Review Quizzes Flashcards
What is Agency Cost?
Value that is lost due to improper managing and supervision of management and C-suite by board of directors
What is the principal-agent problem
- a conflict of interest between the agent and the principal. principal wants growth of company, agent wants bonuses
- caused by information asymmetry - CEO has more knowledge than board
define corporat governance
a set of mechanisms and policies which set out to discourage agents from acting in ways which hurt the shareholders and stakeholders
why is corporate governance important
- controls self-interested executives
- helps investors, directors and regulators make better and more informed decisions
what are the two main jobs of directors (Dual Mandate)
advisory and oversight
what does advisory do (dual mandate)?
directors act as a source of advising for the C-suite on strategy
what does oversight mean (dual mandate)
when directors oversee hiring of c-suite, compensation, approving major expenditures, approving operational decisions, ensuring appropriate financial reporting, legal and compliance
what are the mandatory three board committees
- audit
- compensation
- nomination
what does the audit committee deal with
- internal audit
- ensure external audit are independant
- policies and adherence to them
- f/s reporting
- ## oversee ethics hotline
what does the compensation committee do
- decide on the compensation of the ceo
- decide on the performance goals of the ceo and review these goals
- set board compensation
- advise ceo for compensation of other executives
what does the nomination committee do
- nominate eligible members to serve on the board and have them be voted on
are committees granted full power
yes, committees have full power to act with the authority of the board
what are the two components of fiduciary duty
duty of care and duty of loyalty
what is duty of care
duty to be knowledgeable
- take the same steps that a reasonable and prudent professional would
what is duty of loyalty
duty to make decisions with the company’s best interest in mind
what is duty of condor
duty to produce financial statements that are timely and accurate - required by securities law
pros of ceo and chairperson being the same fella
- faster decision making
- clearer authority/stronger leadership
cons of ceo and chairperson being the same
- conflict of interest
- need for a lead independent director
- harder/awkward to fire due to being fired by same board they lead
- lost of responsibilities
pros of ceo and chairperson being different
- more time for ceo to focus on strategy
- clearer seperation of duties
- good when company has new ceo
- clearer authority
cons of ceo and chairperson being different
- duplication of responsibility
- inneficient decision making
- artificial separation
- recruiting new ceo is difficult
learnings from giving voice to values
- use prescripting and rehearsal to help you act on you own values
- e.g. of helpers during the holocaust
- do not just whistleblow, have a strategy
- reach out to peers and mentors for feedback to devise the best strategy moving forward
- practice and act it out with peers
what is meant in gvv when taking a different approach to whistleblowing
means to devise a plan where you think of what to say, who to say it to, when to say it, and how to react and ounterreact if they disagree
GVV- what does practicing with peers do
act out and practice you values so that you can better react and counter-react when needed in the future
what is prescripting and and rehearsal in gvv
provides the chance to literally “pre-script” ourselves and to create the most effective action plan we can conceive of, and then to actually REHEARSE that script and plan.
what are the types of voting classes and how many votes do they have
class a - 1 vote
class b - 10 votes
class c - 0 votes
what is dual class voting
when different classes of shares have different amount of votes
what is majority vote
when a director has to get more than 50% “for” votes - only a yes or no
what is cumulative voting
when you can allocate the amount of votes you have as you please - each person votes equal to (amount of shares) x (number of nominated directors)
what is a staggered baord term
when directors’ terms run out in staggered years and sets of directors are voted on in different years. typically 3 sets and entire board is voted on in 3 years
what does a staggered board term stop
a hostile takeover because it stops the entity trying to take over the company to replace the entire board in one year
what are criteria for a good director
- not afraid to ask questions against management
- able to attend all meetings and be prepared
- accesible after work hours and meetings to advise management
- work well with the team
- has relevant experince
- understamds the company, its processes, and technology
- is alert and inquisative
- excercise judgement in best interest of the company
criteria of bad directors
- does not asks questions of management
- is friends with the ceo/not independant
- has a herd mentality
- is close to retirement and checked out
- does not have adequate time for meetings and is unprepared
- unable to participate in short-notice meetings
- lacks understanding of companys business and processes
- lack of experience
why was the dey kaplan article created
- canada is lagging in governance best practices reforms
- stakeholder management is crucial
- canadian corporatations have little guidance on how to incorporate the needs of stakeholders and this serves as a guide
what are the 13 points of the dey kaplan report
- corp purpose
- boards duty
- definition of stakeholders
- indigenous peoples
- reporting of stakeholder impact
- stakeholder committee
- stakeholder conflicts
- compensation policies
- board refreshments
- board diversity
- corp diversity
- climate change
- corporate activism
corporate purpose (dey/kaplan)
create value and positively impact shareholders
- why does corporation exist?
- fullfill the needs of consumers
- fulfilling needs may have positive or negative conseuqences
- statement of purpose in living doc
definition of stakeholders (dey/kaplan)
required to have a clear definition of who they are - typically creditors, consumers, employees, environment, people living in impacted communities
indigenous peoples (dey/kaplan)
indigenous peoples are rights and title holders, not just stakeholders
reporting of stakeholder impact (dey/kaplan)
find a way to include it in the annual reporting and way to measure it - difficult as there is no standard for social accounting
stakeholder committee (dey/kaplan)
engage directly with the identified stakeholders that company has material impact on - review the reporting and disclosure and ultimately audit the impact had on stakeholders.
stakeholder conflicts (dey/kaplan)
board should conclude that stakeholder’s needs have not been disregarded when a decision has been made. process should fairly consider needs of all stakeholders
compensation policies (dey/kaplan)
make sure compensation is aligned with achieving purpose and sustainability - do this by tying pay to purpose of company
board refreshment (dey/kaplan)
director can no longer be independant after serving for long time - need to do perfromance assessment - ultimately renew board with diversity and the right mix of skills
board diversity (dey/Kaplan)
board should have appropropriate mix of diversity
need to report on the composition of women, indigenous peoples, persons with disabilities, and visible minorities
corporation diversity (dey/kaplan)
disclosures and diversity targets and timelines for
leadership team and overall workforce
- board needs to report on its process of meeting targets
climate change (dey/kaplan)
corp. policy and board monitoring of climate-
change goals & targets, consideration of climate-change issues when
reviewing strategic choices. Duty of loyalty
corporate activism (dey/kaplan)
- when corporation needs to make a statement publicly
- decision to make statement and content need to be formulated by ceo and approved by the board
what is the shareholder model who does it prioritize and how
prioritizes the interests of the shareholders. the interests of the stakeholders only taken into consideration if they do not conflict with those of the shareholders
what is the stakeholder model and what does it prioritize
company recognizes that it owes responsibility to a wider group of stakeholders, those being employees, vendors, customers, and society in general
principles of corporate governance
fairness, transparency, independence, and accountability
what is the fairness principle
it means to protect the rights of the shareholders, treat them all equally, and provide remedy for violations
what is the accountability principle
management in accountable to board of directors, and board of directors is accountable to shareholders
what is the principle of transparency
timely and accurate material disclosure
what is the principle of independence
independent directors and advisors - free from influence from other
why is corporate governance important
- Better access to external finance and lower cost to borrowing
- Improved company performance
- Higher firm value and share performance
- Avoidance of costly litigation
- Promotes efficient use of resources
- Funds will flow to countries which are perceived to have good corporate governance – prerequisite for national economic development
reasons why a board member might leave
Director wishes to retire or reaches retirement age
Director has disagreement with other directors or management
Company needs new skills on the board and refresh board
Company feels director is negligent and underperforming
HOW board member might leave
- Encourage director to resign
- Director does not get enough “for” in a majority vote - lose election
- Can be voted OUT, not lose in an election
- Remove if CAUSE can be demonstrated
- Board does not have power to remove a fellow board member
what is the business judgement rule
legal doctrine that protects board of directors against legal action if it is believed that board acted in good faith (fiduciary, loyalty and duty of care) - rule stands unless proven otherwise
what is the lead independant director
serves as an intermmideary between the board, the chair, and the stakeholders
- Important when the CEO is also the chair
- Important during times of crisis
- Consulted by CEO and does evaluation of CEO
what makes a good board
- A board that gives proper advice to the CEO and does not let them do whatever they want
- Have clear defined roles and authority - well structured
- Have a lead director with strong agenda and oversight powers
- Have a balance between experience and skills (executive - non-executive)
- Regular and productive meetings
- Fair compensation
why do boards fail
- Time issues - not enough time spent, and even the time that is spent, is not spent productuvely
- Have multiple loyalties when they sit on multiple boards and are also CEOs
- CEO picks and influences decisions of directors recommended
- Directors have only a sall % in shares and no real incentive tied to company performance
- Too loyal to the ceo
- Ceo is chair and controls meetings and information that board receives
why is board diversity important
- Different expertise
- Different perspectives to reach other groups in stakeholder model
- Increase financial performance
- Helpful when expanding business internationally
how can director compensation alleviate the agency problem
- Offer stock options tied to company performance which aligns their interests with shareholders
- High and competitive compensation - will make director what to perform the best in order not to lose position
- Deferred compensation to further years in order to encourage long term growth and interest of the company rather than just short term
- Compensation committee sets fair objectives and pay
what is the Self-knowledge and alignment part of GVV
- people ask themselves when have they been effective in the past, not even about ethical issues – e.g. persuaded someone, gotten your idea across
- Identify your strengths and play the game in the way that helps you with your strengths
