Chapter 3-5

Question 1

Degree of involvement in strategic management

Answer 1

Phantom: doesnt know what to do
Rubber Stamp: officers make all the decision
Minimal review: formally reviews selected issues that officers bring forward
Nominal Participation: performance review, key indicators, and programs
Active Participation: strategy and policies, constant approval, active board committees
Catalysts: leading role in making change, policies and strategy committees

Question 2

Board of Directors

Answer 2

• the centrepiece of corporate governance: overcoming the principal-agent problem
• elected by the shareholders
• acts in owners’ interest
• not an extension of management

Question 3

What is the dual mandate?

Answer 3

the responsibilities of directors are separate and distinct from management

Monitor:
hire, evaluate and compensate the C-suite
approve major operating proposal
Approve major financial decision
ensure firm;s activities and financial condition are accurately reported

Advise
offer expert advice on strategy, new product, M&A

Question 4

Chairman

Answer 4

• leadership of the board and principal between the CEO and management
• agenda and work plan
• meeting of boards, and effectiveness of boards
• good corporate governance and procedures in place
• ensure directors are properly briefed

Question 5

Advantage of CEO being the same as the chairman?

Answer 5

• clear separation of responsibilities
• clear authority to one director
  -give CEO time to focus on strategy
• good when company has new CEO

Question 6

The disadvantage of CEO and Chairman is the same

Answer 6

• artificial separation
• make recruit of CEO difficult
• create duplication of leadership
• inefficient decision making

Question 7

Solution ?

Answer 7

Lead Independent Director
- sometimes communicates with shareholders
- important during a crisis
- consults regarding board affairs and annual evaluation

Question 8

Board Structure - Committees

Answer 8

1. Audit Committee
2. Compensation Committee
3. Nomination Committee

Question 9

Audit Committee

Answer 9

• financial reporting and disclosure
• monitoring accounting policies and principle
• hiring, performance, independent of external auditor
• regulatory compliance, ethics, and whistleblower

Question 10

Compensation committee

Answer 10

compensation of the CEO
- setting performance metrics, measuring targets, and monitoring CEO behaviour
- setting board compensation

Question 11

Nominating Committee

Answer 11

• nominating people to serve the board
• selecting nominees to be put before a shareholder vote at the annual meeting
• Director recruitment process and hiring consultants
• determines governance standards
• CEO evaluation process

Question 12

Shareholder model

Answer 12

shareholders’ interest should be the number one priority

• courts suggest it is important to take non-shareholders interest into consideration as long as shareholder interest is not compromised

Question 13

Stakeholder model

Answer 13

the company owes a responsibility to a wider group of stakeholders such as employees, vendors, customers, society

Question 14

Dual Class Director Voting

Answer 14

different classes of shares, each having a different number of votes 20% of Canadian companies have dual-class shares

Question 15

Majority class voting

Answer 15

WITHHELD or Vote for directors from shareholders. The director needs 50% of withheld votes to stay

Question 16

Cumulative Director Voting

Answer 16

each shareholder gets a number of votes equal to the number of shares they own –> shareholder allocate votes in the way they see best

Question 17

Hostile takeover

Answer 17

hostile bidder makes offer for the company which includes proposing to a new directors board

Question 18

activist investor

Answer 18

an investor unhappy with the company performance attempts to change the board in order to support their plan

Question 19

Director Liability

Answer 19

directors are protected from liability by the company 2 general forms

indemnification agreements: entered into between the company and director

D&O insurance: purchased by the company from an insurance company for the benefit of directors and management

Question 20

Fiduciary Duty

Answer 20

the interest of the client you are representing should have a higher priority than your personal interest

owed at all times to the corporation

falls in to three main category
duty of care
duty of loyalty
duty of candour

Question 21

CBCA has two principles for directors also according to Bill C-97

Answer 21

1. fiduciary duty
2. duty of care

Question 22

Board sizes

Answer 22

large firms publicly traded –> 10
small firms privately traded –> 4-5

Question 23

Advantages of large boards

Answer 23

• more resources and oversight
• allow for greater specialization through diversity and experience

Question 24

negative of large boards

Answer 24

• slow decision making
• less candid decision
• diffusion of responsibility
• risk aversion and free riding
• lower firm value only in non-complex firms

Question 25

Staggered board

Answer 25

grouped in to three classes and only a portion of the board is re-elected

• can lead to less accountability but safety guard for hostile takeover

Question 26

Annual election

Answer 26

all directors are elected annually

Question 27

Co-determination

Answer 27

inclusion of the corporation’s employees on its board. very population in Europe

Question 28

Inside Directors

Answer 28

officers and employees elected by the corporation

Question 29

Outside Directors

Answer 29

maybe executives of other firms but are not employees of the board of a corporation

Question 30

Affiliated Directors

Answer 30

legal and insurance work
used to work for the corporation and responsible partially for current strategy
descendants of the founder and own significant blocks of stock

Question 31

Direct Interlocking directorate

Answer 31

when two firms share a director or one executive sits on multiple boards

Question 32

indirect interlocking directorate

Answer 32

when two corporations have directors who serve on the board of a third firm

additional perspective + diverse background

worst case–> based on relationship rather than qualifications

Question 33

Business judgement rule

Answer 33

protects companies from frivolous lawsuits by assuming that managers are acting in the best interest of the company unless proved otherwise

assumes
managers will not make optimal decisions all the time
unless it is made evident that directors have acted outside of their responsibility the court will not question their decision

Question 34

Board Independence

Answer 34

the degree to which directors are free from conflict of interest that might compromise their ability to act in the interest of the firm

Question 35

Independence Good vs Bad

Answer 35

Large number of outsiders can create problem

• ineffective decision making, limited day-today contact
• information asymtery
• bad for fast moving industries