Corporate governance

Question 1

What is corporate governance mainly designed to address?

Answer 1

Principal-agent problem: separation of ownership and control.

Question 2

What triggered major improvements in corporate governance in the early 2000s?

Answer 2

Accounting scandals from 1999–2002 where 26 companies lost 75%+ value.

Question 3

What is the principal-agent problem?

Answer 3

Conflict where management may act in their own interest instead of shareholders’ interest.

Question 4

What role does the board of directors play in M&A?

Answer 4

Evaluate, approve or reject M&A proposals based on shareholder interests.

Question 5

Why is board independence critical in corporate governance?

Answer 5

Independent members provide unbiased oversight and prevent conflicts of interest.

Question 6

How does SOX impact corporate governance?

Answer 6

It increases monitoring, aligns incentives, and improves management accountability.

Question 7

What are two major corporate governance indices?

Answer 7

G-index and E-index.

Question 8

What does a higher G-index score indicate?

Answer 8

Weaker corporate governance and weaker shareholder rights.

Question 9

What does the E-index measure?

Answer 9

Entrenchment using six key provisions that reduce shareholder rights.

Question 10

What happens when firms have stronger shareholder rights according to Gompers et al.?

Answer 10

They have higher firm value, higher profits, higher growth, and fewer acquisitions.

Question 11

How did SOX affect small and complex firms differently?

Answer 11

SOX imposed relatively higher costs on small and complex firms.

Question 12

What is the purpose of the auditing oversight board under SOX?

Answer 12

Monitor auditors to ensure independence and reduce conflicts of interest.

Question 13

Why is auditor independence important?

Answer 13

To avoid auditors compromising their judgment by offering consulting services.

Question 14

What happens if financial statements are materially restated under SOX?

Answer 14

CEOs and CFOs must forfeit bonuses and incentive compensation.

Question 15

Why are corporate loans to executives prohibited by SOX?

Answer 15

Loans create conflicts of interest and opportunities for self-dealing.

Question 16

How is CEO pay criticized from a governance perspective?

Answer 16

It often grows independently of shareholder value creation.

Question 17

What evidence suggests excessive CEO pay harms shareholders?

Answer 17

Firms with highest-paid CEOs experienced negative excess returns.

Question 18

How does U.S. CEO pay compare internationally?

Answer 18

U.S. CEOs are paid significantly more without proportionally higher shareholder returns.

Question 19

What is ‘say on pay’?

Answer 19

Shareholders’ right to vote on executive compensation packages.

Question 20

How can stock options both help and hurt governance?

Answer 20

They align interests but can be abused through backdating and short-termism.

Question 21

What is one solution to limit CEO rent extraction suggested by the Economic Policy Institute?

Answer 21

Raise corporate taxes on firms with high CEO-to-worker pay ratios.

Question 22

What corporate governance problem does excessive CEO severance represent?

Answer 22

Misaligned incentives and poor oversight by the board.

Question 23

What is a ‘golden parachute’?

Answer 23

Contract guaranteeing large severance payments to executives if ownership changes.

Question 24

Why can golden parachutes be harmful for shareholders?

Answer 24

They incentivize CEOs to agree to sales that may not maximize value.

Question 25

What are staggered boards, and why are they controversial?

Answer 25

Boards where directors serve overlapping terms; they entrench management.

Question 26

Why are poison pills relevant to corporate governance?

Answer 26

They protect management from takeovers, sometimes at shareholders' expense.

Question 27

What is a supermajority requirement for mergers?

Answer 27

Requirement that more than a simple majority approve a merger, often protecting management.

Question 28

What is management entrenchment?

Answer 28

When managers protect their positions at the expense of shareholder value.

Question 29

What are agency costs?

Answer 29

Costs arising from managers acting in their own interest rather than shareholders'.

Question 30

How can separating the CEO and chairman roles improve governance?

Answer 30

It provides greater board independence and reduces CEO dominance.

Question 31

What is an example of an anti-takeover defense that weakens governance?

Answer 31

Poison pills or golden parachutes.

Question 32

What was one major corporate governance failure cited in Tyco’s scandal?

Answer 32

Failure of the board to control the CEO's excessive acquisitions and spending.

Question 33

How did Sarbanes-Oxley aim to restore investor confidence?

Answer 33

By increasing transparency, oversight, and accountability in public firms.

Question 34

What is the impact of corporate governance quality on firm risk?

Answer 34

Stronger governance lowers firm risk and agency costs.

Question 35

How can improving board structure enhance corporate governance?

Answer 35

By increasing board independence and reducing insider control.

Question 36

What happens to shareholders' rights when governance provisions increase entrenchment?

Answer 36

Shareholders' influence over firm decisions weakens.

Question 37

What is the role of monitoring in corporate governance?

Answer 37

Ensure that executives act in shareholders' best interests.

Question 38

Why does excessive management protection harm shareholders?

Answer 38

It reduces accountability and allows managers to pursue self-interest.

Question 39

What is the relationship between governance indices and abnormal returns?

Answer 39

Firms with better governance generate higher abnormal returns.

Question 40

Why might firms with weak governance make more acquisitions?

Answer 40

Management may pursue growth for power or personal incentives rather than value creation.

Question 41

What are the main concerns with CEO compensation structures?

Answer 41

Misalignment between pay and shareholder value creation.

Question 42

How can antitrust enforcement help corporate governance?

Answer 42

By limiting excessive market power that enables CEOs to extract more value.

Question 43

Why do stock option abuses undermine corporate governance?

Answer 43

They encourage manipulation of short-term stock prices.

Question 44

What is the purpose of limiting charter amendment powers?

Answer 44

Prevent managers from easily changing rules to entrench themselves.

Question 45

How did corporate governance evolve after major fraud cases?

Answer 45

Stricter laws, more shareholder rights, better board oversight.

Question 46

Why is it important for shareholders to have a vote on mergers?

Answer 46

To prevent management from unilaterally approving self-benefiting deals.

Question 47

What is the function of shareholder rights plans?

Answer 47

Protect shareholders during hostile takeovers but can entrench management.

Question 48

What happens when a board fails to monitor management properly during M&A?

Answer 48

Deals may destroy shareholder value due to conflicts of interest.

Question 49

What is the Governance Index (G-index) based on?

Answer 49

24 governance provisions affecting shareholder rights.

Question 50

What does the E-index focus on compared to the G-index?

Answer 50

Only six key provisions most correlated with entrenchment.