Chapter 9 Flashcards
What does the term governance indicate?
The term ‘governance’ indicates the system and structures that govern an organization or society so that its goal is determined, and the efforts towards the realization of the goals are organized, adjusted when necessary, and achieved.
What does the term corporate indicate?
The term ‘corporate’ indicates that the subject at issue is the governance of the business corporation.
What does separation of ownership and control mean?
Separation of ownership and control means that the ownership of the entity’s shares is in the hands of the shareholders, but the control of the entity’s assets is in the hands of the company’s senior management.
Separation ownership causes agency problems or principal-agent problems.
When do agency problems arise?
The agency problem arises when a principal entrusts an agent with a responsibility or task and the principal is not able to directly observe the agent when carrying out the task and the principal is not able to directly observe the agent when carrying out the tasks or fulfilling the responsibility.
What does the private property right and obligations include for the owner of the items?
- The right to possess the property.
- The right to use the property.
- The right to manage the property.
- The right to the income generated from the property.
- The right to sell or bequeath the property.
- The right to the capital value of the property.
- The right to security from expropriation.
- The absence of a term of ownership of the property
- The prohibition of harmful use of the property.
- Liability to execution.
- Residuary character.
What are the 5 characteristics of the modern corporation?
- The legal personality of the company is separate from the legal personality of its shareholders.
- Limited liability of its shareholders.
- Transferable shares (in the case of listed companies, freely tradable shares).
- Centralized delegated management under a board structure.
- Absentee investor ownership.
Why are the company’s assets separate from those of its shareholders?
The company’s assets are separate from those of its shareholders. This shields the entity asset from the personal creditors of the shareholders. Entity shielding also means that the company’s creditors have a prior claim on the company’s assets after any liabilities to its creditors have been paid. Instead of having limited liability a company can choose free tradability.
What does free tradability of shares enable for shareholders?
Free tradability of shares enables shareholders to buy, hold and sell shares at will. Freed tradability of shares potentially reduces shareholder’s interest in the company’s management and reduces their incentives to perform their monitoring duties. Therefore, shareholders delegate their monitoring to a board of directors. The board of directors comprises a group of people who represent the company’s shareholders.
Between which conflicts of interest does the corporate governance deal?
- The providers of finance and senior management.
- Different types of shareholders, particularly majority shareholders, and minority shareholders.
- The shareholders and the other stakeholders.
What does the agency theory assume?
The agency theory assumes that the company exists for the benefit of its owners, who are assumed to be solely interested in the maximization of their wealth. Both the principals and the agents are assumed to be rational economic persons who are motivated by self-interest.
What is information asymmetry?
Under information asymmetry, adverse selection refers to the situation that an agent has private information about the costs of their private efforts which the principal does not have at the time they enter into an employment contract, hence the contract could be on terms that are disadvantageous to the principal or the principal might hire a wrong agent.
What is stewardship theory?
Stewardship theory posits that agents are more likely to want to do a good job because they are intrinsically motivated by successfully performing challenging tasks, recognition from peers and bosses, responsibility, and authority. The main challenge is not so much designing the organizational structure to avoid monitoring and bonding costs.
What is stakeholder theory?
Stakeholder theory rests on the observation that companies often do identify and manage their stakeholders. Predicts that stakeholders benefit in the longer term. Considering the interests of all the company’s stakeholders is the morally right thing to do.
