Chapter 10 Flashcards
Corporate Governance
When does an Agency Relationship Arise
when one or more individual, called principals…
A: hires another individual or organization, called an agent to perform a service and then…
B: delegates decision-making authority to that agent
What is an agency conflict
The agent does not act in the best interest of the principal
What are the primary agency relationships between
- The Stockholders and Creditors
-The Managers and Shareholders
who are creditors
people who lend money to the business
who are shareholders
people who own a portion of company and want a return on their investment
-own share/equity in company
what do stockholder do
provide capital that allows the business to grow, allowed to vote on decisions
-own stock in the company
What do Shareholders want from the company?
Hire managers who are able and willing to take legal and ethical actions to maximize intrinsic stock price
What are Shareholder’s requirements for managers
- Technical competence
- willingness to put effort to implement value-adding activities
What are the ways in which a manager’s behavior might harm a firms intrinsic value
1.) not spend the time and effort required to maximize value
2.) Use corp. resources on activities that benefit themselves
3.) Managers might avoid value-enhancing decisions
4.) Might take too much or too little risk
5.) Might stockpile FCF instead of returning to investors
6.) May not release all information desired by investors.
What is corporate governance?
The set of laws, rules, and procedures that influence a company’s operations and the decisions made by its managers
What are the two forms of corporate governance?
Sticks: threats of removal
Carrots: compensation
What are the internal provisions (firms control) for Corporate Fovernance
- Monitoring and discipline by the board of directors
- Charter and bylaw provisions
- Compensation plans
- Capital structure choices
- Acct. control systems
Who elects the board of directors
Sharholders
What are the board’s duties
monitor senior managers and discipline them if they do not act in the interest of the shareholders
What is cumulative voting
each shareholder is given a number of votes equal to their share by the number of seats up for election
Noncumulative voting means
stockholders can not concentrate votes (can only cast a certain amount of votes)
What is a staggard board
only a certain spots are up for election each year, make it harder to gain representation
Are large or smaller boards more effective
smaller
Corporate governance improves if:
- CEO is not the chairman of the board
- The board has a majority of true outsiders who bring some type of expertise
- The board is not too large
- Board members are compensated properly
What is a hostile takeover
The acquisition of one company (the target company) by another (the acquirer) but there is no agreement with management
What is a shareholder-friendly charter
making it harder for poorly performing managers to remain in control
What does a typical CEO receive
- a fixed salary
- cash bonus based on performance
- Equity based compensation
What are examples of equity based compensation
restricted stock awards
restricted stock units (RSUs)
stock options
As the debt level increase so does what?
probability of bankruptcy
