corporate governance

Question 1

Cadbury code

Answer 1

’ Corporate governance is the system by which companies are directed and controlled’
- Cadbury A (1992)

Question 2

Narrow view of corporate governance

Answer 2

focus on relationships between a company and its shareholders

Question 3

Broader views of corporate governance

Answer 3

Related to accountability to a wide and diverse form of ‘stakeholders’
- could include employees, customers, suppliers, creditors, investor groups.
- begins to introduced the idea of corporate social responsibility

Question 4

April 2009- international monetary funds estimate

Answer 4

IMF estimated the losses associated with the financial crisis would reach $4.1 trillion - $630 for each individual

Question 5

Agency theory

Answer 5

• separation of ownership and control can lead to conflict of interest
• owners delegates responsibilities of decisions to directors

Question 6

agency problems

Answer 6

• horizon (shareholders have long term targets)
• risk aversion (managers are risk adverse)
• dividend retention (shareholders expects returns vs managers retain earnings)

Question 7

Agency costs

Answer 7

Bonding, monitoring and residual loss

Question 8

Agency conflict

Answer 8

• residual control rights allocated to directors
• principles bear the risk and want the biggest possible return
• agents try to maximise their own return
• need for monitoring (agency costs)

Question 9

shareholders - Milton Friedman, 1970

Answer 9

‘the social responsibility of a business is to increase its profits’
‘ managing business for any other purpose than profit maximisation is unlawful’

Question 10

stakeholder theory

Answer 10

• company is accountable to a broad range of stakeholders
• considered role of company in society
• ‘exchange’ relationships

Question 11

exchange relationships

Answer 11

stakeholders are affected by actions of company but their actions also affect company

Question 12

M&S 2021

Answer 12

• corporate responsibility example
• environment, social and governance (ESG)
• Plan A: net zero by 2040

Question 13

Stewardship Theory

Answer 13

• directors are seen as acting as ‘stewards’ for the interest of owners. this is a fiduciary duty
• directors can be trusted to act responsibly with independence and integrity

Question 14

Uk companies act 2006

Answer 14

A director of a company must act in a way he considered in good faith