Session 1-4

Question 1

3 parts of corporate governance and their purposes

Answer 1

1. shareholders own the comapny
2. management runs the company and are full time
3. Board is there to keep an eye on management and are part-time

Question 2

What is the self-graded test issue?

Answer 2

Management develops the accounting information that is also used as a measurement for their performance. This creates a incentive to lie in order to look better.

Question 3

How do we address the self-graded test issue?

Answer 3

internal controls, external audit, PCAOB, SEC, media, analysts, internal audit

Question 4

What are three takeaways from the Stanford Board Material?

Answer 4

1. Board is part time and well paid
2. lots of 62-65 year old people, with about 1 in every 10 member being female
3. The #1 risk of being on a board is the damage that can be done to reputation if associated with a disaster

Question 5

good governance is associated with

Answer 5

good accounting, auditors and controls

Question 6

Association vs Causation

Answer 6

Associate is seeing a potential connection between two events (strong guys=big beards and tattoos) while causation is an absolute connection between the two events

Question 7

Why is management not included in corporate governance effectiveness research?

Answer 7

Management qualities such as trustworthiness are hard to quantify

Question 8

Why is the association between good looking boards and good governance fading?

Answer 8

SOX is forcing everyone to do the same thing. Thus most companies just do the minimum as a show of compliance. So now the fraud company boards look just like the non-fraud boards.

Question 9

How did ACs say they dealt with fraud risk?

Answer 9

Very little consensus about what their role was and how their should deal with fraud possibilities

Question 10

Overall takeaway from AC interview paper?

Answer 10

There IS a lot of monitoring going on. It’s not all symbolic.

Question 11

What is the result if the AC are friends with management?

Answer 11

Less work done on assessing fraud risk and management integrity.

Question 12

What is the result if the AC has a professional relationship with management?

Answer 12

The more work is done assessing fraud risk and management integrity.

Question 13

What is the result when there is a corporate controller on the AC?

Answer 13

More work is done because controllers are actually in the trenches and know how accounting works.

Question 14

What is the result when there is a female on the AC?

Answer 14

more work on management integrity, but NOT fraud risk

Question 15

What is NIFO and what does it mean?

Answer 15

Nose In Fingers Out

Management is the one who should have their fingers in accounting policy, not the AC

Question 16

Why might the CEO pay ratio not be meaningful?

Answer 16

The company may just get rid of low paid employees to raise ratio

Question 17

What are the four forces that affect CEO pay and what is the effect??

Answer 17

1. Retaining talented CEOs causes pay to go up. This is the strongest force.
2. Angry shareholders want CEO pay to go down
3. Angry public/media at high CEO pay, so pay goes down
4. Doesn’t want out-of-step with CEO peer payment, sp pay could go either up of down.

Question 18

What are five reasons why negotiation between CEO and Compensation Committee Members not fair?

Answer 18

1. CC may be friends with CEO
2. CC made up of CEOs (solidarity)
3. Cost-benefit of increasing CEO pay is worth it (pay raise not much compared to total company funds)
4. Peer studies raise averages, causing everyone to raise pay again
5. CC members want to be re-elected, and CEO may be able to help out