Corporate governance

Question 1

Agency problems arising when incentives are not perfectly aligned

Answer 1

• empire building
• managers staying at the job for too long (resisting takeovers)
• managerial expropriation

Question 2

Examples of takeover protection (2)

Answer 2

• poison pill

- golden parachute

Question 3

Types of shareholders

Answer 3

• large, also called blockholders (>5%)
• controlling (>20%)
• majority (>50%)

Question 4

Monitors other than shareholders (3)

Answer 4

• Lenders
• Securities analysts
• Regulators

Question 5

Goals of executive compensation (3)

Answer 5

• motivate executives to take actions that create long-run shareholder value
• attract the right executives at the lowest cost
• retain the right executives at the lowest cost

Question 6

Ways to compensate CEOs (4)

Answer 6

• base salary
• bonuses
• stock options
• long-term incentive plans
• life insurance
• retirement plans

Question 7

Problems with stock options (4)

Answer 7

1) valuation
2) dividends
3) market crashes and retention
4) relative performance

Question 8

The SOX aimed to improve the accuracy of information given to both boards and shareholders by: (3 ways)

Answer 8

• by overhauling incentives and independence in the auditing process
• by stiffening penalties for providing false information
• by forcing companies to validate their internal financing control processes

Question 9

Ways to measure country-level governance

Answer 9

• voting rights of shareholders
• % of shares needed to call special meeting
• oppressed minorities can challenge decisions of management
• creditor rights
• corruption index
• accounting standards

Question 10

Types of legal systems

Answer 10

1) Common law

2) Civil law (french, german, scandinavian)

Question 11

Measuring firm-specific governance (3)

Answer 11

• Does a company have possibilities of delaying hostile bidders?
• Voting rights of shareholders
• Protection of executives: is there a golden parachute?

Question 12

Tasks of BoD

Answer 12

• approve strategy and important business decisions
• hire and fire the CEO
• determine executive compensation

Question 13

What are the two major ROLES of BoD?

Answer 13

1) monitoring: controlling the conduct of business in the interest of shareholders
2) advising: supporting the economic performance of the business

Question 14

Board characteristics (3)

Answer 14

• independence
• number of directors
• diversity

Question 15

types of directors (3)

Answer 15

• inside directors (by def dependent)
• outside directors (indep)
• grey directors (not clear, in between; banker)