Page 33 - FINAL CFA II SLIDES JUNE 2019 DAY 6

LOS 23.a: Compare interests of key stakeholder groups READING 23: CORPORATE PERFORMANCE, GOVERNANCE, & BUSINESS ETHICS
and explain the purpose of a stakeholder impact analysis.

MODULE 23.1: CORPORATE PERFORMANCE, GOVERNANCE, AND BUSINESS ETHICS
ETHICAL DILEMMAS

External stakeholders:
• Customers
Key internal stakeholders: • Suppliers
• Stockholders. • Creditors
• Employees. • Unions
• Managers • Governments
• Members of the board of directors • Local communities and general public

RECONCILING INTERESTS AND THE STAKEHOLDER ANALYSIS
1. Identify the relevant stakeholders.
2. Identify the interests and concerns of each group.
3. Identify the demands of each group on the company.
4. Prioritize the importance of various stakeholders to the company.
5. Identify the strategic challenges these conflicting demands pose.

LOS 23.b: Discuss problems that can arise in principal–agent relationships and mechanisms that may mitigate such problems.

THE PRINCIPAL-AGENT RELATIONSHIP (PAR)

Arises when one group delegates control to another. Creates problems because ‘agent’ has an asymmetric information advantage over the principal.
• Agent then uses information advantage for their own interests to the detriment of the interests of the principal.
• Compounded because the asymmetric information makes it difficult for the principal to evaluate the agent’s actions.
• Gets worse as authority is delegated further down.

To illustrate:
• CEOs can enjoy on-the-job consumption in the form of lavish offices or travel that is passed off as a necessary business expense.
• CEOs can manipulate the board of directors to extract excessive compensation packages that do not link to improving company performance.
• Empire building through acquisitions that may not benefit the existing shareholders. Company size has been strongly linked to executive compensation.