ARM 400 Chapter 5 Flashcards
An organization’s corporate governance is about acting in the best interest of all the stakeholders, including shareholders. Is it beneficial to separate the ownership of an organization from control of the organization?
Yes, separating ownership and control provides many benefits that risk professionals should be aware of.
Midsize to large corporations generally separate ownership and control which means that?
The corporation is owned by its shareholders but controlled by its board of directors and management.
Under corporate governance principles, the board has an________ role.
oversight
What potential incentive gives rise to agency costs?
The potential for managers and nonmanagers to pursue their own interests over what is best for the shareholders that they represent.
What are the 3 agency cost categories? (Hint - MBI)
Monitoring costs
Bonding costs
Incentive alignment costs
In regard to agency costs, what is an example of monitoring costs and who typically bears the cost?
A fee paid to an external auditor to verify financial statements.
The majority of these are borne by the shareholders.
In regard to agency costs, what is an example of bonding costs and who typically bears the cost?
A manager’s willingness to accept noncash compensation.
Managers bear these costs to demonstrate they are serving or will serve the shareholders’ interests.
In regard to agency costs, what is an example of incentive alignment costs ?
How a manager, for example, may or may not pursue a course of action depending on their personal risk appetite.
What are 4 main mechanisms used to reduce the agency costs that are involved with the separation of ownership and control in a corporation?
Incentive compensation - tied to performance of company
Legal liability - under certain conditions, directors and officers can be held legally liable to shareholders for any harm their decisions caused them.
Management reputation - professional reputation can be affected by how well they perform.
Takeover threats - Directors and officers whose decisions consistently fail to maximize the value of the corporation’s stock can increase the probability of a takeover.
Although corporate governance codes can vary by social and business climate, they tend to contain a few common provisions. What are they?
-A balance of independent and executive directors.
-A nomination process to select new directors.
-Compensation and risk oversight audit committees.
-Regular evaluations of board member and committee performance. -
What did the Sarbanes-Oxley codify?
Requirements for reporting, transparency, accounting practices and the accountability of those in positions of corporate responsibility.
Corporate boards vary in size from ___ to ___ directors.
8 to 20
Inside directors on a board may hold what titles?
CEO, CFO
Outside directors of a corporate board often were or have been______________.
Top officers for other corporations and/or may have specialized expertise in that particular industry.
Corporate governance is evolving towards the separation of oversight and control for corporate boards and this separation is accomplished by_____________.
-Requiring that a majority of directors are outside directors.
-That regular meetings of outside directors occur without management present.
-Key committee are composed of only outside directors.
