Given the spate of U.S. corporate scandals in the early 2000s and the corporate governance failures associated with the 2008 financial crisis, this material is ripe testing fodder for CFAI. Further, an analyst’s ability to detect corporate governance weakness ahead of the crowd, may position him/herself for juicy investment returns. This week’s sheet aligns with […]
Corporate Finance Part 2
Introduction to Corporate Governance
In a corporate business structure, management (i.e. the company’s executive leadership) and ownership (i.e. stockholders) are separated. It is not uncommon for a corporation to face decisions where the interests of management may be different from that of owners and other stakeholders (employees, business partners, and creditors). Corporate governance is the policy structure applied by […]
Types of Business Organizations
Generally, businesses are legally organized in one of three forms: Sole Proprietorship This is a business owned and operated by a single individual. The law makes no distinction between the individual and the business, so the individual assumes unlimited liability. The individual owner may face challenges in raising capital. Ownership of the sole proprietorship is […]
Conflicts of Interest in a Corporate Environment
The Agency Relationship: When one party (the agent = company management) acts for another party (the principal = shareholders), an agency relationship exists. The Principal-Agent Problem: The situation where agents act in their own best financial interest rather than the interest of their principals. This is an ongoing challenge for investors. Corporate Conflicts of Interest […]
Assessing The Board of Directors
When an analyst evaluate the investment quality of a corporation’s debt or equity, he/she should look at the following board of director elements: Board Independence: The analyst must review the board’s roster to determine if one or more board members could be subject to management influence. In some instances company executives actually sit on the […]
Investment Valuation and Corporate Governance
Companies with quality corporate governance systems can be better positioned to drive higher returns for investors. Alternatively, poor corporate governance systems can negatively affect a company’s valuation. Companies with poor corporate governance expose investors to the following risks: Accounting Risk: a company with poor corporate governance may be more likely to issue misleading or inaccurate […]