Page 35 - 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
The purpose of the stakeholder impact analysis (SIA) is to force the company to identify which stakeholder groups are most critical. The SIA should:
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 decision making or control to another group. PAR can create problems because the group receiving the power (the
agent) generally has an asymmetric information advantage over the group making the delegation (the principal).
• The PAR problem arises if the agent uses the information advantage for their own interests to the detriment of the interests of the principal.
• It is compounded because the asymmetric information makes it difficult for the principal to know enough to detect the problem and evaluate the
agent’s actions.
• It is also compounded when senior executive officers delegate authority to additional officers who report to them. At each level of delegation,
additional layers of information asymmetry occur with the potential for more PAR problems. In each case, the agent has incentives to exploit the
information for improper personal gain.
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.