Topic 7 - Corporate Governance

Question 1

Corporate governance

Answer 1

is the way a business is run and the structure of decision making.

Question 2

Principal–agent problem

Answer 2

is where principals as a result of a lack of knowledge cannot ensure that their best interests are served by their agents.

Question 3

Adverse selection:

Answer 3

when one party has better information than the other party and can exploit this.

Question 4

Moral Hazard:

Answer 4

Once an agreement has been met, the principal or agent has an incentive to engage in behaviour problematic to the other party.

Question 5

Improving Corporate Governance

Answer 5

1. Executive pay
2. Internal and external mechanisms of the firm
3. Regulatory bodies