Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

corporate governance > Lecture 3 > Flashcards

Lecture 3 Flashcards

1
Q

Duties of CEOs include

A

Manage the day to day business

Control the free cash flow

Implement the long term strategies of the firm

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

The managers have fiduciary duty towards shareholders

A

Duty of loyalty

business ethics

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

The managers have fiduciary duty towards shareholders

A

Duty of loyalty

business ethics

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

How to measure the impact of a CEO

A

Historians and economists use natural experiments

To study the events of national leader or CEO sudden death

Random evens of natural cause serve as exogeneous shocks

Findings

Jones and olken found that leaders do affect national economic growth, for better or for worse

–> Newman 1985: company shares rise upon CEO sudden death

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Information transparency

A

independent board of directors (monitoring cost)

Independent and well functioning media (monitoring costs)

Truthful disclosure of information (binding cost by the agend)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Strong enforcement of law

A

Accountability (harsh punishment for bad behaviors)

Challenge: asymmetric compensation: reward for profits, no punish for huge losses

Increase monitor
Challenge: it may increase overhead cost enourmously

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

How to incentivize CEO

A

Making them partial owner would help to align the interests of managers and investors

Principles of compensation: transparency, accountability, fairness

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

CEO compensation package

A

Base salary

Cash bonuses

Stock options

Stocks

Long term incentive plan

Retirement plan

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Performance based bonus

A

Performance threshold (minimum pay)

If performed better –> additional bonus up until bonus cap –> no additional bonus for better performance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Most of the performance based bonuses are dependent on the accounting performance

A

Sales growth

Earnings per share

Return on assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Advantages of using accounting performance are:

A

Verifiable

Widely understood

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

There are several drawbacks to accounting performance:

A

Backward looking

Short term focus

Incentives for earnings management

Strategically set lower targets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Performance driven compensation

It may heavily affect the inecntives of executives/employees:

A

Short term focus (forgo long term growth opportunities)

Excessive risk-taking (stock options is the main driver)

Less cooperative behavior (within an organization)

Forgo the interest of other stakeholders (clients, employees, creditors and society)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

ESG metrices in CEO compensation

Key findings

A

ESG contract ties CEO attention to a subset of stakeholder welfare

ESG linked contract increase over the years

Esg metricts have little transperency, impossible for outsiders to monitor, verify therefore worsens the agency problem

ESG metric in general does not significantly reduce CO2 emissions, Carbon specific metric does significantly reduce CO2 emission

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Relative performance compensation

A

To pay for effort or pay for luck? how to distinguis the two?

Relative performance helps differentiate effort of manager in the same industry

The art/challenges of choosing industry peers

How to peer conglomerates

Tendency to cherry pick weaker peers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Would bonus cap work?

A

European Capital Requirement Directive III and IV (Basel III compliant requirement)
caps bonus to 100-200% (subject to shareholder approval) of the base salary,
effective from 1 Jan. 2014.
 The Dutch Act on Remuneration policies Financial undertakings caps bonus to 20%,
effective from 7 Feb. 2015.
 The UK government has openly fought against this bonus cap but failed.
* How effective could it be?
* What are the implications for the financial sector?
* How would regulatory discrepancies affect the international labor market?
22 Corporate
Governance
Understanding Society

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Claw back clause

A

A contractual provision that requires an employee to return money already paid by an employer, sometimes with a penalty

18
Q

Vesting period

A

The time an emplyoee must work for an employer in order to own outright employee stock options, shares of company stock or employer contributions to a tax-advantage retirement plan

19
Q

Who determines CEO compensation

A

A compensation committe of independent directions

Most of the independent directors are CEOs of other firms and have personal ties with the CEO

Sometimes even worse, CEOs themselves are also active in the compensation committees

20
Q

CEO compensation is higher when the board has the following characteristics

A

The CEO is also the chairman of the board (CEO duality)

Size of the board gets larger

Large percentage of outside directors being appointed by the CEO

The ouside directors are older

The ouside directors also serve on more than three other boards

21
Q

CEO compensation is a decreasing function of

A

THE CEOs ownership stake

The existence of an external big shareholder that owns at least 5% of the equity

The existence of a non-CEO internal board member owns at least 5% of the shares

22
Q

Board of directors - Why?

market solution

A

agency problem exist in all organizations

BOard of directors are there to monitor management

23
Q

Board of directors -

Regulations

A

Minimum board size

Minimum percentage of independent directors

Various committees

Minimum female and minority directors

24
Q

Board of directors - general information

Responsibility

A

To represent the owners or shareholders

To monitor and advise the management and mitigate agency problem

To hire and fire management

To provide strategic guidance

25
Q

Board of directors - general information
size

A

5-20

26
Q

Board of directors - general information
Appointment process

A

The existing board first creates a subcommittee with independent directors

The subcommittee identifies suitable candidates

Nominated board must be approved by the full board

Finally approved by shareholders at the annual general meeting (AGM)

27
Q

Board of directors - qualifications
Board members are selected based on:

A

Relevant experience as an executive of a comparable firm

Political considerations: minority or female representation targets

Prominence: political and entertainment celebrities

28
Q

Board of directors - board structure
One tier board system

A

Common in the US. UK nad most of europe

CEO, chairman and other executive and nonexecutive directors

29
Q

Board of directors - board structure

Two - tier board system

A

Most common in germany, austria, the netherlands and denmark

One executive board (management)

One supervisory board (supervision)

30
Q

Board of directors - factors that influence the board

The board of directors can be influenced by the following factors :

A

Firm performance: firms with poor performance are more likely to change CEO

CEO turnover: new CEOs tend to appoint board members that they trust

Changes in ownership: large shareholders may appoint a representative to the board

31
Q

Board of directors general information
Board composition:

A

Inside boards directors:

CEO and his executive members

Representatives of labor union

Outside board directors:

Individuals who ahve no current ore recent material relationship with the company

Conventional independence and no sociel ties

32
Q

Board diversity improves:

A

Corporate performance

Higher firm values

33
Q

Board of directors effectiveness

A

board of directors rarely fires underperforming CEO

34
Q

Executive directors

A

Cant sufficiently monitor themselves

Many CEOS are also chairman of the board (US)

Executive directors are managed by the CEO on daily basis

35
Q

Non-executive directors

A

Have not sufficient incentives to monitor

Not sufficient financial interest in the well being of the firm

overstretched by sitting on too many boards

Loyalty to CEO

36
Q

Board of directors Chairman

A

Controls the boards meeting agendy

Directs management to produce information needed

In many US firms, the CEO and board chairman are one person

37
Q

Board of directors and firm performance

A

insider-outsider director ratio does not influence firm performance

Large boards can be less effective

Firms with more outside directors and smaller boards can make better decisions

Mergers and acquisitions, poison pills, executive compensation and CEO replacement

38
Q

Audit committee

A

Oversee financial reporting and internal control

Appoint, assess, review control system and auditors

39
Q

Renumeration committee

A

Ensure accountability of the firm and formal and transparent process for executive

40
Q

Nomination committee

A

Appoint executive ans ensure balance of skils and experinece

CEO succession

41
Q

Risk committee

A

Making risk management strategies

corporate governance (7 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions