W10: Corporate Governance Across Countries

Question 1

Definition Corporate Governance

Answer 1

Corporate Governance is about the structure of rights and responsibilities among parties with a stake in the firm. Moreover, about the relationships of various stakeholders or constituents with executives and managers

Most studies consider the relationship between managers and shareholders

Question 2

Types of ownership

Answer 2

Institutional investors, families, the state, other corporations

Most institutional investors are passive and do not try to influence governance process

Question 3

Institutional Investors

Answer 3

Tend to have diversified investment portfolios

Relatively small stake in many companies.

Are passive and do not influence governance process
- i.e. USA, UK

Question 4

Family ownership

Answer 4

• Long-term orientation
• Independent directors may be present but have limited influence
• Top managers often family members and therefore agency problems are less likely
• i.e. Europe, Germany

Question 5

State ownership

Answer 5

Often have goals other than shareholder value maximization

Government officials often exercise direct control by circumventing formal governance mechanism
- i,e, China, Russia

Question 6

Ownership by other corporations

Answer 6

Focus on maximizing profits across companies connected by ownership network

Director often represent other companies in same network
- i.e. Japan, Korea

Question 7

Agency Problem

Answer 7

We need Corporate Governance to make sure that managers act in best interest of shareholders.

Managers want growth, profitability and tend to take high risk for that.

The principal (shareholder) wants the agent (manager) to perform tasks and maximize his benefit

Question 8

Soliving the agency problem with

Answer 8

1. Executive compensation
   Allignment of interest:
   > Owners need to compensate managers in way that managers act in best interest of owners (stock option)

> question on correct compensation
Sometimes poor performance is rewarded

2. Board of directors
   > effective monitoring
   > Conditions that may prevent effective monitoring:
   conflict of interest, social ties, lack of expertise
3. Ownership concentration
   centralised vs. diffused ownership (large block or small block of shares)
4. Market for corporate control
   > selling shares is a strong signal to fire CEO
   > Cross national differences in marktes for corporate control (see slides)