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Homework answers / question archive / Assess Nokia company’s corporate governance structure and examine the relationships between different stakeholders in the business (stockholders, society, bondholders, and financial markets)

Assess Nokia company’s corporate governance structure and examine the relationships between different stakeholders in the business (stockholders, society, bondholders, and financial markets)

Finance

Assess Nokia company’s corporate governance structure and examine the relationships between different stakeholders in the business (stockholders, society, bondholders, and financial markets).

Key Steps:

1. Examine whether there is a separation between the management of a business and its owners. If so, assess how much power owners have in monitoring management and influencing decisions.

2. If the firm has borrowed money, either form banks or in the form of bonds, evaluate the potential for conflicts of interest between the equity investors and lenders and how it is managed.

3. If the firm is publicly traded, examine how markets get information about the firm and investor reactions and assessments of the stock.

4. Evaluate the company’s standing as a corporate citizen, by looking at its reputation (good or bad) in society.

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ANSWER 

1. Yes, there is a separation between the management of a business and its owners (Nokia). The managers basically make the day to day decisions on behalf of the owners (shareholders) of a company. It is not possible for owners to make all the decisions. Therefore, they appoint managers who manage the company on behalf of them and who use their funds efficiently to generate profits. Shareholders want management to make decisions that maximise their wealth or increase their ROI (Return on Investment). But sometimes managers, may take decisions that maximise their own wealth. Some situations in which managers may act for their own interests rather than the owners; thereby creating conflict of interest between them:

· The managers utilising owner’s funds to expand the size of the firm as big firms may increase the manager’s job security, power and compensation at the expense of owners.

· Sometimes, managers may give themselves high salaries that they expensed as normal business expense.

· Managers may invest in risky ventures buy using the owner’ funds ineffectively.

· Every decision has to be passed from owners before finalisation. Therefore, they have all powers in monitoring management and influencing decisions.

2. Equity Shareholders are the owners of the company while bondholders are the creditors of the company. Both have different relationship with the company; thereby creating conflict of interests between them.

· Equity shareholders have an incentive to take riskier projects than bondholders (creditors, lenders). Other conflicts of interest arise from the fact that bonds often have a defined term (maturity) after which the bond is redeemed, whereas stocks do not have any predetermined maturity.

· Bondholders (creditors, lenders) sometimes may put contracts in place (covenants) prohibiting management from taking on very risky projects or may raise the interest rate demanded; thereby increasing the cost of capital for the company. But it is one of the ways to manage their conflict of interests.

· Conversely, shareholder preferences–for example for riskier growth strategies –can adversely impact bondholders if there are no covenants in place.

3. If the firm is publicly traded, then the markets get information about the firm and investor reactions and assessments of the stock through their websites and some other platforms also like money control, yahoo finance, SEC filings. It is also necessary for all public traded companies to publish their results on their investor’s relation section. We can get these information from news, press releases, Tv Channels (Zee business, CNBC Aawaz) also.

4. Every corporation has a social responsibility towards the society. Society can expect adherence to rules and regulations of a corporation. Corporation can benefit the entire society by providing them efficient services and thereby creating profits. Therefore, social responsibility of a business cannot be ignored. Social responsibility of a business is to increase profits within the rules and regulations of a society. A corporation cannot grow and make profits until and unless it fulfill its social responsibilty.