Corporate Governance

Question 1

What are the three different types of corporations?

Answer 1

Sole proprietorship partnership, Limited corporation

Question 2

What is a sole proprietorship?

Answer 2

A company owned and managed by one person many very easy to form, but there is unlimited liability. The amount of funding is limited by the owners, personal wealth. Profits are taxed as personal income and the company only exists for the person’s lifetime

Question 3

What is a partnership?

Answer 3

Control by general partners is easy to form and requires a partnership agreement. Unfortunately it’s difficult to raise cash as it depends on the personal wealth of the partners. Profits are taxed as personal income and a partnership is terminated when a partner dies or leaves the firm.

Question 4

What is a limited corporation?

Answer 4

Limited corporation has a board of directors articles of memorandum of incorporation are required. There is limited liability. Profits are taxed as a corporate rate and the life of a company is hypothetically, unlimited.

Question 5

What are the article of incorporation?

Answer 5

Name of the corporation, intended life, business purpose, shares issued, nuimber of directors

Question 6

What are the memorandum of association?

Answer 6

The rules by which a corporation is organised

Question 7

What is the different between directors and non-executive directors?

Answer 7

Directors are employed directly from the firm, non-executive directors sit on the board of directors but are not employed directly by the firm

Question 8

Who does a supervisory board consist of?

Answer 8

Representatives from banks, the government, trade unions or other stakeholders

Question 9

What is the key difference between partnerships and corporations?

Answer 9

Partnerships are taxed at the personal rate, Corporations are taxed at the corporate tax rate

Question 10

What are the key features of corporate governance?

Answer 10

• Investor protection
• The financial system
• Control mechanisms
• Firm corporate governance structures

Question 11

What is the difference between common law and civil law?

Answer 11

Common - based on cases (stronger protection of outside investors)
Civil - based on code (weaker protection of investors)

Question 12

What are differences between countries financial systems that can effect corporate governance?

Answer 12

• Bank-based systems
• Market-based systems

Question 13

What are bank-based systems?

Answer 13

Banks are central to the process of moving funds between demanders and suppliers of capital there is more active monitoring here. Germany and Japan for example

Question 14

What are some indicators of banking development?

Answer 14

Bank liquid liabilities/ GDP
Bank assets/ GDP
Domestic bank deposits/ GDP

Question 15

What are market based systems?

Answer 15

Securities markets aer as important and can be even more important based off of external market discipline. Examples include the US and the UK

Question 16

What are widely held firms?

Answer 16

Firms owned by many shareholders
There is seperations between ownership and control
Agenecy issues between managers and shareholders

Question 17

What are closely held firms?

Answer 17

Managers and shareholders incentives are aligned
There are agency issues between controlling and non-controling shareholdesr

Question 18

What is the principal-agent relationship?

Answer 18

An agent is hired by a principal to do a job for them

Question 19

Who are managers hired by?

Answer 19

Shareholders

Question 20

What are agency problems (agency costs)?

Answer 20

A conflict of interest that occurs when agents don’t fully represent the best interests of principles. If asked this list hidden actions and hidden information too

Question 21

What is a hidden action?

Answer 21

Agents make decisions to maximise their own interest at the expense, the principles interest without being detected by the principal

Question 22

What is hidden information?

Answer 22

Agents have access to all available information about the firm principles, typically, only receive some summary reports which could be manipulated to the benefit of the manager of themselves

Question 23

How can agency costs be mitigated?

Answer 23

Direct managerial/financial incentives
Control: if managers perform poorly, they can lose their job
Two tier systems: trade unions, another group can make managers act in the interest of stakeholders as well as shareholders

Question 24

what are some examples of direct material/financial incentives?

Answer 24

Option to buy stock or opportunity for promotion
Tie management compensation to market performance

Question 25

What are the OECD principles of corporate governance?

Answer 25

• Ensuring the basis for an effective corporate governance framework
• The rights and equitable treatment of shareholders and key ownership functions
• Institutional investors, stock markets and other intermediaries
• Disclosure and transparency

Question 26

What should a corporate governance framework achieve (3 points)?

Answer 26

Should promote transparent and fair markets and the effective allocation of resources
Should be consistent with the rule of law and support effective supervision and enforcement
Should protect and facilitate the exercise of all shareholders

Question 27

How should the corporate governance structure be established for finance purposes?

Answer 27

The corporate governance framework should provide sound incentives throughout the investment chain and provide for stock markets to function in a way that contributes to good corporate governance

Question 28

What are the responsibilities of the board?

Answer 28

Should ensure the strategic guidance of the company, the effective monitoring of management by the board and the board’s accountability to the company and shareholders