Corporate Governance and ESG

Ownership Structure

• Dispersed ownership (no larger than $25\mathrm{\%}$)
• Concentrated ownership (One larger than $50\mathrm{\%}$)
• Hyprid ownership (In the middle)

Externally, there are structures as

• Horizontal ownership: Companies with mutual business interest that have cross-holding share arrangement with each other.
• Vertical ownership: A company or group that has a controlling interest in 2 or more holding companies, which in turn have controlling interests in various operating companies.

Voting power:

Dual-class shares: Grant one share class superior or even sole voting rights, where as other share classes has inferior or no voting rights.

Types of influential Shareholders:

• Banks
• Families
  • Benefit: lower risks associated with principal-agent problems
  • Drawbacks: poor transparency, lack of management accountability, modest consideration for minority shareholder rights, and difficulty in attracting quality talent for management.
• Institutioonal investors
• Group companies
• Private equity firms
• Foreign investors
• Managers and board directors (insiders)

Effects of Ownership Structure on Corporate Goverance

• Independent board directors:
  • No material relationship with company
  • U.S. requires audit, nomination, and compensation committees be composed entirely of independent directors.
• Board Structure
  • One-tier: Single board of directors
  • 2-teir: Supervisory board + Board of Directors.
• Special voting arrangement
• Corporate governance codes, laws, and listing requirements
• Steward code

Corporate Goverance Evaluation

Board Policies and Practies

• CEO duality: CEO also serves as chairperson of the board
• Board independence
• Board committee:
  • Audit, Goverance, Renuimeration, Nomination, Risk, Compliance
• Board skills and experience: A board director's tenure is considered long if it exceeds 10 years.
• Board composition: Reflects the number and diversity of directors
• Executive Remuneration (compensation)
  • Transparent
  • Incentive plan
  • Linkage with company strategy
  • Say-on-pay provision: Director decide
  • Claw-back policy: Claim part of compensation depending on performance
  • Excessive remuneration $\to$ use KPI to analysis
• Voting rights
  • Straight voting
  • Dual class

ESG

Materiality refers to ESG-related issues that are expected to affect company's operations, not relating to positive or negative. Also considering the investment horizon match

ESG Integration Implementation of qualitative and quantitative ESG factors in traditional security and industry analysis:

• Identify potential opportunites and mitigate downside risk

Green bonds:

• Bond with environmental or climate benefits
• Same credit ratings and valuations
• Command a premium and a tighter credit spread (less risky)
• Greenwashing risk
• Liquidity risk