on the division between shareholder and managers.

When we have the investors on one side and the managers on the other side there could be a conflict of
interests. The main aim of shareholders, that put money in the company, is to get a remuneration instead
managers follow their own interests to have a higher visibility in the managers job market, this led to an
interest conflict. This the reason for which CG exists. The separation between owners and managers is
typical of Angolan systems, this do not mean that every company have this separation, but this represents the
majority of the cases.

3. Hanson and Song, 2006 -> Corporate Governance as a “bundle” of internal and external mechanisms,
aiming to reduce the interests’ misalignments among the firm and the different stakeholders who have
relationships with the firm itself. Focus on countries in which there is no separation between ownership and
control, where part of the control is part of the property. (referred to non Anglo-American countries).

In terms of CG, in those firms who have separation between ownership and control, we are dealing with the
so-called outsider systems or market-based systems. Instead when we are dealing with non anglo- american
countries in which there is not the separation, in terms of CG we are dealing with the insider systems or bank
oriented systems.

In each systems there are several characteristics

Anglo American Model

- Separation between those who own the company and those who manage it
- liquid market, financial markets are liquid that means that there are many transactions.
- Dispersed ownership, the shares are in the hand of different shareholders, so there is no shareholders that
take decisions by it-self. Managers run the business and they should behave in the interests of
shareholders and create value.
- High relevance of financial market, it is the tool that helps the CG of the firm. Helps shareholders to be
safe and that managers are behaving properly following the aim of the company. Indirectly control
managers’ operating.

A conflict is between the majority shareholders and minority ones who do not have voice in decisions
Non Anglo American Model
- The ownership is concentrated, large part of the shares Is in the hand of one or few shareholders.
- Control exercised by the majority shareholders
- Low relevance od market for corporate control, we say illiquid market
- High relevance of banks or State, a company can be financing by internal (shareholder put the money
through financial market and so shares) and external financing (the firm asks for money to lenders, the
main lenders are banks)
- Presence of important informal relationships among the different shareholders
- Low information transparency.
Corporate Governance Mechanisms
- CGM are “the means by which managers are disciplined to act in the investors interests”, in more simple
words the CGM are tools through which managers have on one hand control and on the other one are
incentivised to behave in the interest of the company – Bushman, 2001.

- “Corporate governance mechanisms should solve the corporate governance problems”- Fama and
Jensen, 1983.

Mechanism can be defined in terms of internal and external. The internal one are those created by the
company it-self, the external one exists because of the external environment in which the company works,
not set up by the company.

INTERNAL MECHANISM:
- Board of Directors monitoring, is a body that control the managers activities, created according to the
company characteristics
- Managers’ incentive systems, there are bonuses given to managers in order to implement their behavior
and to evaluate managers (they are valuated according to the targets given to them in the previous year)*
- Internal auditing, function of the company that has some duties as check the fairness of the financial
statements and the financial documents, to check the compliance with laws and regulation.
- External auditor control is mandatory for every companies, it is an external subject whose aim is to
control the financial documents, to control If they are fair, if there is a documentation behind the
numbers that demonstrate them. At the end of the annual report there is a section dedicated to their
comments.
- Large blockholder control is a mechanism that will be effective only for outsider systems,
A blockholder is the owner of a large block of a company's shares and/or bonds. They are a cohesive
group of shareholders that have an interest in the firm as pension funds or institutional investors

 If the managers achieve the target, he gets a certain amount of stock-options, they can buy the shares of
the company at a price that is predetermined. the time period considered was usually too short, to create
value for a firm so managers in order to reach the goal and take the option started to take decision that
were not long-term oriented so the stock-option model begin to fail. To avoid the problem it was
considered a longer period to exercise the option for managers.

EXTERNAL MECHANISMS:
- Market of corporate control, it incentive managers to create value because they could acquire reputation
if the company has an higher value
- Takeover, it’s the same of market of managers but from a different point of view. When the price of
shares decreases one possible situation is that one buy a lot amount of the shares becoming the main
shareholder and so the owner will fire the managers and choose other one.
- Market for products and services, less effective mechanism compared to the others, if a company fails in
terms of products and services it offers, the main consequence is that clients will reduce, the price of the
share will reduce.
- Market for mangers is basically the job market for managers, if one of them lost his job because he
wasn’t able to do it, no one will hire him.
- Law and regulators refers to the legal framework in which the company is included, to which belongs.
Companies have to be compliant with the domestic law and also with the regulation coming from the
financial market.

SOX: Sarbanes-Oxley Act declares that the external auditors can’t be also a consultant of the company. In
the past the external auditors were usual to also provide some consultant services and there was a conflict of
interests. It was created to avoid some financial and accounting scandals that characterized different
companies such as Enron. The Lead Independent Director is introduced by this Act, so after 2002.
THE BOARD OF DIRECTORS
It is a mechanism of CG, is a governing body, the main one and it represents the link between the ownership
and the top managers.

The role of BoD and the independence of its members

The BoD is the body through which the Cg structure is created, should basically ensure the strategic
guidance of the company, the effective monitoring of the management and the board’s accountability to the
company and the shareholders.

There are two main functions:

1. Advisory, refers to the duty of the firm to provide advise. We have some formal and informal
communication between the board and the top managers so there is a close relationship between them.
The board is offering assistance, advice and so influencing the decisions of managers.
2. Oversight, is the duty of the board that refers to the control, it has to control managers and that they
are behaving according to the interest of shareholders and moreover to control that they are not
committing illegal acts. Is a constant function

Main duties and responsibilities of BoD:

- It is entitled to hire and fire the CEO (Chief Executive Officer)
- It measures corporate performance, broader form of performance, for this reason called corporate. It is a
measurement of the value created during the year, not referring to a single area.
- It evaluates management contribution to performance, still linked with the measurement of the
performance of corporate performance. They have to understand the key decision that the managers
implement in order to increase the value of the firm.
- It awards compensation, it is the one that define the bonuses assigned to the top managers according to
the position received.
- It oversees legal and regulatory compliance (including the audit process and reporting requirements) to
do that they need the support of internal auditing function.

The board advices on corporate strategies and checks the integrity of the financial statement

To fulfill their duties and responsibilities, directors are expected to be independent

Independence: degree to which a director is free form conflicts of interest that might compromise her/his
ability to act in the interest of the firm.
All the committees has to be composed only by independent directors

Requirements to be declared independent:

- Th member of the board can’t have any material relationship with the company directly or indirectly or
with a partner company. The member can’t have any economic or personal relationship with the other
member of the board, with the company at least for the past 3 years
“no material relationship with the listed company, either directly or as a partner, shareholder, or officer
of an organization that has a relationship with the listed company”

It is not possible to anticipate all circumstances that might signal potential conflicts of interests.

INDIPENDENCE REQUIREMENT for the NY Stock exchange :

1. Has been employed as executive officer within the past 3 years (it can be in the board but it will not be
an independent director)
2. Has earned direct compensation higher than 120.000 from the company in the past 3 years
3. Has been employed as internal or external auditor of the company in the past 3 years
4. Is an executive officer in another company where the listed company’s actual executives have served on
the compensation committee in the past 3 years. Inderct relationship between the member we are
considering and some mebers of the board in which he is as well sitting
 5. Is an executive officer at another company whose business with the listed company has been greater than
2% of the revenues or 1 million euros within the past 3 years, economic relationship

Main issues: formal independence standards do not necessary lead to true independence. -> pay attention to
Independence issue in Parmalat case

BOARD COMPOSITION
Board composition consists of 3 main characterisitcs:
- Board size: the number of directors. Is influenced by the characteristics of the company as its size, its
industry and its ownership structure. On one hand, larger boards favor the creation of links with
external stakeholders, provide greater collective information and competencies and are less subject
to CEO domination. On the other hand, larger board decrease the amount of genuine debate during
meetings, reduce directors’ commitment to board tasks and put at risk. Cohesiveness and ability to
reach consensus. There is no rule to determine the number of directors, generally in large listed
companies is about 15. A board. With less than 9 may lack of adequate diversity of competencies
and experiences and also a sufficient number of non-executive and independent directors. A. board
with more than 15 reduce the time. Available for interact with others, leads to slower decision-
making process and increase free-riding problem.

- Number of non-executive and independent directors: a proper board have to balance three types of
directors.

o Executive or inside directors that are board members who are top managers of the company.
o Non-executive or outside directors that do not have managerial position within the company.
They can be divided into independent or affiliated directors and non-independent or grey
directors. Independent directors are those that don’t have or didn’t have over last few years
employment or a continuous professional relationship with the company or other group
companies; are not large shareholders (do not own more than 10%); do not have close family or
business ties with large shareholders or top managers; have not served on the board for more
than 9 years.

INDEPENDENCE: when no family, personal, or professional relationship can compromise their

independence of judgement.
It is a board responsibility to verify annually the independence. The number of non-executive independent
directors increases when the company wants to emphasize its control role, and decreases when it wants to
emphasize the strategic role.
To sum, the number of executive directors should be low, 2-3 (when there is only one is the CEO, when
there are more than one the CEO is complemented by COO, CFO and others top managers) because they
could prevent the board from analyzing problems about the management’s behavior and limit the range of
experiences and viewpoints.

- Director diversity: directors should combine general knowledge and competencies since the complexity and
the variety of problems that a company faces are high. The board and the nomination committee should
identify the mix of experiences and skills necessary to nurture a decision-making process, compare them
with those of the current members and eventually fill the gap. Good governance code are encouraging boards
to promote a diversity of gender, social and ethnic backgrounds basing on the beliefs that greater diversity
improves decisions and the performance of the company.

BOARD STRUCTURE
It is important to assign to the members key board roles or board committees responsibilities in order to
promote its accountability:
- Separation of the chairperson and CEO’s roles: good governance code encourage boards to separate the
roles of the chairperson and the CEO in order to promote board independence from top managers. It
helps directors to express independent and open assesments of the CEO’S behavior and the company’s
results. The CEO is the most powerful manager of the company, responsible for running the business and
 delivering the expected results. The chairperson is an executive or non-executive or even and
independent director who is responsible for coordinating and promoting the board effectivenesess.

- Lead or senior independent director: when the two figures above descripted are combined or when the
chairperson is a large shareholders, as in Latin Economies, it will be useful to nominate a lead
independent director (LID) among the independent directors, also called senior independent director in
UK. It should perform some key task as coordinating ans representing the non-executive and
independent directors, organizing and chairing independent direcotr’ meetigns, discussing with the
chairperson how to ensure a complete and timely flow of information to the baprd. It should be chosen
for her experience, status and leaderships skills. ADVANTAGES: support the chairperson promoting a
dialogue with the board or acting as mediator in disputes, it is less powerful than the ceo so it can avoid
interpersonal conflicts. DISADVANTAGES: it may promote a dialogue with the ceo on the board
proposal and increasing the workload and creating greater distance between the CEOA and non-
executive directors.

- Board committees: good governance encourage board of directors to set up subcommittees which are
delegated to carry out analysis and formulation of proposal on critical topics, then presented to the board,
which may revise, approve or reject them. Board committees consists of non-executive directors with
competencies and experience to analyze and discuss in detail the subject area at the core of committees’
responsibility.

The BoD has always a chairman as a key member that has three main duties:

1. It set the agenda, the agenda is sent to all the directors prior to the meeting. It is fundamental because no
topic that there aren’t in the agenda can be discussed. Directors need time to be prepared to discuss the
topic that will be discussed.
2. Schedule meetings
3. Coordinate actions of board committees

Chairman power -> the chairman determines the content and the timing of matter brought before the board.
Traditionally the CEO has served as the chairman in most US corporations. Nowadays, it is more common to
have nonexecutive director to serve the chair.

The independent director is the one who can be defined as independent, the nonexecutive is a director that
can’t be defined independent because independence criteria can’t be met but he is not working in the firm.
The executive directors are directors that works in the company.

In the board there is another relevant member-> Lead Director

The sox require a lead director for each board meeting
Only independent directors can be lead one

Represent the independent directors in conversation with the CEO, it is a representative. It can be nominated
at each meeting or for a certain period of time, there is no specific role in terms of appoint of this member. It
is important when the firm presents the so called CEO duality (CEO /Chairman duality), when the chairman
is the ceo of the company it has all the managerial power.

The board committees

There are 4 mandatory committees in each board:
- Audit
- Compensation
- Nomination
- Governance
They are mandatory and have to be formed by independent members according to NYSE, the directors are
assigned to committees based on their qualifications. For all of them, excluded for the executive one, the
CEO and the executive directors cannot be members but can help the overall work.

AUDIT COMMITTES it is responsible for verifying the adequacy of the internal control and risk
management systems, assessing the effectiveness of internal and external audit process, is the body
responsible for overseeing the external auditors and is basically the one that have the direct relationship with
the external auditors. It makes recommendations on the appointement, remuneration and removal of external
auditors. Ensuring the company’s compliance with regulations and laws. It is composed by at least 3
members and a chair who are financial expert.

Duties:
- Controlling the financial reporting and disclosure process, to do this it will work closely the internal
auditing function
- Monitoring the choice of accounting policies and principles
- Controlling the hiring, performance and independence of the external auditor
- Controlling compliance and ethics
- Monitoring internal control process
- Overseeing the performance of the internal audit function
- Discussing risk- management policies with management

COMPENSATION COMMITTEE it is responsible for assessing the adequacy of the top managements’s
compensation policy and for submitting proposals on their remuneration to the board. It should consists on
non-executive and independent with good knowledge of finance and remuneration policies. focused on the
CEO figure, it has to set the CEO remuneration and to inform and communicate to the him about his
compensation and about the other executives compensation decisions.
Duties:
- Setting the CEO compensation
- Setting and reviewing the performance-based goals for the CEO
- Determining the compensation for these goals
- Monitoring CEO performance
- Setting and advising the CEO on other officers’ compensation
- Advising the CEO on and controlling compensation of non-executives
- Setting board compensation
- Hiring consultants, if necessary, to assists the compensation process. They can need an external help.
To be part of the compensation committee it is mandatory to be independent.

NOMINATING COMMITTEE is responsible for identifying, evaluating and nominating new directors. It
takes care of succession-planning process for both directors and top managers. The CEO or other executive
directors cannot be members but may contribute in various from to its work. The nomination committee
should define the optimal board size and composition, analyze the gap between the skills and experience of
the current board member and propose candidates for the board election.

Duties:
- Identifying individuals to serve the board
- Selecting nominees to be put before a shareholders’ vote at the meeting
- Hiring consultants to assist in the directors’ recruitment process
- Determine governance standards
- Managing the board evaluation process, it is not referred to a single person but to all the board as a body
- Managing the CEO evaluation process

They make a list of candidates, evaluate them and then propose the candidates to the shareholders who will
decide trough the votes. The committee can use external consultants to be helped because they could not
have the tools to evaluate the job market in all its aspects to identify the candidates.
Most of the time the nominating committee is combined with the governance one, that’s why usually it is
said that the governance have 3 committees.

GOVERNANCE COMMITTEE Is responsible for evaluating the whole CG structure of the firm. It has to
recommend improvements if necessary. It periodically assess the effectiveness of the board and its
committees.
COMPLIANCE COMMITTEE responsible for verifying compliance with environmental or safety
regulations.

EXECUTIVE COMMITTEE consists of the company’s executive directors, including the CEO, and is
responsible for making decisions within the boundaries decided by the board. It creation could create
problems, because it may contribute to the strengthen and creation of a two-tier board. It legitimize the
presence of two class of directors with different powers, reducing the responsibilities and duties of the non-
executive directors. The board should define ex-ante the limits of this committee and monitor ex-post the
quality of its decisions absed on periodic reporting.

All the committees have a consultative role and cannot substitute the board resposnabilities. In large listed
companies the members should be at least 3 all non-executive and independent. Non-executive directors
cannot be part but are invited to share their point of view.

BoD Actions

The board operates through actions:

- They can take place during a board meetings. An action is complete when it receives a majority of the
votes
- They can take place through written consent, the board make circulation a written resolution that is a
proposal sent to any directors, if they want to approve they have to sign it. It is complete when it receives
the majority of the votes.
Directors relies on materials provided by management to take actions, they get the documentation about a
specific issue according to what the management provide them.

BOARD FUNCTIONING

To promote an open and constructive dialogue with the board, best practices encourages the company to:
- Distribute timely, adequate and objective information to all board members
- Organize an adequate number of board meetings
- Periodically evaluate the board of directors in order to assess its effectiveness in performing its roles.

DURATION OF DIRECTOR TERMS

Board members serve on the board for a determined period of time
1. They can be elected annually;
2. They are elected for a period of 2-3 years-> staggered board;
In both of the cases they can be reelected

ONE TIER BOARD:

Board of directors differ across countries in terms of administration and control models, composition,
structure and functioning. The one tier or unitary board model is the most common, it consists of both
executive and non-executive directors, all elected by shareholders’ annual general meeting. The board is
responsible for both administration and control, it makes strategic decisions and control their
implementation. The non-executive directors provide relevant contributions to the board effectiveness
sharing their experience and competencies to improve strategic decisions and control the top management
behavior. One tier board create more interaction and a team spirit among board members, they allow non-
executive to develop a deep understanding of the comnay and its business model, lower administrative
burden because of a single governance body.

TWO TIER BOARD:

It splits the board of directors into two governance bodies, separating management and control tasks. The
supervisory board consists of non-executive directors, it is appointed by the shareholers’ annual meeting and
is responsible for overseeing the management of the business, appointing and removing members of the
management board, managing relationships with external stakeholders. The management board consists of
top managers and is responsible for running the business. Member of supervisory board cannot be members
of the management one and vice versa.

Some countries such as Italy and japan have developed a variant of the one-tier system. It consists of two
governance bodies, the board of directors and board of statutory auditors (collegio sindacale). The
shareholders’ annual meeting appoint the members of both and no one can be member of both boards. The
BoD is responsible for both management and control (as in one tier) and can delegate day-to-day business
actions to one or more executive directors or to the executive committee. The board of statutory auditors
consists of three to five members with professional qualifications of independence. Its main tasks are both to
monitor compliance with the law, and the principles of correct administration and to check the soundness of
the company’s organizational, administrative and accounting structure.

JOB MARKET FOR DIRECTORS

A board member may be removed or not reelected.

Considering the critical role, board member splay in the governance process, the quality of individuals
appointed as directors should have a director correlation with the quality of advice and oversight the board
provides to management.

- Industry experience is believed as the most critical factors for recruiting new direcotrs, because the
directors decide on the long-term so they have to understand the dynamics of that industry in terms of
investing, financing.
- Nowadays we have boards with mixed compositions in terms of backgrounds or personal characteristics,
gender and ethics are to most relevant variables for diversity. The diversity enhances, following
academic studies that provides empirical analysis, is appreciated because when a board is diversified is
more effective and provides at the end better outcomes.

Potential candidates for directors

- ACTIVE CEO: top managerial position are generally preferred (people that are already CEO, CFO in
other companies). Directors with CEO level experience offer a miz of managerial, industry and
functional knowledge. The stock market reacts positively to the appointment of a new outside director
who is a CEO. On the other hand, the risk of having an Active CEO is that it would be are too busy with
they own companies to be effective board members.

- INTERNATIONAL EXPERIENCE: previous experience In international environment. It provides skill

and competencies that are high valued. They can bring contacts with key government decisions makers
and business executives who can help the manufacturing, distribution and customer development
process.
The presence of a foreign independent director (combining the experience and a personal
characterisitics) is positively associated with better cross.border acquisitions when the target company is
from the foreign diector’s home country.
- SPECIAL EXPERTISE: directors with special expertise are those needed because of specifical type of
their path career, they matches the situation and /or the business of the company (ex technolocical firm
needs directors who are expert in IT).
In case the board have not a special expertise directors, they can actually nominate an observer or an
advisory director. They are not board members and do not vote on corporate board matters, thus they are
not liable as the other directors. They just advise on specific matters in which they are experts.

- DIVERSE DIRECTORS: recently companies are seeking directors of diverse ethic origin or female
directors.
In the past boards were composed by people that were similar, Nowadays is to introduce and give voice
to minorities (mostly gender with new laws and regulations that were asking of high percentage of
women in the board).
The representation of minorities remains low due to several cultural and societal factors (as lack of
access to the networks that lead to board appointment, low representation in senior management teams).
Diversity lead to a better performance of the board. The negative aspects is that there could be different
thoughts and way of thinking that could take several time in decisions, so not all the academics and
practionesr agree on the value of diversity. There is no right solutions so for each aspects we have to
keep in mind the positive aspect and the negative one.

Focusing on gender aspects, having a mix board can be good because women and men have different
approaches and so when we have to take decisions that takes long-term thinking can be profitable. On
the contrary two ways of thinking that matches each other will be difficult and lead to no decisions.
Long tenure directors is one thst serves the board since a long period of time, usually more than 5 years.
A short tenure is one that is in the board since few time. Actually the board have mixed short term and
long term,it will be more effectively having long term one that know the company and the industry. On
the other hand short one are not tired of being in the company, they have to show and demonstrate that
they are good at their job.

- PROFESSIONAL DIRECTORS are individuals whose full-time careers are serving on board of
directors. They can provide the 100% of their time to the board. They are generally retired consultants,
retired executives, lawyers, financiers or politician. They bring their extensive expertise based on both
professional background and the multitude of current and previous board seats.

REQUIREMENTS:
1. Specif experience, qualifications and attributes that make an individual qualified to serve as a directors
2. Directorship held currently and in the previous 5 years
3. Legal proceedings involving the director in the previous 10 years ha to be discloses.
4. Any disciplinary sanction imposed by regulatory bodies
5. In case the company has a policy regarding the board diversity, it has to be declared

SELECTION PROCESS
The nomination committee is the one that select the potential directors. It is necessary to understand the
needs of the company and look on the job market for directors. The process take place through different
places:
- It is more informal
- The sequence of steps:
1. A list of top candidates is assembled
2. Rank them in preferred order
3. Meeting face to face (it is much an invitation to join the board) in case the candisdate refuse, the
second one will be contacted.

DIRECTORS COMPENSATION (appunti)

The amount of the composition should be sufficient to attract and retain qualified professionals and
guarantee the monitoring of the management. It has to be proportional to the type of the work done by it.
Directors’ compensation covers:
- The time spent on board meetings
- The cost of keeping the director’s calendar open in case of unexpected events
On average the 40% is based on a fix part provided by cash and the rest made by stock option. When the
compensation committee create the compensation package consider the requirements that are asked and also
the fact that senior directors gain more than youngers and also the amout of company liquidity available for
paying them. When they participate in meetings they get some supplementary fees. The compensation
committee has to consider that in the compensation package are included some benefits consistent for the
company and the director himself.

How much does a board costs for a company? For a small company is the 0,5% of revenues, instead for large
companies the cost of the board is around the 0,1% of revenues.

The directors’ compensation is typically made by two parts:

- A fixed one related to the responsibilities they run
- A variable one in order to incentivize them to do better

Incentive:
- Short term are based on cash and are related to the KPIs (key performance indicators)- they are targets
(numbers) that the company decide to which the bonuses are connected (they could be ROI, turnover of
employees and so on..). in this way it is possible to create a relationship between shareholders’ interests
and those of the directors.
- Long term are based on stock options, pensions and so on. Shareholder theory sustaining that stock
option are good to incentivize directors
Managerial approach theory disagrees with stock option remuneration because of several problems they
create.
Today there is no a unique vision because of the country, policies, laws for which the different
companies differ, that have a huge impact on board vision.

- Some companies have also medium-long incentives

KPI have to be in line with the strategy adopted by the management of the company. Compensation is a way
for shareholder to agree with the strategy of the company.

The main issues about directors’ compensation is to understand the good balance between fixed and variable
part, but above all between short and long part.
The compensation committee may be made of only true independent directors.

There also other benefit (non-financial components of the compensation) that are also part of the
compensation package. Like computers, phones, car. They represent an extra compensation for the manager
that will lower his/her expenses as insurance that the company pays for.
ESG and KPI are considered in the remuneration policy of the company
On November and December the board analyze and approve or ot the remuneration policy proposed by the
the remuneration committee.

Remuneration policy and remuneration report

The Remuneration policy lays down the framework within which remuneration can be awarded to directors
and top management, defining the balance between the fixed and the variable component consistently with
the company’s strategic objectives and risk management policy - a mandatory and binding vote is required
at least every three years and whenever the board proposes to change the remuneration policy.
The remuneration report is the document that have the full disclosure of the elements that characterize the
remuneration policy of a company. This section provides a detailed disclosure of the compensation granted
in the previous financial year on the basis of the remuneration policy adopted for such financial year - a non
binding vote is required.
The starting point of a remuneration policy is pay for performance.

TEORIA

Executive directors compensation system is aimed at fulfill four main objectives:

1. To attract top managers with the necessary experience and competencies
2. To retain top managers avoiding they leave the firm
3. To motivate and incentivize top managers to contribute to the firm’s strategy and performance
4. Reduce costs related to managerial compensation using mechanism that do not impose costs on the
income statement.

The rationale is related to agency problems. Shareholders are interested in increasing the company’s value
over the long term, top managers are short-term oriented and interested in enjoying their own personal
benefits. Executive compensation is a mechanism that the company use to avoid managerial opportunism,
aligning top managers interests with those of the shareholders through linking their compensation with the
firm performance.

Executive directors compensation key components:

The remuneration package for executive directors consists of 3 components:
- Basic or annual salary is a fixed cash payments distributed monthly whose amount is influenced by
the costs of living, some firm’s variables and professional characteristics of the beneficiary.
- Short term incentives link a portioton of executive directors compensation to company performance.
the bonus is generally paid at the end of the reporting period but can also be distributed in shares or
deferred. They are aimed to encourage the achievement of annual budget results and they are be
based on performance metrics financial or strategic measures. The distribution is calculated
according to the percentage of achievement of the objectives. they are easily to verify, allow
managers to understand the link between metrics and their pay and so to predict consequence of their
decisions and, finally, may promote higher efficiency. At the same time they entail the risk of
stimulating top managers to follow short-term outcomes and thus to neglect the impact ot their
decisions on medium-long term results. It is useful to use short-temr and long term plans in a
complementary way.
- Long term incentives link a portion of the remuneration to the company’s long-term performance.
the performance measures can be either accounting based or financial-based. These type of
incentives are aimed at balancing the potential negative effects of the short-term ones, indeed they
attenuate the risk of incentivizing top managers to maximize current performance at the expense of
long-term (managerial myopia). They can distribute cash compensation but more often involves
stock options or shares. The company can combine two or more lt plans. Companies adopt equity
and share-based incentive plans to:
 Align managers’ interests with shareholders’ one
 Encouraging entrepreneurship and value creation
 Attracting and retaining talented employees
 Increasing employees’ identification with company objectives
 Reducing the cost of employee or top management compensation
- Other items as a wide range of benefits and perquisites purchased by the company and used by
managers as corporate cars, jets, life insurance. The employment contract may include also a
severance package in case of early termination of employment.

TYPES OF EQUITY BASED COMPENSATION:

- Stock option plans: give employees the right to buy shares at a fixed price within a certain period
- Non-option stock plans: include a wide range of equity incentives with different characteristics.
(performance shares assigns beneficaires a bonus in shares is some important objectives are met in
the medium-long term; stock granting plans assigns shares to the company’s employee, if the shares
have a vesting period the employee may retain them only after the vesting period expires, they lose
all shars if they leave the company before vesting).
They differs in terms of :
- Risk profile
- Impact of the dividend policy: unlike the ownership of the shares, the ownership of stock options
changes manager’s attitude towards dividends policy, because the value of the options decreases if
the company distributes dividends on the shares.

Empirical evidence shows that the ceo’s compensation is higher when:

- The board is weak or ineffective
- There is no a large blockholder
- Institutional investors are dispersed
- Anti-takeover provisions are absent
- Country level institutions are weak

NON-EXECUTIVE DIRECTOR’S COMPENSATION

Non-executive directors compensation is aimed at attracting reputables and competent direcotrs and
motivating them to contribute positively to the board effectiveness. It is decided by shareholders meeting and
the board decide how to divide it among its members.
Non-executive directors receive a fixed remuneration based on the commitment and responsabilities
connected with their board membership. Directors who are member of one or more committees receive an
additional fee that compensate them for the effort and responsabilities. Those who are elected as leading
independent directors receive an additional fee for the supplementary role. The one who acts as chairperson
may receive a substantial amount of money as the role is very demanding and full-time. It is debated whether
it is appropriate to give them some shares or stock incentives because may undermine the independence of
judgement.

BOARD EVALUATION PROCESS

Being a director involve to match some requirements and some behavior and decisions could have
consequences for the company and if the directors committees illegal acts there is an evaluation process that
take place that lead to the detection of the illegal act that has been committed. There is an issurance for bad
behavior.

Board evaluation process is about the evaluation of the board as a unique body making some checks:
- If the board gets enough information
- Are the meetings well-structured considering the topics that have to be discussed
- If the composition satisfies the requirements of the company and if it allows the company to achieve the
targets it was expecting

HOW DOES THE BOARD OPERATES IN PRACTICE: THE VOTES

2 different procedures
The board members can be voted and the one used is up to the company

1. PLURALITY OF VOTES: the shareholders votes on a one-share one-vote basis. The candidates will be
directors when they obtain a plurality of votes even if they don’t get the majority
2. DUAL-CLASS SHARES: each class of stocks is equal in terms of economic benefit, but not in terms of
voting rights. The preferred shares present
3. MAJORITY VOTING: a candidate is nominated only if receives a majority of votes (more than 50%).
This system gives shareholders more power to control the composition of the board
4. CUMULATIVE VOTING: a shareholder can concentrate vote on just one candidate instead of requiring
one vote for each candidate. A shareholder has a number of votes equal to the number of shares …

A member can be nominated more than once but when the time board fineshes.
Board elections are usually uncontested, contested board elections occur int wo cases:
- Hostile takeover battle
- Presence of a dissatisfied active investor

05/11/21

CORPORATE SOCIAL RESPONSABILITY

Business should not be responsible morally to the stakeholders but also to the society, environment and
towards a sustainable planet at large.

Many other names are used to refer to CSR such as socially responsible business, responsible business
conduct, responsible entrepreneurship, corporate citizenship, corporate accountability and corporate
sustainability.

The actors of CSR are the stakeholders and not only the shareholders. It is not a one shot activity, is the
continuing commitment by business to behave ethically and contribute to economic development while
improving the quality of life of the workforce and their families, local communities and society at large.

Even if there is a kind of definition, the studies are not still aware about what is CSR.
- It Is an extended model of corporate governance based on the fiduciary duties owed to all the firm’s
shareholders
- It’s about how companies manage the business process to produce an overall positive impact on the
society
- It’s the responsibility of corporations to go above adnd beyond what the law requires them to do
- It’s the responsibility of corporations to contribute a better society and cleaner environment.

The meaning of CSR changes a lot during time:

- 1870/1930 Prelegalization period there was the attention only to the shareholder. The company should
create value for the shareholder. Stakeholder weren’t considered
- 1950 CSR started to refer to the obligation of businessmen to make decisions which are desirable in
terms of the objectives and valued of our society. The main object was to maximize the value of
shareholder
- 1950/1960 study period. CSR had a kind of legalization on a study point of view. With the economic
boom there was an increase of firms so it was mandatory to introduce CSR
- 1960/1970 increasing interest towards the issue, studies and first definitions
- 1979 first definition by Caroll, with the increasing of diversification and globalization CSR gained a
certain place in the business and during last time there were studied best practice of CSR because it is
important to codify the requirement to be socially responsible.
“The social responsibility of business encompasses the economic, legal, ethical, and discretionary
expectations that society has of organizations at a given point of time”
- 1990 diversification and globalization
- 2000 Best practice : cause promotion, cause-related marketing, corporate social marketing, corporate
philanthropy, community volunteering, socially responsible business practice (Kotler e Lee)
CSR is not only to create value for shareholder but also for stakeholder. During the prelegalization period
CSR was intended in a negative sens, the question was why should I create value for stakeholder if one of the
responsibility is to create value just for shareholders.

SHAREHOLDER VALUE THEORY: the only responsibilities of business towards the society is the
maximization of profits to the shareholders, within the legal framework and the ethical custom of the country

STAKEHOLDER VALUE THEORY: the firm is a system of stakeholders operating within the larger
system of the host society that provides the necessary legal and market infrastructure for the firm activities.
The purpose of the firm is to create wealth or value for its stakeholders by converting their stakes into goods
and service.

RELATION BETWEEN CSR AND FINANCIAL PERFORMANCE

POIN OF ATTENTION: ESG and CSR are not the same. ESG are all the measures from the investment
point of view, CSR it’s a strategy inside the corporate. If you work for an investment fund is important to
consider ESG index, but they are linked- you cannot be socially responsible without ESG investment.

Corporate social performance (CSP) is the configuration in the business organization of social
responsibility, processes of response to social requirements and policies, programs and tangible results that
reflect the company’s relations with society.

Corporare Financial Performance (CFP) are measure of the performance of the company ans accounting-
based indicators (ROE, ROS, ROA..) and market-based measures (stock price)

To measure CSR and CSP we use corporate social performance model: three-dimensional model of social
performance identifying the basic principles of social responsibility, the concrete problems for which social
responsibility exists and the specific philosophy of response to these problems.
- Social responsibility categories: economic, legal, ethical and discretionary
- Social issued involved
- Philosophy of Social Responsiveness: no response- proactive response

All starts from the economic responsibility (produce goods and service to gaijn profit and run the business).
There are these dimensions and the company can answer or not to them, it is nothing mandatory by law.

Corporate social performance evolution definition: “Corporate social performance is a set of descriptive
categorizations of business activity, focusing on the impacts and outcomes for society, stakeholder and the
firm. Types of outcome are determined by the linkages, both general and specific, defined by the structural
principles of CSR. The process by which these outcomes are produced, monitored, evaluated, compensated
and rectified or not are defined by the processes of corporate social responsiveness” – Wood, 2010
HOW TO MEASURE CORPORATE SOCIAL PERFORMANCE?

CSR INDECES
- MSCI Kinder based on the exclusionary screens. It put light on strength and weaknesses along the lines
of a series of attributes. It excludes firms that are not socially responsible, it considers what is not social
responsible to identify what, instead, is.
According to the index what is responsible? Communities relations, support for education, social
housing, diversity, employee relations and so on

CSR reporting measurement: written measure

- Social report - it is not mandatory it is a report without quantitative information regarding all the
initiatives and actions about CSR
- Copenhagen charter – it is a circular process, it identifies all the decisions made by the top management
from a strategic point of view related to CSR,then there is the identification of the stakeholders, then the
identification of the indicators that can be quantitative and qualitative and then the publication of the
report. After that the company wait for a feedback from the stakeholder.
- CRI Reporting framework, it is a financial statement on one hand and it has also a sustainability
framework and it can show how corporate governance can create value.
- Integrated reporting

CSR and ESG

Environmental, social and corporate governance (ESG) and corporate governance resposnability (CSR) are
two words to discuss how a business could be socially conscious.

ESG are the parameters and criteria that can be used by investors to screen companies they potentially invest
in.
CSR is a strategy, self-regulating business model where companies are more conscious of the impact they are
having on wider society. This includes the environment, the economy and people within the society.

Whilst ESG and CSR are both concerned with a company’s impact on society and the environment, the
major difference between them is that CSR is a business model used by individual companies, but ESG Is a
criteria that investors use to assess a company and determine if they are worth investing in.

RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND PERFRMANCE

Primary objective of corporate governance is not to improve performance.

Issues of CG are become so important during the last year, it became important with the scandals because
million of stakeholders were affected by the bad governance of some companies, CG born to protect them
from managerial opportunism.

OICD- some statement say that to improve performance it is necessary to have a bad corporate governance.
A lot of studies have been faced this topic, but the results of lot of them are really poor because they found
no link between CG and performance.

ISSUES
- Difficult to identify the measures (short term or long term?)
- Which measures for good or bad corporate governance?
- There is a third reason why some study does not find relationship between corporate governance and
performance: endogeneity is not clear the direction of the raltion so it is difficult to find the correlation
between the variables in target.

1. Difficult to find and measure performance, there are many indicators to measure performance, so it is
difficult to choice and not to measure.
Measure of performance:
- ROE, Return for shareholders (net income/equity)
- ROIC (ebit/noa)
- P/E
- ROA
- EVA economic value added (NOPAT- wacc)* NOA – most used performance measure

The best way to measure in terms of effectiveness and combining short term an d long term period is the
EVA. The worst is ROA because it has no meaning total assets and net income are unrelated, despite this is
very used. All the measure related to stock price are not bad but are short term measure of performance, so it
is not a good measure when the market is not efficient, it is influenced by the volatility of financial market.
ROE is good for certain purposes, measuring the shareholders return.
80% of the studies on the relation between CG and performance use ROA and stock ratios to measure
instead of ROIC and EVA because are too difficult to collect data and information, you should have access
to financial performance of each company.

2. How can we define a good or bad corporate governance?

- Non-executive/independent director: the more independent director you have the more the good
pcorporate govenrnac eyou have.
- Board size
- Audit committees
- Compensation
- Competence

Gompers et Al -> g index

Bebchuc et al -> e index

The only studies which gave some evidence of relation between some measure of corporate governance and
performance were:
- Competence
- Engagement of the board (participating and spending time in the activities of the board)
1) Type of company
2) Board composition>>main issues: biased judgement of the
top management’s performance and
compensation
+ clear conflict of interests
3) Directors compensation , compresi gli errori sulle stock options
4) Lack of true independence and transparency, CEO duality,
function of very committee
5) Desirable solutions:
a) Complete DISCLOSURE of directors’ origins and background
b) Diversification among Bod members (gender, ethnicity…)
c) Draw up a stronger policy for directors’ conflict of interests
d) Reporting procedures to fill the gaps in the policies
e) New performance-based compensation
f) Limit the number of shares assigned with stock options
g) Establish new equity ownership requirements for
top management (ownership guidelines)
h) Reaffirm the company’s commitment not to
re-price options without shareholder approval.