Corporate Governance and Financial Strategy

Financial strategy is about how companies raise funds and manage them within their organizations. Corporate governance is relevant to both of these aspects, and an understanding of corporate governance is vital for an appreciation of corporate finance. This chapter from Corporate Financial Strategy, 4th edition, examines several aspects of corporate governance that are directly relevant to corporate finance, affecting as they do the perceived risk of investors and thus their required return. The chapter sets out a model of how governance requirements change over an ‘ownership lifecycle’ which moves potentially from sole trader through partnership, various forms of limited company ownership and ultimately to a fully listed company. It acknowledges that most businesses will not make this full journey, but uses the stages to consider agency issues, internal control, reporting and management compensation, linking that compensation specifically to a company’s cost of capital and share price, and noting the problems with standard performance measures. Within the chapter we also examine finance-related issues such as block-holders, structures of indirect control, and the regulation of exchanges. The chapter ends with a consideration of how stakeholder value can help create value for shareholders.