1. What is corporate governance?
A system of principles, policies, procedures, and clearly defined responsibilities and accountabilities used by stakeholders to overcome the conflicts of interest inherent in the corporate form.
the ways in which suppliers of finance assure themselves of getting a return on their investment
Why is it needed?
In most corporations, the owners (shareholders) do not manage the company’s operations. Corporate governance is needed to ensure that the managers are compelled to return some of the firm’s profits to investors, or that managers do not steal the capital or invest it in bad projects.

2. Two major objectives of corporate governance:
To eliminate or mitigate conflicts of interest, particularly those between managers and shareholders
To ensure that the assets of the company are used efficiently and productively and in the best interests of its investors and other stakeholders

3. Most common sources of conflict in agency relationships within a corporation:
Manager-Shareholder conflicts
Management may use funds to increase their job security, power, and salaries
Managers may give themselves a lot of perks (e.g. use of corporate jet, $200,000 bathroom, etc)
Managers may take on risky ventures that benefit themselves, but not necessarily the shareholders

4. Duties of the Board of Directors:
Establish corporate values and governance structures for the company
Ensure that all legal and regulatory requirements are met and complied with fully and in a timely fashion
Establish long-term strategic objectives for the company with a goal of ensuring that the best interests of shareholders come first
Establish clear lines of responsibility and a strong system of accountability and performance measurement
Hire the CEO, determine the compensation package, and periodically evaluate the officer’s performance
Ensure that the management has supplied the board with sufficient information
Meet frequently enough to adequately perform its duties, and meet in extraordinary session as required by events

5. Director-Shareholder conflicts
Boards are supposed to represent the interests of the shareholders, by monitoring managers and making sure their actions are in the best interests of shareholders.
Conflicts arise when directors come to identify with the managers’ interests rather than those of the shareholders. This can happen when:
Board members are not independent (e.g. they are employees of the firm, they have business dealings with the firm as consultants, lenders, suppliers, etc., they are family members or friends of the managers)
Board memberships are inter-linked, e.g., CEOs serve on other companies’s boards

6. Evaluating Corporate Governance
Evaluating the power of the CEO
Is the CEO the chairman of the board?
Does the CEO have ownership in the company? In what form (stocks, options)?
How long has (s)he been CEO?
How much is the CEO’s compensation?
Difference between the next highest paid officer?
Difference between the average compensation of other top management?

7. Evaluating Corporate Governance
Evaluating the board of directors
Board composition and independence
Independent chairman of the board
Qualifications of directors
Annual election of directors
Annual board self-assesment
Separate sessions of independent directors
Audit committee and audit oversight
Nominating committee
Compensation committee
Board’s independent and legal counsel
Statement of governance policies
Disclosure and transparency
Insider or related-party transactions
Responsiveness of the board to shareholder proxy votes

8. Evaluating Corporate Governance
Assessing shareholder power
Voting rights (i.e., are there different classes of shares with different voting rights? Who owns the shares with the voting rights?)
Is the top manager a founder/owner?
Institutional shareholders
Stockholders with competing interests (e.g. employee ownership)
Corporate cross-holdings

9. Other corporate governance issues
Conflict between shareholders and bondholders
Environmental, social, and governance issues

10. Sources: Clayman, Fridson, Troughton. Corporate Finance. Damodaran
Sources: Clayman, Fridson, Troughton. Corporate Finance. Damodaran. Applied Corporate Finance, 2nd ed.