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Question 1

Business Enterprise?

Answer 1

Is a combination of people and resources for the purpose of earning a return on capital invested

Question 2

Business enterprise relation to risk?

Answer 2

Limited liability privilege - they cannot lose more than they contributed into the firm

Question 3

What is the purpose of the business enterprise?

Answer 3

To benefit the share holders and maximize shareholder value

Question 4

Stakeholder view of an Enterprise (4)

Answer 4

The business enterprise has societal obligation beyond increasing shareholder value

1) Providing an acceptable standard of living
2) Mitigating risk for debt holders
3) Providing good quality and value to consumers
4) Safeguarding the Enviroment

Question 5

Agency Problem - parties involved

Answer 5

Many situations require you (the principle) to retain somebody (the agent) to perform some work on your behalve

Question 6

What is an agency problem

Answer 6

When the agent acts in their own self interest first, and when this is contrary to the interest of the priincipal it creates a problem.

Question 7

Conflict of interest in management / business enterprise?

Answer 7

if not monitored or controlled, management will often act in a self-interested manner to benefit themselves in detriment to stakeholders

Question 8

How do shareholders monitors and control management and how has it worked?

Answer 8

Via board of directors and it has not worked well in the past

Question 9

Agency problem is the core of the corporate scandal

Answer 9

trueee

Question 10

What is the BASIC purpose of good corporate governance?

Answer 10

to minimize agency cost

Question 11

What is the LARGE purpose of good corporate governance?

Answer 11

to minimize agency cost and ensure firms comply with legal obligations

Question 12

The HOLISTIC purpose of good corporate governance?

Answer 12

To make sure the firm makes correct economical decisions and complies sin an ethical manner that benefits the shareholders

Question 13

Define Corporate Governance -

Answer 13

The collection of mechanisms that an organization dopts to prevent or dissuade potentially self-interest managers who are willing to participate in actions detrimental to shareholders

Question 14

Corporare Governance- How extensive are the control mechanisms are chosen to be? (6)

Answer 14

• Size of pontential agency cost
• Ability to control mechanisms to mitigate cost
• Cost o implememnt nd operate the control mechanism
• Legal & regulatory requirements for control mechanism
• Economical efficiency (benefit> cost)
• SOme residual agency cost has to be ‘tolerated’ ince reducing it to zero would be cost-prohibitive

Question 15

Importance of Corporate Governance (4)

Answer 15

• Best ROI companies had the best corporate governance compared to poorly governed companies
• Efforts by institutional investor to improve corporate governance of poorly govered companies pay
• ortfolios of companies with strong shareholder rights outperform out performe portfolios of companies with weak shareholder protection

Question 16

In addition to the Board, many stakeholders are monitoring and or trying to influence MANAGEMENT decision making. Who are these actors?

Answer 16

• Shareholders and debt holders
• Regulators
• External auditors
• Security Analysts
• Union and employment

Question 17

The environment also influences MANAGEMENT decision making

Answer 17

• Capital market price securities to management decisions
• The enforcement of regulation
• The accounting standard
• The legal tradition
• The societal and cultural values

Question 18

Evolution of Corporate Governance (3)

Answer 18

1) Code of best practices f the Caury Committee
- Set of RECCOMENDATIONS n corporate governance
- Basis of lsiting requirements for LSE and NSYE
2) Sarbanes- Oxaley Act
- Series of legal requirements required to improve corporate control
- CEO’s and CFO’s have to sign financial statements
3) Dodd Frank Act
- provide shareholders with greater ay on board of directors elections and executive compensation + clawback provisions
- Increase using corporate governance rating and roxy advisory

Question 19

Key Components to of a CG system - Board of Directors (3)

Answer 19

1) Responsibiliies, independence, terms, and selections
2) Committees ( audit, compensation, and nomination)
3) Code of conduct

Question 20

Key Components of a CG system (5)

Answer 20

1) Board of directors
2) Executive compensation and incentives
3) Shareholders rights and actions
4) Internal controls, reporting and external audits.
5) Market for corporate control - (possible hostile takeover)

Question 21

Key components of a CG system - Internal reports, reporting and external audit

Answer 21

• Controls procedures in place for day-to-day operations - Governance, operating and financing activities are reported in a fair, accurate, and timely, relevant, complete, and verifiable manner