Corporate Valuation and

Governance

Group members:
Amar Nadeem
Omer Khan
Faiq Fawad
Abdullah Adrees
BS( A&F)
Fast Nuces Islamabad.
Contents

Employees
Agency
Stock
Conflicts and
Ownership
its types.
Plans (ESOPs)

Corporate
Governance with
inside and outside
provisions
 Agency Conflicts
 Stockholders and Creditors
 Inside owners/managers and outside owners.
 Managers and Shareholders
Stockholders and Creditors
Managers and Shareholders
 Using Compensation to Align Managerial
and Shareholder Interests

 The typical CEO today receives a fixed salary:

 Cash bonus based on the firm’s performance
 Stock-based compensation:
 stock grants or option grants

 Cash bonuses often are based upon:

 Short-term operating factors
 Same year’s growth in earnings per share,

 Medium-term operating performance

 Earnings growth over the past 3 years.
Strike price or exercise price: Gives owner of option
the right to buy a share of the company’s stock at a
specified price even if the actual stock price is higher.

Vesting period: Usually can’t exercise the option for

several years

The expiration, or maturity, date: Can’t exercise the

option after a certain number of years
Problems with Stock Options

Manager can underperform

market, yet still reap
rewards from options as
long as the stock price
increases to above the
exercise cost.

Options sometimes
encourage managers to
falsify financial statements
or take excessive risks.
Capital Structure and Internal Control
Systems
Capital structure decisions can affect managerial behavior.
As the debt level increases, so does the probability of
bankruptcy. This increased threat of bankruptcy affects
managerial behavior in two ways:

First: Managers may waste money on unnecessary

expenditures and perquisites

Second: high levels of debt may also reduce a manager’s

willingness to undertake positive-NPV but risky projects
 Internal control systems
 Internal control systems have become an increasingly important issue since
the passage of the Sarbanes-Oxley Act of 2002. Section 404 of the act requires
companies to establish effective internal control systems.
 The Securities and Exchange Commission defines:
 “reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.”
 In other words, investors should be able to trust a company’s reported
financial statements.
Corporate Governance

The set of laws , rules

and procedures that
influence a company’s All corporate governance
operations and the provisions effect either the
threat of removal or
decisions its managers
compensation.
make.
Monitoring & Discipline by the Board Of Governors

 Shareholders are corporation’s owners and they elect the board of directors
to act agents on their behalf.
 Board of Governors System
 Mostly , The CEO is the Chairman of Board of Governors
 Many Board Members are insiders
 Voting System in Choosing the board of governors
 Voting “No” isn’t an option
 “Just Vote No” Campaigns
 Interlocking Boards Of Directors
How to improve corporate governance

The CEO , not Small board ,

being the Good
chairman of board Understanding &
of governors Coordination

Outsiders in the
board who bring
Business Experts
in board
 Charter
Provisions &
Bylaws Affecting
Likelihood Of
Hostile
takeovers
Environmental factors outside the firm

Competition
Regulation in Product
and Laws Market

Block The Media

Ownership and
Patterns Litigation
Employee Stock Ownership Plan(ESOPs)

In an ESOP,
companies provide
their employees
with stock
ownership, often
at no upfront cost
to the employees.
Example

Balance Sheet Prior to ESOP

ASSETS Liability and equity

Cash $10 Debt $100

Other $190 Equity $100
Total $200 Total $200
 Balance Sheet after the ESCOP
Asset Liabilities and Equity

Cash $10 Debt $100

Other $190 Equity $150
Total $200 Total $200
 Balance Sheet after ESOP and Share Repurchase
Asset Liabilities and equity

Cash $10 Debt $100

Other $190 Equity $150
Treasury Stock (50)
Total $200 Total $200
Benefits for employees

Enhancing Boost
Retain Tax Oppose
Employees Retirement
Employees incentive Takeover
productivity Income