Friday, January 14, 2011

MicroCaps.info: Corporate Governance

by: Nicholas Gabriel

Whether you are an investor, a CEO, or a regulator, corporate governance of a micro cap is important information. More over, the elements of the corporate governance of any organization, in this case a micro cap company, is more important than the overall schematic. what is corporate governance? Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, the board of directors, employees, customers, creditors, suppliers, and the community at large.

A few key points to keep in mind when looking at the corporate governance of a micro cap company.


  • Separation of Ownership and Managerial Control-When a company becomes publicly traded, it creates an agency relationship. The shareholders (Principals) are the firm owners. The managers (agents) are the decision makers. Together they form an agency relationship, where the risk-bearing specialist (principal) pays compensation to a managerial decision maker specialist (agent). In micro cap companies, which are usually more tightly held, the separation of ownership and control is mostly less spread meaning that the managers are less likely to outside influence of ownership because they usually hold alot of the ownership.

  • Ownership Concentration-Large-block shareholders usually own around 5% of the company's total stock. When a micro cap company has a ownership concentration of institutional holders, they can control many aspects such as the volume of trading and/or voting depending on how the company is structured. It can also be a powerful aspect of the financing, with a large institution holding shares, they are less likely to let a company fail and more likely to provide favorable financing terms since their interest are involved.

  • Board of Directors-These people usually are the bosses of the executives and control the general direction the managers will take. In a large corporation they are separate from the executive body with the CEO at times having a seat on the Board. In micro cap companies, where the human resources are usually alot smaller, the CEO and other executives usually double as the Board of Directors. This means that there is no check on the executives for their decision making.

  • Executive Compensation-How much do the executives running the company get paid, and how? Do they have a salary or are they on commission (stock options). This is important because if an executive gets paid to much, they may have little incentive to make the stock price go higher or create profits for the company. If the executive gets paid to little, they may have incentive to go elsewhere for work or even dip into the company funds for misc. expenses. If they get paid depending on the stock price, they are more likely to work on raising the stock price. Usually a combination of the two is necessary to properly retain an executive to perform well. Researching the compensation payout of executives can give an investor, or CEO insight on how the company will perform or how to make the company better perform.

  • Market for Corporate Control-If a micro cap company is mainly held by insiders, there may be no checks and balances when it comes to corporate control. Also, large caps may be held so thinly over millions of shareholders that there might not be one majority holder with an interest enough to want to control the company, thus leaving the managers to execute decisions are they seem fit. Another company may also see a hostile takeover as an option to take control of the corporation. There are amendments that can be made to the corporate charter, standstill agreements, and the infamous golden parachute that can be utilized as well as other tactics in setting the standards for corporate control. As an investor and a CEO one must look to see how vulnerable a company is in a market that may look to more closely control a corporation.

  • International Corporate Governance-In America corporations are usually left on their own to deal business transactions as they seem fit within the law. Internationally micro cap companies may be subject to legislative actions by foreign countries governing bodies, government banks, or government and non-government committees. Basically the laws vary in every country and one must be aware of who or what is really governing the corporation.

Remember, the three internal governance mechanisms in the modern corporation include (1) ownership concentration, (2) board of directors, (3) executive compensation. The market for corporate control is the single external governance mechanism influencing managers' decisions and the outcomes resulting from them.

Sources: Strategic Management Competitiveness and Globalization (Hitt-Ireland-Hoskisson) 8th Edition, Wiki, Investopedia

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