Chapter 13 Shareholder Rights and Corporate Governance Copyright

Chapter 13 Shareholder Rights and Corporate Governance Copyright © 2017 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education.

Who Are Shareholders? § Shareholders: The legal owners of business corporations (also called stockholders or investors). § Types of shareholders: § Individual shareholders are people who directly own shares of stock issued by companies. (main street investors!) § Institutions à Examples: pension funds, mutual funds, insurance companies, and university endowments § Also called institutional investors (Wall street investors!) Copyright © 2017 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -1

Objectives of Stock Ownership § To produce a return greater than they could receive from alternative investments § Shareholders make money § when the price of the stock rises (capital appreciation) § when they receive their share of the company’s earnings (dividends) Copyright © 2017 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -2

Shareholders’ Legal Rights and Safeguards Copyright © 2017 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill 13. 3 Education.

Corporate Governance § Corporate governance § Refers to the process by which a company is controlled, or governed. § Board of directors § An elected group of individuals who have a legal duty to establish corporate objectives, develop broad policies, and select top-level personnel to carry out these objectives and policies. Copyright © 2017 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -4

Securities and Exchange Commission (SEC) § The major government agency charged with protection of shareholder interests. § Established in 1934 in the wake of the Great Depression. § Mission: to protect shareholders’rights by making sure that the stock markets are run fairly and investment information is fully disclosed. § Government regulation is needed because shareholders can be damaged by abusive practices. Copyright © 2017 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -5

1. Information Transparency and Disclosure § In recent years, management has tended to disclose more information to shareholders and other interested people. Copyright © 2017 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -6

2. Insider Trading § Insider trading § Occurs when a person gains access to confidential information about a company’s financial condition § Uses that information, before it becomes public knowledge, to buy or sell the company’s stock for a profit § Is illegal under SEC (in US), meaning against the law to: § Steal nonpublic information and use it to trade a stock § Trade a stock based on a tip from someone who had an obligation to keep quiet § Pass information to others with an expectation of gain Copyright © 2017 Mc. Graw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Mc. Graw-Hill Education. 13 -7