Lecture 3 Flashcards
(13 cards)
What is the role of the board of directors in corporate governance?
The board represents shareholders, makes key strategic decisions, and oversees executive management.
What are the three main roles of a board according to governance theories?
Control Role (Agency Theory) – Reducing information asymmetry and monitoring management.
Consulting Role (Stewardship Theory) – Assisting management in decision-making.
Contact Role (Resource Dependence Theory) – Providing external resources and connections.
What is the difference between a one-tier and a two-tier board system?
One-Tier Board (UK, USA): Shareholders elect both executives and non-executives in a single board.
Two-Tier Board (Germany, Austria, Finland):
Supervisory Board (Non-executives) – Oversees the Management Board (Executives).
What are the advantages and disadvantages of large vs. small boards?
Large Boards (10+ members): More diverse opinions but risk slow decision-making.
Small Boards (5-8 members): Faster decisions but less diversity and potential expertise shortages.
Why is board diversity important?
Diversity (gender, ethnicity, experience) improves decision-making, innovation, and stakeholder trust.
What is CEO duality, and why is it controversial?
CEO duality is when the CEO also serves as Chairperson of the Board, reducing checks and balances.
How is board independence defined?
A board member is independent if they:
✔ Are not a current/past employee
✔ Have no business relationship with the company
✔ Do not hold significant shares
✔ Are not related to executives
Name three key board committees and their functions
Audit Committee – Oversees financial reporting and risk management.
Compensation Committee – Determines executive pay structures.
Nomination Committee – Selects board members and executives.
What are the two main theories of executive compensation?
Optimal Contracting Theory – Compensation aligns CEO performance with shareholder interests.
Managerial Power Theory – Executives influence their own pay, leading to excessive compensation.
What are the key components of executive compensation?
Base Salary – Fixed annual income.
Annual Bonus – Short-term performance-based cash payments.
Stock Options – Right to buy company stock at a set price in the future.
Restricted Stock – Shares that vest over time (reducing excessive risk-taking).
Perquisites (“Perks”) – Benefits like private jets, company cars, and retirement plans.
What is the “Say on Pay” mechanism?
Shareholders vote annually on executive compensation, influencing pay transparency and fairness.
What governance failures occurred in the Marks & Spencer case?
CEO Sir Stuart Rose was also Chairman, violating best practices.
Board lacked independent directors, weakening oversight.
What was the main executive pay controversy at Royal Dutch Shell?
CEO received a 58% pay increase despite failing to meet performance targets.
59% of shareholders voted against the remuneration package.
