What is corporate governance<div><ul><li>Definition</li><li>2 reasons why c.g. is important (1 access to equity capital, 2 lower cost of capital).</li><li>&nbsp;C.g. complexity</li><li>C.g.r. statute need fairness with monitoring, transparency, accountability, balance of power</li><li>&nbsp;C.g. shareholder’s model</li></ul></div>
Partnership<div><ul><li>A partnership is a weak entity which is divided from his members.</li><li>Each partner is liable for the debts of the partnerships. The creditors have the right to claim the money against the partners. Partners are jointly liable.</li><li>Partners are vested by the law to be also managers and have the task to control and administrate the managerial decisions of other partners.</li><li>Fiduciary relationships between members are the very key of partnerships</li><li>Every decision requires the unanimity of the partners</li><li>Partners can also opt out different rules to organize the company</li></ul></div>
Private companies<div><ul><li>A private company is a strong legal entity</li><li>Private companies do not go to stock exchange as happens in public companies. The capitals are used reach entrepreneurial goals</li><li>Stop loss rules, limited liability.</li><li>Private companies are based on fiduciary relationships between participants</li><li>Participants are active and vested by specific voice rights Ex Ante, Ex Post.</li><li>Opting out” rules, there’s freedom of contract</li></ul></div>
public companies common hallmarks<ul><li>Legal personality</li><li>Limited liability</li><li>Investor ownership</li><li>Delegated management</li><li>Transferable shares</li></ul>
<h1>Public companies common problem</h1><ul><li>Investor ownership, shareholder investor and entrepeneurships, 3 common information assymmetry, Ration apathy syndrome, free riding, wall street rule.</li></ul><ul><li>Delegated management, agency problem are generated</li></ul>
Imploding model<ul><li>Strong property weak control</li><li>Shareholder centric</li><li>ADV Medium long term more stable and cohesive</li><li>DISV Lower liquidity, not easy to challange the control so pyramidal group, interlocking directors, shareholders agreement.</li></ul>
Exploding model<ul><li>Weak property, strong directorss</li><li>Board centric sytem</li><li>ADV easy acess to capital money, high skilled board</li><li>DISV Short sight managing, dissociation of property and power&nbsp; director dominant.</li></ul>
Internal agency problem<ul><li>Imploding model -&gt; minory vs majority shareholders</li><li>Exploding model -&gt; companies and third parties like creditors</li></ul>
External agency problem<ul><li>both publc and private, moral hazard</li><li>creditor can be affected by managers decision&nbsp;</li><li>shareholder tend to engage in risky policies and if they succeed tall the upside is for them, if they fail all the downside is shifted to creditors.</li></ul>
How the law can help avoid moral hazard risk ?<ul><li>First company should be transparent</li><li>If they are risking to be insolvent --&gt;</li></ul>
Say on pay principle<ul><li>Refer to remuneration of the manager</li><li>Usa manager</li><li>Eu Shareholder</li><li>Shareholder activism to reduce conflict of interest</li></ul>
Good corporate governance&nbsp;<ul><li>Market of capital&nbsp;</li><li>Market for corporate control</li><li>Market rules</li><li>Corporate rules&nbsp;</li></ul><div>the last two are in two moment</div><div><ol><li>firm on market rules</li><li>market on the firm rules</li></ol></div>
Harmonization<ul><li>Level legal playing field, to harmonize all the jurisdictions</li><li>5 reason why we need harmonization</li><li>1 fullness and effectiveness of the freedom of estabilishment of the business</li><li>2 freedom to move from a state to another should be granted</li><li>3 grant certainty in trans-national operations</li><li>4 transfering capitals and activities for efficieny reasons and not due less severe law</li><li>5 common level of protection&nbsp;</li></ul><br>
Harmonization process nowPervasive<br>Articulated<br>Unfinished&nbsp;<br>Imperfect
Harmonization Type<ul><li>Decentralization (directives) Positive harmonization 5th directive</li><li>Centralization (regulations) True standardization</li></ul>
Advantages and Disadvantages of Harmonization/standardization<ul><li>Adv Less cost of transcations and informations</li><li>Dis&nbsp; Central legislator less informed, regulation are confined on limited liability, no competition&nbsp;</li></ul>
Bottom up process<ul><li>negative armonization</li></ul>
Lex societatis<ul><li>Place of incorporation</li><li>Real seat</li><li>which is adopted by eu since 2000 is place of incorporation</li></ul>
Competitions<ul><li>Market of rules</li><li>Race to the top</li><li>Race to the bottom</li><li>Delaware vs Nevada</li><li>Cant be done in Europe since no perfect market so we have transactions cost.&nbsp;</li><li>Defensive regulatory competition&nbsp;</li><li>But anyways convergence path</li><li>Italy Fca one share one vote</li></ul>
Characteristics of Harmonization by soft law<ol><li>Promotion of a culture more careful to CG</li><li>More attention to peculiarities of national systems</li><li>Greater flexiblity and adaptability over time of CGRs</li><li>Fundamental role of private parties in drawing up corporate governance codes.</li></ol><div>THE GOAL IS TO FOSTER AND PROMOTE RATIONAL REGULATORY COMPETITION AND TO ACHIEVE A MORE EFFECTIVE AND COMPLETE HARMONIZATION</div>
Harmonization of soft lawsthis phenomenon is taking place on 2 level:<br><ul><li>Freedom of contracts, comply or explain</li><li>Reccomendation.</li></ul><div>More room to competition, in the end market will evaluate you but you pre condition is needed</div><div><ol><li>fourth directive article 20, transparency must be granted in the c.g. statement which has to embody some informations such as cg codes, all relevance information ect.</li><li>reccomendation of april 2014, quality of information should be granted and also properly inform the stakeholders and investors, wheter the company is complying or not and why</li></ol><div>no size fits all so if yu do not comply doesnt mean is a negative thing</div></div>
Italian law provisions about fourth directive and more<ul><li>Article 123, Quality of informations, 1) oblige to draft annualy report, 2) complying or not, 3 impose to audit firm to verify CG statement has been drafted according to 123.</li><li>Article 149. BoA has to verify if CG is applied not only formal but al substantially.</li><li>Art 192 tuif entrust Consob in case of omittment of the information requested in art.123.</li></ul>
Strategy to curb down agency problem<ol><li>Fairness of the agen, hard low</li><li>Disclosure of the agent, transparency of what he doing</li><li>Enforcement sanctions, exp ante or ex post by principle</li><li>Defining role and involvvement of either the BoD, and shareholders activism</li></ol>
Eu action plan4 pillars.<br><ol><li>enhancing corporate governance disclosure</li><li>strenghtening sharelholders rights</li><li>Modernizing BoD</li><li>Cordinating corporate governance efforts of Member States.</li></ol>
Financial structure of PLC and Shares<ul><li>Share</li><li>Bond</li><li>Type of shares</li><li>Pre-Emption right</li></ul>
"Shareholder's primacy"a good corporate governance require more shareholders involvement<br>3 resolution should be granted to shareholders:<br><ol><li>Rules of the games decisions.</li><li>Game ending decisions</li><li>Scaling down decisions</li></ol><div>All of them are extraordinary decisions</div><div><br></div>
"Director's primacy""Shareholder's primacy has some critical points:<br><ol><li>They have numerous different interest</li><li>They are jeopardized in taking decision because of a lack of incentive</li><li>They do not bare any legal risk</li></ol><div>For this 3 point the still bare investment risk&nbsp;</div><div><br></div><div>Also a BoD is better then a single Directors for multiple reasons</div>"
Empty vote phenomenoncan be split in two part<br><ol><li>Dissociation between the legal ownership and the economic ownership</li><li>Record date rule which is mandatory in Europe.</li></ol>
"Shareholder's rights Exit Right"Exit right,<br><ul><li>Withdrawal or appraisal right.&nbsp; is not always granted, only in some specific circumstances stated by hard law, generally when company modify its business radically.</li><li>Share transfer or Wall street rule. its backed by shares transfer, the shareholder who doesnt agree can just sell the shares and leave without affecting the company patrimony</li></ul>
Shareholders rights Voice rights<ul><li>Ex-ante voice rights, right to call meetings, right to ask questions in meeting etc..</li><li>Ex-post voice rights, 3 right</li></ul><ol><li>Right of removal</li><li>Recover damage caused by directors claw blak law suits</li><li>Report right</li></ol>