Föreläsning 15

Question 1

What is corporate governance?

Answer 1

Corporate governance: system of controls, regulations and incentives designed to make management act in the interests of shareholders

Question 2

On what view is corporate governance based?

Answer 2

It is based on the shareholder-value view.

Question 3

What is the shareholder-value view?

Answer 3

+ Management should maximize shareholder value
+ Other stakeholders (debt holders, employees, customers etc.) are protected by contracts and regulation
+ The government, not firms , is in charge of correcting market failures and income or wealth inequality”

Question 4

What is the root to corporate governance problems?

Answer 4

A corporation, ownership (sharholders) and direct control (board of directors) are typically separate

Question 5

What are the board of directors?

Answer 5

+ Elected by shareholders
+ Have ultimate decision making authority
+ Inside directors (with executive duties; CEO, CFO, COO
+ Outside directors (not otherwise employed by or engaged with the organization)

Question 6

What is the conflict between managers and shareholders?

Answer 6

Managers may act in their own interest rather than in best interest of shareholders

Question 7

What is the role of corporate governance systems in conflict like these?

Answer 7

Corporate governance system attempts to provide incentives for taking the right actions, and punishments for taking the wrong actions

Question 8

What is another centrral conflict connected to corporate governance?

Answer 8

The conflict between conrolling (majority) sharholders and minority shareholders.

Question 9

Which are the three main problems with the agency conflict between shareholders and managers?

Answer 9

Shirking, excessive perk consumption, empire building

Question 10

What are perks?

Answer 10

Forms of nonmonetary compensation offered to select employees Ex: executive jet, chauffeur driven car, giant corner office, country club memberships

Question 11

What is implied from the defenition of perks?

Answer 11

Perk is not strictly necessary for accomplishment of employee’s duties

Question 12

What is the optimal contracting view?

Answer 12

+ Perks may motivate executives to work hard; non monetary compensation components
+ They could create economic surplus if the company can acquire assets more cheaply than the manager due to purchasing power or tax status.

Question 13

What is the entrenchment view?

Answer 13

+ Perks could reduce firm value directly if managers consume more than shareholders want.
+ Perks could also indirectly cause firm value to fall if perks become catalysts for shirking, unethical behavior, or low morale throughout a company

Question 14

What is empire building?

Answer 14

Increasing size and scope of an organization’s power and influence. In corporate world: CEO more concerned with expanding business units and staffing levels under his control than with creating value for shareholders

Question 15

What are some reasons for empire building?

Answer 15

1. Managers prefer to run larger firms rather than smaller ones (Shareholders prefer profitable (not necessarily big) firms and high share price)
2. Managers may want to reduce risks (shareholders can achieve the benefits of diversification themselves)
3. Overconfidence

Question 16

Why do shareholders may have problems disciplining managers?

Answer 16

+ Ownership in firm could be too diffuse
+ Free rider problem: it is not in the interest of any individual
shareholder (with a small stake) to take costly actions that discipline a non value maximizing manager

Question 17

Who monitors management?

Answer 17

Board of directors has a clear fiduciary duty to protect interests of shareholders

Question 18

How can you affect agency costs?

Answer 18

Pay-for.performance, ownership concentration

Question 19

What is the conflict between controlling and minority sharholders?

Answer 19

Controlling shareholders may make decisions that benefit them disproportionally relative to minority shareholders

Question 20

What are dual class shares?

Answer 20

One class of a firm’s shares has superior voting rights compared to the other class

Question 21

What is an example of dual class shares?

Answer 21

Class B share might have ten votes per share, while a class A share has one vote per share.

Question 22

What is the intent of dual class shares?

Answer 22

A way for founding families to retain control over firms without owning majority of the shares