1. Nature and Significance

Question 1

What is Corporate Governance - what happens in a modern corporation?

Answer 1

• In modern corporations (PLC), senior executives manage firms on behalf of shareholders.
• Must consider if they serve shareholder interests or their own interests - Principal-Agent problem

Question 2

What is corporate governance - Shareholder Interests

Answer 2

• Assumed the single objective of shareholders is to maximise shareholder value.
• Senior execs might use firm resources to benefit themselves, not maximise shareholder value.

Question 3

What is corporate governance - literature

Answer 3

• Adam Smith: Wealth of Nations 1766
• Managers not expected to be as vigilant in their stewardship of the firm if they have no ownership interest.
• Negligence and profusion prevail in the management of the joint stock firm.

Question 4

Corporate Governance - Where does modern interest stem from?

Answer 4

• Berle and Means 1932

Question 5

Corporate Governance - What does Berle and Means 1932 say about CG?

Answer 5

• Corporate law separates ownership and control.
• Should we assume those who control joint stock firms will operate them in shareholders’ interests?
• Disperse ownership structure means shareholders lack financial incentive to monitor managers.
• Owners of joint stock companies provide how a managerial elite exercises power.

Question 6

Corporate Governance - Joint Stock Company Definition

Answer 6

• Company who’s stock is owned jointly by the shareholders.

Question 7

Corporate Governance - Picture before 1990s

Answer 7

• Debate emerged concerning the weakness of the Anglo-American corporate form.
• Shareholders are considered to have weak incentives to monitor management.

Question 8

Corporate Governance - Definition

Answer 8

• Formal system of accountability of senior management to firms’ shareholders.
• Executive Compensation
• Board of Directors

Question 9

Executive Compensation - CEO Pay in FTSE 100 Firms Trends

Answer 9

• Mean pay is returning towards Pre-Covid levels.
• Median pay higher than the previous high level in 2018.
• Median CEO to employee pay 2nd highest level in 2022 to 2018.

Question 10

Executive Compensation - Questions on Executive Pay

Answer 10

• Do executive pay motivate managers to maximise firm value
• Do senior executives earn their pay
• Should we focus on structure, not level of pay.

Question 11

Board of Directors - What are their jobs?

Answer 11

• At the apex of the firm’s internal control system.
• Directors have a fiduciary duty to shareholders and the firm.
• Hire and fire senior executives.
• Monitor senior executives performance.
• Set executive pay
• Do board characteristics impact on the board effectiveness and firm performance.

Question 12

Corporate Restructuring - Definition (Def 1)

Answer 12

• Hoskisson and Turk 1990
• Defined as a major chance in the composition of a firm’s assets combined with major changes in its corporate strategy.

Question 13

Corporate Restructuring - Definition 2

Answer 13

• Thompson and Wright 1995
• Involves simultaneous changes in the ownership, financial structure and incentive systems of the firm.

Question 14

Nature of Corporate Restructuring - 3 Categories of Restructuring

Answer 14

• Portfolio restructuring
• Financial restructuring
• Organisation restructuring

Question 15

Portfolio Restructuring - Definition

Answer 15

• Changes in the mix of assets or lines of business.

Question 16

Portfolio Restructuring - Types

Answer 16

• M&A/Takeover
• Divestment
• Do shareholders benefit from M&A?
• Drivers of M&A and divestment?

Question 17

Financial Restructuring - Definition

Answer 17

• Changes the capital structure of a firm.
• LBO
• Leveraged Recapitalisation
• Causes and consequences of Leveraged Buyouts? (LBO)
• Motives?

Question 18

Organisational Restructuring - Definition

Answer 18

• Changes the organisation structure.
• ## Divisional Design & Downsizing

Question 19

Organisation Restructuring - Motives?

Answer 19

• Align company structure with strategy
• Change the incentive structure within an organisation.

Question 20

Global M&A - Trends

Answer 20

• Number of M&A’s at their lowest point since 2013 in 2022.
• Value of M&A’s at their lowest level since pre-covid

Question 21

M&A Activity - Big Deals

Answer 21

• Largest ever deal: Vodafone M&A of Mannesmann, $202.7b in 1999
• Largest deal in 2022: Microsoft Acquisition of Activision $68.7b - Competition issues

Question 22

Oliver Hart Shareholder Primacy - Thoughts on Shareholder Primacy Critique

Answer 22

• Challenges traditional focus on shareholder interests.
• Argues for a more balanced approach, considering all stakeholders.

Question 23

Oliver Hart Shareholder Primacy: Thoughts on Stakeholder Inclusion

Answer 23

• Advocates for inclusion of employees, customers and community.
• Stresses importance of balancing stakeholder interests.

Question 24

Oliver Hart Shareholder Primacy: Long-term Perspective

Answer 24

• Emphasises need fro long-term view over short-term profits.
• Believes in benefits for sustained value creation.

Question 25

Oliver Hart Shareholder Primacy: Corporate Purpose

Answer 25

• Notes a shift towards socially responsible corporate purpose.

Question 26

Oliver Hart Shareholder Primacy: Legal and Regulatory Changes

Answer 26

• Highlights the role of legal changes in supporting inclusive governance.
• Advocates for regulations fostering societal impact consideration.

Question 27

Oliver Hart Shareholder Primacy: Adaptation to Modern Challenges

Answer 27

• Encourages adaptation to modern challenges
• Acknowledges environmental, social, and technological concerns.