Management and Governance: Ownership and Control, Board Structure and Firm’s Interactions with the Markets PNC Bank

QUESTION
Management and Governance: Ownership and control, board structure and firm’s interactions with the markets PNC BANK
ANSWER
1. Ownership and Control
PNC is a public company and its shareholders have the right to vote on many major decisions affecting the firm. Under the PNC Investor Profile on Yahoo Finance, it is indicated that shareholders have the right to vote on major decisions such as mergers and acquisitions, election of directors, and changes to the company’s charter. With the recent acquisition of National City Corporation, this will be an important time for PNC to maintain shareholder approval for any future decisions. As the right to vote is useless unless it affects an outcome, absolute voting rights are the best situation for the effective use of ownership as a control mechanism. In the case of dual-class stock, the class of stock with superior voting rights has better control than cash flow rights in the same number of shares. This is relevant to PNC as the recent acquisition of National City Corporation has resulted in PNC having issued non-cumulative perpetual preferred shares series B with a liquidation value of $3.7 billion, which carries a higher vote entitlement than common shares. Changes to the company’s charter may dilute voting value and shareholders may protect themselves against this by buying and selling different classes of shares. Measures such as these to protect voting rights are important and PNC shareholders have the right and freedom to hold shares in and to effectively use power to influence the company’s decisions. However, at times, voting rights may also have adverse outcomes for shareholders, so it is important that shareholders have the freedom to sell shares.
The efficiency of stock ownership as a monitoring and control mechanism depends critically on the rights of shareholders to key decisions. McNulty (1966) defines corporate control as the power to influence or make decisions on the allocation of resources by a firm. Shareholder rights, which refer to the right to vote, the right to sell shares, and the right to protect shares against dilution, are an important mechanism in any public company for transferring control from one owner to another and an essential prerequisite for the effective use of ownership as a control mechanism.
1.1. Shareholder Rights
Management rights are the right to access information about the company and to sue the company for a breach of fiduciary duty. The effectiveness of shareholders’ rights in the US can be seen through the court case Smith v Van Gorkom. In this case, the Board of Directors of Trans Union Corporation agreed to a deal to sell the company at $55 per share. In the process, they only discussed the price with the buyer and not other possible buyers. The deal was seen to have breached the Board’s duty of care, and all the directors were sued. This case showed the importance of management rights as the decision by the directors resulted in huge financial losses for the shareholders.
Shareholder rights refer to the powers of the shareholders to make decisions in the company. The decision-making involves voting on certain issues such as the appointment of new Board of Directors, amendments of the corporation’s articles and bylaws, or the decision to merge or sell the corporation. Shareholders’ rights can be divided into two categories: voting rights and management rights. Voting rights give shareholders the right to vote on certain issues, and it is a very important form of participation for shareholders in the decision-making process.
1.2. Voting Rights
Voting rights are the essence of control in the company. There are several different types of shares with different voting rights attached to each type. The most common form of share is known as common stock, differing from non-voting common stock, preferred stock, or dual-class shares. Downtown and Bethem found that the percentage of total votes held by the largest inside blockholder is, on average, 84.9%. While remaining shares are split fairly widely amongst different investors. Inside blockholder being defined as owning at least 5% of company stock. This highlights the immense ownership concentration in the US, as firms tend to concentrate voting rights into the hands of a few key individuals, despite widespread share ownership. Dual-class shares occur when a company issues two different classes of common stock with different voting rights. Bertrand and Mullainathan note that this is common when management is afraid of losing control of decision-making due to investor pressure on particular issues. One such example is Ford Motor Company when, in 2002, it issued a second class of stock with the intention of preserving family control and protecting against the potential threat of a takeover bid. Although this practice is illegal in the UK and most European countries, they found that in the US, dual-class shares are more commonly seen among firms that are in their early growth stages. This suggests that management feels that it is a way of raising finance capital while reducing shareholder interference in company affairs.
1.3. Ownership Concentration
Section “1.3. Ownership Concentration” is the starting point to understand how corporations develop their governance mechanisms. A firm controlled by a single shareholder or a small tightly-knit group of shareholders will have different needs than a corporation with widely dispersed shareholdings. It helps explain the context of governance mechanisms and their needs. If one can understand “who controls the corporation and to what extent,” it will be easier to understand the governance strategy that has been chosen. Shareholders might have been informed about current conditions. PNC already talked about ownership of stockholders that reached 63% shares of the company. Public investors are relieved because they no longer need to inject capital to buy stocks since they feel PNC has had good performance during this time. Shares owned by the public are a short-term program to get some benefits before making long-term investments in the hope that it can be profitable at a certain level. But this is still considering the various possibilities because many retail investors who start to understand the positive performance of PNC have expectations that stocks can still be reached and still have a good price, so they decide to keep the obligations to ensure stocks in the company. While retail investors and other public investors who are planning to buy stocks at this time until the stock price is relatively higher will be affected by the decision to put a premium on consumer direct services and lower the credit. At this time, they still need more time to change the decision because it is still speculation of the company’s stock movements. Now public investors are the most common and have a fairly high influence on the capital, so it must be considered by the company. If considering the role of large institutions, they have different interests. Individually, they are also concerned with policies that provide more benefits because they are indirectly affected and have an interest to repurchase stock at a low level because it consumes a relatively small premium. It is written in this article that about 30% of high-income retail customers are investors who have stock in the company PNC Wealth Management. An affluent investor will respond to a change in the stock price because it will continue to provide advice to other clients, and the level of decision-making will be more stable because it has a relatively small level of risk. High-income PNC customers are still concerned about the credit facilities and cheap loans. Their decision is to sell stock and look back into the movement of stock and interest rates provided. If the decision from stock to find credit facilities is not commensurate with favorable stock bonds, they are very likely to redeem and switch to the purchase of bonds issued by the company. At least changing the trend of holders still expects good stock performance and sees the various decisions still taken by PNC. So there will be much consideration taken by the customer stock or potential new stock buyers to ensure the stock’s performance truly deserves long-term investment. If the decision is still considered effective, PNC can be a good choice to translate stock performance into a debt or financing from another loan. At this stage, stockholders or even a customer can decide to buy stock at a relatively cheap price for a loan will bring a higher level if the company’s performance always brings promise. So, in the various provisions of underlying PNC, it should provide various statements and choices to keep its stock and future investors or new customer stock is still a good choice step in long-term investment. A different story is owned by a public investor. They have an obligation to match capital purchases with quality investments. A long-term investment would be a good choice to still be positive and is also an option to repurchase. It still offers a variety of possibilities for PNC to keep participants, and the expected results can be found in the first paragraph of this article.
1.4. Corporate Governance Mechanisms
Corporate governance refers to the mechanism by which a company is directed and controlled. Boards of directors are responsible for the governance of the company. The shareholders’ role in governance is to appoint the directors and auditors and to satisfy themselves that the board is acting in the best interest of the shareholders and the company. The governance mechanism serves to ensure that the Board is effectively monitoring or managing the top executive. It is particularly important for the owners to make sure that the board has strong monitoring incentives because often the board will consist of the CEO and his cronies. In this case, it is unlikely that the board will act to monitor the CEO who selected them. Ownership & Control PNC exhibits a diffuse ownership characteristic. This can be defined by the fact that no outside investor owns more than 10% of the total shares outstanding. This is particularly important to note in regards to corporate governance at PNC. The level of ownership concentration, in a way, determines the level of monitoring needed. High ownership concentration can often be viewed as a negative as it indicates the CEO might face heavy monitoring and therefore might have less leeway in his decision making. The bank’s decision to include a ‘Lead Director’ is an admission that PNC’s corporate governance failed in the past and a sign that they are concentrating on making sure they don’t make the same mistakes. In the aftermath of the accounting scandal, with one person simultaneously holding the CEO and Chairman position, there is a clear consensus that stronger governance is required and that the board of directors needs to take a more active role in monitoring PNC’s CEO. An internal chief compliance officer and more efficient direct reporting methods to the board are also seen as conscious efforts by PNC to ensure that future errors are quickly identified and do not persist without the board’s knowledge. Although while not specifically related to corporate governance at PNC, the adherence to signing ‘Corporate Integrity Agreements’ issued by the government also illustrates PNC’s desire to move past previous transgressions and towards a more positive public image.
2. Board Structure
2.1. Board Composition
2.2. Board Independence
2.3. Board Diversity
2.4. Board Committees
2.5. Executive Compensation
3. Firm’s Interactions with the Markets
3.1. Regulatory Compliance
3.2. Financial Reporting and Transparency
3.3. Investor Relations
3.4. Market Competition
3.5. Stakeholder Engagement
4. Strategic Decision Making
4.1. Long-Term Planning
4.2. Risk Assessment and Management
4.3. Capital Allocation
4.4. Mergers and Acquisitions
5. Performance Evaluation and Accountability
5.1. Key Performance Indicators
5.2. Financial Performance Analysis
5.3. Internal Control Systems
5.4. External Auditing
5.5. Shareholder Activism
6. Ethical and Legal Considerations
6.1. Code of Conduct and Ethics
6.2. Compliance with Laws and Regulations
6.3. Corporate Social Responsibility
6.4. Legal Risk Management