E2 Chapter 9: Corporate Governance

Question 1

corporate governance

Answer 1

method by which a firm is being governed, directed, administered, or controlled. And, the goals for which it is being governed

Question 2

historically the governance model has been a ______-_______ model; recently, it has shifted to a _________ model.

Answer 2

shareholder-primacy
stakeholder

Question 3

pre-corporate period

Answer 3

owners were managers who controlled business

Question 4

corporate period

Answer 4

dispersion of ownership into shareholders (owners) → board of directors → management (control)

Question 5

shareholders

Answer 5

own stock in firm giving them ultimate control

Question 6

board of directors

Answer 6

elected by shareholders to govern and oversee management

Question 7

managers

Answer 7

hired by board to manage business on a daily basis

Question 8

employees

Answer 8

non-managers hired to perform actual operational work

Question 9

precorporate vs corporate: what’s the issue? (3)

Answer 9

• shareholders are owners but do not perceive themselves as such
• true authority and control has shifted to the group w/ the most concentrated interest –> management
• mgmt often controls proxy process (election of board of directors) thus, semi-controls who fires and hires them/managers

Question 10

agent

Answer 10

hired to represent owners’ best interest, NOT their own

Question 11

agency problem

Answer 11

as managers are hired as agents, there becomes conflict when interest of shareholders are not aligned with interests of managers

Question 12

outside directors

Answer 12

no direct relationship to the firm or its CEO (not even family members); independent

Question 13

inside directors

Answer 13

have some tie to the firm through a top manager or family member; could be beholden to CEO and thus less objective

Question 14

there is a great importance for Board independence; public policy has led to an increase in the percentage of ______ ______. thus, greater independence.

Answer 14

outside directors

Question 15

5 issues surrounding executive compensation, which is determined by the _____.

Answer 15

Board
1. CEO pay-firm performance relationship
2. excessive CEO pay
3. executive retirement and exit plans
4. outside director compensation
5. transparency

Question 16

in terms of the CEO pay-firm performance relationship, execs in the top quartile make __x those in the bottom quartile but produced financial returns only __x as good.

Answer 16

12
2

Question 17

stock options

Answer 17

allows recipient to purchase stock in the future, but at the price today. designed to tie pay to performance but doesn’t always

Question 18

backdating

Answer 18

allows recipient to purchase stock at yesterday’s price, resulting in immediate wealth increase

Question 19

spring-loading

Answer 19

granting a stock option at today’s price, but with the inside knowledge that the stock’s value is improving

Question 20

bullet dodging

Answer 20

delaying a stock option grant until right after bad news

Question 21

say on pay

Answer 21

requires companies to submit their exec pay packages to a non-binding shareholder vote once every 3 years

Question 22

clawback provisions

Answer 22

compensation recovery mechanisms enabling company to recoup CEO pay in the event of a
financial restatement, or
executive misbehavior

Question 23

clawback provisions are included in about __ of ___ largest publicly traded companies’ executive contracts

Answer 23

90 out of 100

Question 24

In 2024, the average pay ratio for CEOs of S&P 500 companies was ___ to _, compared to the median employee

Answer 24

261 to 1