Factors That Can Affect Stakeholder Relationships and Corporate Governance

Both market and non-market related factors can affect stakeholder relationships and corporate governance. Market factors are those factors that are related to the capital markets, while non-market factors are those that are not related to the capital markets.

Market Factors

Market factors include shareholder engagement, shareholder activism, competition, and takeovers.

Shareholder engagement involves a company’s interactions with its shareholders, namely through annual general meetings (AGMs) and analyst calls.

Shareholder activism refers to the efforts of shareholders to excite change within a company or to modify company behavior with the primary objective of enhancing shareholder value. Shareholders usually compare the earnings reports and market share of a company with those of its competitors. They then use the comparison to judge the performance of the managers and/or board.

Corporate takeovers can be pursued in several ways:

• in a proxy fight: shareholders are persuaded to vote for a group seeking a controlling position on the company’s board;
• in a tender offer: shareholders sell their interests directly to the group seeking control; and
• in a hostile takeover: an attempt is made by one company to acquire another company without the consent of the company’s management.

Non-market Forces

Non-market forces include the company’s legal environment, the role of the media, and the corporate governance industry.

A company’s legal environment can significantly impact the rights and remedies of stakeholders. In civil law systems, laws are created primarily through statutes and codes enacted by the legislature. In contrast, in common law systems, laws are created both from statutes that are enacted by the legislature and by judges through judicial opinions. Regardless of the prevailing legal system, creditors are generally more successful in seeking remedies in court to enforce their rights than shareholders are.

The media can quickly spread information and shape public opinion. Social media, in particular, has become a tool that shareholders are increasingly using to protect their interests or influence corporate matters.

With the increased importance of corporate governance, the demand for external corporate governance services has grown considerably. As a result, an industry that provides corporate governance services such as governance ratings and proxy advice has emerged.

Question

Which of the following statements is most likely accurate?

A. In a proxy fight, shareholders are persuaded to vote for a group seeking a controlling position on the company’s board of directors.

B. In a hostile takeover, shareholders sell their interests directly to a group seeking control of the company.

C. In a tender offer, an attempt is made by one entity to acquire another company without the consent of the company’s management.

Solution

The correct answer is A.

Options B and C are incorrect because the definitions have been interchanged. In other words, a tender offer describes a situation where shareholders sell their interests directly to a group seeking control of the company. On the contrary, a hostile takeover refers to an attempt made by one entity to acquire another company without the consent of the company’s management.

Reading 31 LOS 31g:

Describe market and non-market factors that can affect stakeholder relationships and corporate governance