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MGST 451 > Review for Quiz 2 Dasha Notes > Flashcards

Review for Quiz 2 Dasha Notes Flashcards

1
Q

Why might a CEO leave (4 reasons stated)

A
  • M&A (failed mergers and acquisitions like HP CEO)
  • Underperformance
  • Misconduct
  • Retirement
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2
Q

how do ceo’s most often depart

A

their departure is planned

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3
Q

what is a rough percentage on CEO termination

A

3-6%

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4
Q

what is a interim CEO and what is their main purpose

A

a ceo that is there temporarily
- used to navigate through the succession and transition to a new ceo
- used in emergency situations
- used to audition new ceo
- used to groom potential candidates

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5
Q

what is a director CEO and what does it signify

A

a director turned CEO
it is a sign of poor planning

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6
Q

what are the two types of internal hires

A

heir apparent and horse race

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7
Q

what is the heir apparent model

A

it is when you promote the leading candidate to president or COO in order to groom them into the CEO position

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8
Q

what are positives of the heir apparent model

A
  • known leadership style
  • little to no onboarding because there it familirity with company
  • can observe their perfromance before promoting
  • custom to company’s needs
  • gained exp through interacting with board, shareholders, analysts
  • continuity and retention of private knowledge
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9
Q

what are some negatives of the heir apparent model

A
  • adds complexity to decision
  • must CREATE CLEAR distinctions between tasks of CEO and heir apparent
  • might be there for too long and stuck in role
  • no change in company mentality and its just more of the same
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10
Q

what is the horse race model

A

the idea of promoting 2 or more candidates and having them “battle it out” on who gets promoted to CEO

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11
Q

what are positives of the horse race model

A
  • do not have to commit to one candidate
  • observe performance before selection
  • candidates develop specific skills
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12
Q

what are negatives of the horse race model?

A
  • a lot of unwanted media attention
  • internal fraction for favored candidates
  • losers most likely resign and there is a brain drain
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13
Q

define a moral hazard

A

the risk that someone or something will be more likely to take a risk when they know that an insurer will cover the cost of any damages

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14
Q

why is succession planning important (4 points)

A
  • reduces costs due to loss business or desperate spending on new ceo
  • reduces fear of internal or external shareholders
  • prepared if there is a lawsuit, retirement, or transition of new CEO into role
  • prepared in emergency situations such as CEO death/termination/departure
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15
Q

what are consultants helping with

A
  • external party fairness in decision making
  • provide external expertise
  • provide external objectivity
  • enhance board credibility
  • takes away power and influence from CEO
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16
Q

what are the two conflicts of interests from consultants

A
  • if they have interest and allow the CEO to exert power and influence over them
  • they have have conflict of interest because they provide other services to the company
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17
Q

what are the 3 main goals of CEO compensation

A
  • attract
  • retain
  • motivate
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18
Q

companies with weaker governance pay the CEO ___

A

more

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19
Q

companies with weaker governance have a ________ chance of hiring consultants

A

higher

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20
Q

why are companies with weaker governance more likely to spend more on a CEO

A

because they would need to spend more in order to get them on board in difficult situations

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21
Q

weaker governance means there is a ______ chance of agency problems and _______ performance

A

higher and lower

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22
Q

what is the biggest determinant of CEO pay and why

A

company size, often because of benchmarking to peers

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23
Q

what are the considerations in benchmarking pay

A
  • company size
  • industry
  • geography
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24
Q

what is the ratcheting affect

A

raising median pay due to benchmarking to 50th percentile

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25
Q

what are the pros of hiring an internal ceo (4)

A
  • lower first year compensation
  • already understand the company - little to no onboarding
  • can groom them into the position
  • have observed their performance
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26
Q

what sort of performance does a company have if it is hiring and internal ceo

A

higher perfromance

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27
Q

what is teh negative of an internal ceo

A
  • no change in philosophy
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28
Q

_______ performing companies are more likely to higher an external ceo

A

lower

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29
Q

positives of hiring an external CEO

A
  • more ceo experience
  • more free in decision making because they have a blank slate with the company
  • e.g. cultural, operating, strategic
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30
Q

negatives of hiring an external ceo

A
  • cannot gauge capabilities during an interview
  • less familiar with company
  • may disrupt staff and operations
  • leadership style may not work for the company
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31
Q

what are the three categories of CEO pay and state if they are short or long term

A
  • salary s-t
  • bonus s-t
  • stock options l-t
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32
Q

what is a bonus and what are some types (5)

A

cash for meeting or exceeding certain targets
- guaranteed bonus
- min/max bonus
- based on financial targets
- based on non-financial targets (e.g. environmental)
- discretionary bonus

33
Q

what are stock options

A
  • right to buy shares at a certain price before expiration in the future
34
Q

what is vesting and what does it encourage

A

the process of the stock being earned over time.
encourages long term focus

35
Q

what is restricted stock and its purpose

A

stock that cannot be be sold, transferred, hedged or pledged. the stock will be transferred to you if you have met certain conditions or targets
encourages long term focus

36
Q

what are the two schedules for restricted stock

A

time based
performance based

37
Q

what is a severance payment

A

a payment that is awarded once the CEO is terminated

38
Q

what is a golden parachute

A

severance payment that is made if the company changes ownership or there is a takeover

39
Q

what are perquisites

A

other perks like personal use of corporation car, plane, club membership, home

40
Q

what is the concept of say on pay and has it been influential?

A

shareholders have a say on exec pay during annual meetings.
has not helped much or had influecen

41
Q

what are the two theories on compensation

A

optimal contracting
rent extraction

42
Q

what is optimal contracting

A

efficient process of pay, driven by market forces.
Value that is created by the CEO is shared amongst share/stake holders and CEO

43
Q

what is rent extraction

A

not an efficient process and CEO exerts influence over the BofD
typicall receives higher compensation than they should

44
Q

what are 4 contractual restrictions

A
  • target stock ownership plan
  • hedging restrictions
  • pledging restrictions
  • clawback + deferred payouts
45
Q

what is the target stock ownership plan

A

it is the minimum amount of stock that a CEO must have in the company and it is usually expressed as a multiple of their salary

46
Q

what does the targeted stock ownership plan encourage

A

long term approach and risk taking

47
Q

the targeted stock ownership plan is non-_____

A

linear

48
Q

what is hedging

A

it is a risk management strategy that is used to offset losses in an investment by taking the opposite position in a related asset

49
Q

what are hedging restrictions

A

the idea that the company can chose to limit the CEO hedging their equity

50
Q

what are your choices when it comes to hedging and how much can you hedge

A
  • can chose to hedge equity rather than sell the equity
  • cannot hedge everything
51
Q

what are benefits of hedging

A

minimizes public scrutiny when dealing with shares
allows diversification

52
Q

what is the negative of hedging

A

diminishes incentive to perform

53
Q

what is pledging

A

the use of shares as collateral for a loan or margin act.
can pledge your shares and purchase more

54
Q

what is a pledging restriction

A

some companies allow you to use equity as collateral and some do not

55
Q

what is the main positive of pledging

A
  • can diversify portfolio while maintaining high equity in your company
56
Q

which structure does pledging change for management

A

the incentive structure

57
Q

what are clawback and deferred payments

A

the company can reclaim compensation in future years if it has become clear that there was unethical practices involved. These two concepts are related because deferred payout arrangements can include clawback provisions to align executive pay with long-term company performance and compliance with ethical standards.

58
Q

what happens the clawback clause is triggered

A

must surrender back all your gains

59
Q

what do clawbacks reduce and what might trigger a clawback

A

clawbacks reduce agency costs
- ethical misconduct
- manipulation of earnings
- violation of non-compete

60
Q

what is the main purpose of equity ownership (5)

A
  • align interest
  • minimize agency costs
  • incentivize to increase value of company
  • incentivized to run company more efficiently
  • increases risk taking
61
Q

what does equity ownership have to do with risk

A

encourages risk taking, especially with stock options as riskier projects are more likely to increase the value of the company

62
Q

what is manipulative accountaing

A

changing of numbers in order for the CEO to meet objectives and receive bonus or inflate stock price, or manipulate the timing of the granting of the stocks

63
Q

what incentivizes manipulative accounting

A

equity ownership in the company

64
Q

what is the definition of an insider trader

A

a corp officer, employee, director that has access to material confidential information before the general public and uses this knowledge to trade

65
Q

how can family be part of inside trading

A

letting them know about material confidential information not known to the public and shares being traded based on it would make it insider trading

66
Q

how can government officials be inside traders and give an example

A

they can get information from their day to day tasks
e.g. knowing that a certain law will be passed which will benefit a company and buying its stock

67
Q

what professionals might be able to inside trade

A

those who would have access to insider information such as bankers, lawyers, paralegals, auditors

68
Q

what is insider trading a negative of?

A

equity ownership in a company

69
Q

what does the SEC rule

A

that you may trade only if you are not in posession of material confidential information not available to the public

70
Q

what are the consequesnces for insider trading

A

jail time and financial penalties (3x gains)

71
Q

what are blackout trading periods

A

period presceeding the earinigns announcement and release of material information such as
- earnings
- acquisitions
- major product release

72
Q

what is teh typical range of blackout periods

A

50 days

73
Q

what sort of trading happens when there is market outperfromance

A

purchasing

74
Q

what sort of trading happens when there is market underperfromance

A

selling

75
Q

why do the ceo and chairman have the most amount of power

A

because they have the most amount of information

76
Q

what is tipping

A

the act of providing material non-public information about a publicly traded company or a security to a person who is not authorized to have the information with the intent to gain some sort of benefit

77
Q

can executives/CEO buy put options

A

yes.
put options are having the right to sell something at a specific price during a specific time - can be done as hedging

78
Q

can executives/CEO short sell

A

no selling borrowed assets in anticipation of a price drop

MGST 451 (5 decks)

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