1. The standard view of CG (“The Shareholder Value Model”): Deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investments Both owner capital and debt financing

2. Prime aim: To present the standard view of Corporate Governance, where shareholders and debtors are vital for corporate control.

3. Conflicting interests (managers vis-à- vis owners) The founders of a firm sell shares to outside investors to raise money for additional investments (the firm “goes public”) The decision to sell shares may affect incentives for maximizing profits (“ownership affects incentives”) The fact that the founder retains only a part of the shares alone does not cause any distortions (maximization of a share of financial net benefits also maximizes total financial net benefits) Distortions appear to the extent that decisions have non-financial costs and benefits hat are not easily observed and contracted over. An owner-manager, who owns 50 % of the shares and decides to fly first-class, pays only 50% of the costs but receives all benefits of flying first-class

4. Types of conflicts: Growth (investment) and longevity of companies: a) top managers in larger firms tend to earn higher salaries, b) when companies become bankrupt or are sold or taken over managers loose lucrative jobs Advantages or benefits considered as part of the job as manager (perks): As owner-managers bear only part of the costs, they are tempted to spend too much on benefits to themselves Managements prefer independence from outside interference

5. What can the suppliers of capital do in this situation? Get decision and control rights enforced by a court of law Shareholders have the right to elect boards of directors Creditors can 1) force a firm that is in default to liquidate assets and 2) enforce restrictions on the debtor’s behaviour, which are written into the debt contracts. Incentive systems of the management

6. Basic Shareholder Value model: I : Set up cost of the project A: “Initial equity” (contribution by the entrepreneur to cover part of investment costs) R: Profit at the end of the project (R>0 a success; R=0 a failure) pH: Probability of success if the entrepreneur “behaves” pL: Probability of success if the entrepreneur “misbehaves” B: Private benefit if the entrepreneur “misbehaves” w: Compensation the entrepreneur receive in case of success (w=0 in case of failure)

7. Markets for corporate control The critical corporate governance mechanism in the Anglo Saxon system (large shareholders are less common) Hostile takeovers (control is bought despite active resistance by the top management of the target firm) Corporate control: the rights to determine the management of corporate resources (the rights to hire, fire and set the compensation of top level managers) The managerial competition model: the acquisition of a target firm implies that control rights are transferred to the board of the acquiring firm. The free cash flow should be distributed to shareholders, who use the stock markets to allocate this flow to alternative uses.

8. Management (MBO) and Leveraged buyouts (LBO) MBO:Changes in corporate ownership, where firms’ managers purchase outstanding shares in order to gain ownership control. LBO: Shareholders are bought out by a new group of investors usually including old managers, a specialized buyout firm and debt holders. Most of the finance comes from “junk bonds” (corporate debentures that are considered particularly risky and so carries a high interest rate). The financial structure is changed as equity is replaced with debt The debt holders are organized in associations to monitor management intensively.

9. LBOs are efficient organizations Old shareholders are bought out with a premium Increased profits Lower agency costs: non-core competences sold out