Corporate Governance Flashcards
What are the key objectives of corporate governance?
Ensuring accountability, balancing stakeholder interests, managing risks, and promoting sustainable corporate growth.
Why did companies emerge as a dominant form of business?
The Industrial Revolution created demand for large-scale infrastructure projects requiring substantial capital.
What is the contractual model of the company?
It views the company as a nexus of contracts where individuals engage in economic exchange.
Who are the principal and agent in corporate governance?
Shareholders are principals (owners), and managers/directors are agents appointed to run the company.
What is the agency problem in corporate governance?
Managers may prioritize their own interests over those of shareholders, leading to inefficiencies.
How did Adam Smith view the corporate form?
He was skeptical, arguing that hired managers lack the same motivation as owner-managers.
What did Berle and Means argue about corporate control?
They showed that corporate ownership became dispersed, giving managers significant power over shareholders.
What are two solutions to the agency problem?
- Directors’ Duties
- Market for Corporate Control
What does the Efficient Capital Markets Hypothesis (ECMH) propose?
Share prices reflect all publicly available information, ensuring poor management is disciplined by the market.
How does the market for corporate control address poor management?
If a company is underperforming, its low stock price makes it attractive for a takeover.
What critique did Lynn Stout and behavioral economists offer against ECMH?
They argued that markets are not always efficient due to irrational investor behavior and stock price bubbles.
What is the shareholder primacy model?
The view that maximizing shareholder profits is the primary goal of corporate governance.
What did Milton Friedman argue about corporate social responsibility?
He claimed the only social responsibility of business is to maximize profits within legal and ethical constraints.
What is the stakeholder model of corporate governance?
It argues that companies should consider all stakeholders, not just shareholders.
How did Blair & Stout’s Team Production Theory challenge shareholder primacy?
They argued that firms require cooperation from multiple contributors, and the board of directors acts as a mediator.
What is the stewardship theory of corporate governance?
It suggests that directors act as stewards of the company, motivated by intrinsic goals.
What key distinction does stewardship theory make from agency theory?
Stewardship theory suggests managers may act collectively to benefit the organization.
What is concession theory (fiction theory)?
The idea that companies exist only because the state allows them to.
What is aggregate theory?
It views the company as a collection of individuals, emphasizing private contracts over state intervention.
What is corporate realism?
The belief that a corporation is a real, independent entity with rights and obligations distinct from its members.
What are the three main models of corporate governance?
- Shareholder primacy model
- Director primacy model
- Stakeholder model
How does the UK corporate governance system balance these models?
UK law prioritizes shareholder interests while directors owe duties to act in the company’s best interest.
What did Automatic Self-Cleansing Filter Syndicate Co Ltd v Cunninghame (1906) decide about directors’ authority?
Directors are not mere agents of shareholders and do not have to follow simple majority votes.
What principle was established in Gramophone & Typewriter Ltd v Stanley (1908)?
Directors have autonomous control over company management unless constrained by the company’s constitution.
How do Model Articles of Association (Article 4(1)) affect shareholder power?
Shareholders can issue binding special resolutions directing directors to take specific actions.
What was the Dodd-Berle debate about?
- Berle: Directors should only focus on maximizing shareholder value.
- Dodd: Companies should also consider employees, consumers, and the public interest.
Which modern corporate governance theory aligns more with Dodd’s view?
The stakeholder model and ESG (Environmental, Social, and Governance) principles.
What are the key features of shareholder primacy?
Maximize profits for shareholders.
What are the key features of the stakeholder model?
Consider all stakeholders (employees, creditors, etc.).
What are the key features of agency theory?
Shareholders = Principals, Directors = Agents (conflict risk).
What are the key features of stewardship theory?
Managers act as stewards for long-term company success.
What are the key features of the market for corporate control?
Takeovers discipline poor management.
