Lecture 1

Question 1

What is the definition of corporate governance according to Cadbury (1992)?

Answer 1

The system by which companies are directed and controlled.

Question 2

Why is corporate governance important?

Answer 2

It ensures transparency, accountability, and ethical decision-making, preventing fraud and corporate failures.

Question 3

What is the core idea of agency theory in corporate governance?

Answer 3

The conflict between principals (shareholders) and agents (managers) due to differing interests.

Question 4

How does stewardship theory differ from agency theory?

Answer 4

It assumes that managers act as good stewards of the company and prioritize long-term success.

Question 5

What does stakeholder theory emphasize in corporate governance?

Answer 5

The interests of all stakeholders (employees, customers, society), not just shareholders.

Question 6

How does transaction cost economics relate to corporate governance?

Answer 6

It focuses on minimizing costs associated with contracts, decision-making, and firm operations.

Question 7

Name and explain the three types of agency problems

Answer 7

Type I: Shareholders vs. Managers (e.g., excessive executive pay).

Type II: Majority vs. Minority Shareholders (e.g., unfair voting rights).

Type III: Shareholders vs. Stakeholders (e.g., environmental neglect).

Question 8

What were the key governance failures in the Enron scandal?

Answer 8

Lack of transparency

Fraudulent accounting practices

Weak board oversight

Question 9

What activities are not considered corporate governance?

Answer 9

Management, Audit, and Public Relations.

Question 10

Name two ways to reduce agency problems in corporate governance.

Answer 10

Independent boards & committees

Incentive alignment (e.g., performance-based pay)