Chapter 7 Corporate Governance

Question 1

Corporate Governance:

Answer 1

systems of checks and balances that attempts to make corporate boards and management accountable and make them operate in the interest of their stakeholders

Question 2

Corporate governance can entail:

Answer 2

bylaws and policies, definitions of accountability at various levels, board committees and oversight, annual general meetings, regulations

Question 3

Public companies:

Answer 3

shares listed on stock exchanges, stocks available for purchase by public, regulated requirements for disclosing info to shareholders/investors

Question 4

Private companies:

Answer 4

not listed on stock exchange, small number of shareholders, variety of models for investment, also called “closely held” company

Question 5

Hierarchy of governance:

Answer 5

stakeholders/shareholders to board of directors to (employees) CEO to executive leadership teams

Question 6

Board of directors:

Answer 6

compensated, but not employees - supposed to be objective third parties. Not responsible for the operations of the company, and should have no interaction with employees - nose in, fingers out

Question 7

Shareholders:

Answer 7

financial relationship with company, want to see company succeed/investments grow, interest in company activities that will influence company performance, not involved in day-to-day business, trusted communication and information sharing with this group is important

Question 8

Board of directors:

Answer 8

not involved in day-to-day business, not employed, objective oversight, represent interests of stake/shareholders, bring expertise/experience from individual careers/industry to benefit oversight of company, depending on company performance/management - may enact more direct oversight, in charge of hiring the CEO

Question 9

CEO:

Answer 9

top executive of organization, tasked with setting and implementing strategy. highest ranking employee in company, typically selected by board, reports to board, maintains accountability to board on behalf of company, provides direction and oversight to employees of the company to deliver on business strategy, supported by other executive leadership (CFO, COO).

Question 10

Voice of shareholder:

Answer 10

board of directors act as shareholders, incorporate shareholder feedback into decision making and corporate oversight. Also can attend annual meetings, and utilize exit, voice, loyalty framework

Question 11

Annual meetings:

Answer 11

where shareholders can express concern - public updates from company rooted in performance from previous year, opportunity to vote on major corporate matter, where nominations/elections occur

Question 12

Exit, voice, loyalty framework:

Answer 12

primary options shareholders can express their opinion about management of the company – exit, voice, loyalty

Question 13

Exit:

Answer 13

shareholders sell stocks to display frustrations with organization

Question 14

Voice:

Answer 14

shareholders express dissatisfaction formally/informally to board and/or management - can be letter etc

Question 15

Loyalty:

Answer 15

remain silent, signalling shareholder general satisfaction and loyalty to company

Question 16

Best Practice in Corporate Governance:

Answer 16

board independence and accountability, board diversity, board & exec compensation, CEO & Chair duality, shareholder voting right

Question 17

Board independence and accountability:

Answer 17

independent directors w/o material relationship with company. Directors are elected.

Question 18

Board diversity:

Answer 18

increase community representation in boards, particularly with gender, race, professional background, etc

Question 19

Board & exec compensation:

Answer 19

tightening linkage b/w compensation and performance (eg minimum stock requirements, performance-based equity grants etc).

Question 20

CEO & Chair Duality:

Answer 20

research and evaluate how to serve and promote the organization most effectively

Question 21

Shareholder voting rights:

Answer 21

address communication challenges and opportunities with thoughtful strategy contributing to organization’s mission & goals

Question 22

strategic communications role in corporate governance:

Answer 22

sustain strong organizational-public relationships, make “friends” with share/stakeholders before support is needed. Supporting opportunities for stakeholder interactions, bringing stakeholder feedback to leadership to influence perspective/policy changes, acting/advising w sensitivity to management decisions/performance

Question 23

Strategic communications - how to be involved in corporate governance:

Answer 23

stay current/educated to good governance and stakeholder activism, manage program to monitor/listen to governance concerns for a range of stakeholders, encourage organization to release timely/accessible information that is important to shareholders

Question 24

Enron & Accounting Fraud:

Answer 24

unethical leadership, lack of board accountability, inadequate financial reporting

Question 25

Volkswagen “Dieselgate”:

Answer 25

questionable practices with auditors, issues with transparency, regulatory oversight failures

Question 26

Wells Fargo fake customer accounts:

Answer 26

weak internal controls, accountability, lack of customer-focused culture

Question 27

WWE “Operation Raw Deal”:

Answer 27

weak internal policies and care for athletes, role of leadership in accountability and ethical practices, need for regulatory oversight

Question 28

Corporate governance:

Answer 28

the system of checks and balances that attempts to make corporate boards and management accountable and make them operate in the interest of stakeholders

Question 29

SEC definition of Corporate Governance:

Answer 29

the framework of rules and practices that reflect and define the responsibilities and the appropriate level of accountability of a company’s decisions makers – both the directors elected by shareholders and the managers selected by directors.

Question 30

Aspects of Corporate Governance:

Answer 30

corporate charter, bylaws, formal policies, customs, other processes adopted by the organization

Question 31

Shareholder activism:

Answer 31

taking an active role in affecting change at a company - a proven and successful investment strategy

Question 32

Principles:

Answer 32

the shareholders

Question 33

Agents:

Answer 33

members of the board of directors that act on behalf of the principles

Question 34

Board:

Answer 34

tasked with advising/overseeing senior management.

Question 35

Senior management:

Answer 35

responsible for day-to-day management of the organization aka the C-suite

Question 36

Executive committee:

Answer 36

a larger group of senior executives drawn from the organization - hold C-level positions or report to C-level executives

Question 37

Agency problem:

Answer 37

when the interests of company management, board, shareholders and stakeholders don’t align - leads to agency costs

Question 38

Shareholder primacy:

Answer 38

the concept that interests of shareholders come before/are more important than the interests of other stakeholders - many boards operate under this concept

Question 39

Classic agency theory model:

Answer 39

Shareholders are principle, then board of directors (agents) then company management, then stakeholder groups (employees, customers, suppliers, creditors, other stakeholders)

Question 40

Annual meetings:

Answer 40

required for public companies, allowing shareholders to vote on major corporate matters including - election of board of directors, management, shareholder-submitted proposals.

Question 41

Proxy statement:

Answer 41

a required corporate governance document which is filed with SEC’s EDGAR system under DEF 14A filing. Provides info on company management, board nominees, and other matters to be voted on

Question 42

Corporate gadflies:

Answer 42

small shareholders who attempt to make governance changes at public companies despite minimal resources and stock ownership positions - generally easy to brush aside

Question 43

Rule 14(a)8:

Answer 43

major change in 1943, SEC allowed shareholder activists to submit some shareholder proposals for inclusion in the company’s proxy materials - limited because they are nonbinding, so even if majority vote on it, company doesn’t have to act. Rarely these proposals gain traction.

Question 44

Council of Institutional Investors (CII):

Answer 44

historic shift in relationship b/w shareholders, cborads, management in mid-1980s. Marked start of public pension funds taking more active role in investment portfolios including submitting proposals focused on corporate governance issues.

Question 45

Main options for shareholders opinions:

Answer 45

exit, voice, loyalty (Hirschman, Lowenstein)

Question 46

Exit:

Answer 46

decide to sell stock due to dissatisfaction with company performance aka The wall street walk

Question 47

Voice:

Answer 47

instead of selling, express dissatisfaction privately or publicly to board/management via news media, negotiations and meetings with management, creating/submitting shareholder proposals for inclusion in company proxy materials, letters, proxy contest etc.

Question 48

Loyalty:

Answer 48

if satisfied, choose to remain silent which signifies approval to company

Question 49

Proxy contest:

Answer 49

binding - when shareholder group pays out of pocket to distribute competing set of proxy materials and alternate slate of board of director nominees to shareholders. Can cost millions of dollars, only groups with considerable economic interest engages in aggressive and costly behavior

Question 50

Proxy advisors:

Answer 50

specialized consulting firms who play notable role in influencing direction of shareholder voting on proxy proposals/contests.

Question 51

Proxy solicitors:

Answer 51

advise public companies and dissident shareholder groups on everything from voting projections, building support, generally overseeing process of soliciting votes on contested proxy issues.

Question 52

mediocre/poor corporate governance:

Answer 52

face greater regulatory/governmental scrutiny

Question 53

Board independence and accountability:

Answer 53

majority of board must be independent directors ie not employees or consultants of company - no other material business relationships with company. More companies have declassified board meaning directors come up for election every year, not multi year periods.

Question 54

Board diversity:

Answer 54

more women, race, nationality, background, experience. Research showes companies with women on board outperform all-male boards

Question 55

board/executive compensation:

Answer 55

directors/executives must maintain minimum stock ownerlship levels, make performance-based equity grants, eliminating accelerated vesting of sock, reducing “golden parachute” packages for executives following takeovers, implementing stronger compensation “clawback” provisions in employment contracts

Question 56

CEO/chair duality:

Answer 56

separation of CEO and chair of the board positions. Eliminates risk of too much power in hands of an individual

Question 57

Shareholder voting rights:

Answer 57

eliminating dual class stock with special voting power, reducing/eliminating supermajority voting provisions, removing antitakeover provisions aka “poison pills, implementing cumulative voting in director elections, giving shareholders right to act by written consent or call special meetings - essentially, giving shareholders stronger voting rights

Question 58

Dodd-Frank/Executive compensation:

Answer 58

Dodd-Frank act signed by US congress in 2010 - financial regulations to prevent financial crisis and protect investing public. Includes that companies must disclose info and provide advisory vote on executive compensation packages. Aka say-on-pay vote.