Chapter 10- Corporate Governance

Question 1

Corporate governance

Answer 1

-Is the set of mechanisms used to manage relationships among stakeholders and to determine and control the strategic direction and performance of organizations
-concerned with identifying ways to ensure that strategic decisions are made more effectively
-used in corporations to establish harmony between the firm’s owners and its top-level managers whose interests may be in conflict

Question 2

Agency relationship

Answer 2

Exists when one party delegates decision-making responsibility to a second party for compensation.
Shareholders (principals/owners) hire Managers (Agents/decision makers) and create an Agency relationship
**transfer of decision rights*

Question 3

Managerial Opportunism

Answer 3

Is the seeking of self-interest with guile. —-Opportunism is both an attitude and a set of behaviours.
-Prevents the maximization of shareholders wealth (primary goal of owner/principals)

Question 4

Agency Costs

Answer 4

The sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals, because governance mechanisms cannot guarantee total compliance by the agent.
-higher in a diversified firm

Question 5

Dispersed shareholding

Answer 5

Makes it difficult and inefficient to monitor management’s behaviour

Question 6

Board’s 3 key functions

Answer 6

-monitoring the manages’ actions on behalf of shareholders
-advising the managers on strategic direction and key strategic decisions
-interfacing with stakeholders/institutions in the external environment to help provide legitimacy, expertise, and access to critical resources

Question 7

Ownership concentration

Answer 7

Relative amounts of stock owned by individual shareholders and institutional investors

Question 8

Boards of directors

Answer 8

Individuals responsible for representing the firm’s owners by monitoring top-level managers’ strategic decisions

Question 9

Executive compensation

Answer 9

The use of salary, bonuses, and long-term incentives to align managers’ interest with shareholders’ interest