Lecture 3

Question 1

Duties of CEOs

Answer 1

1. Manage the day-to-day business
2. Control free cash flows
3. Implement long-term strategies

Question 2

Fiduciary duty

Answer 2

Managers’ duty of loyalty, business ethics, act in interests of shareholders and create value

Question 3

How to alleviate some agency problem of CEO

Answer 3

Give CEO partial ownership of the company

Question 4

CEO compensation package

Answer 4

-Base salary
-Cash bonuses (based on performance)
-Stock options (Reward linked to stock appreciation)
-Stocks (Partial ownership)
-Long term incentive plan (based on 3-5 year average performance)
-Retirement plans

Question 5

Drawbacks of accounting based performance bonus compensation for CEO

Answer 5

-Backward looking
-Short-focus
-Strategically set lower targets

Question 6

Claw back clause meaning

Answer 6

contractual provision that requires an employee to return money already paid by an employer, sometimes with penalty

Question 7

Vesting period

Answer 7

the time an employee must work for an employer in order to own outright employee stock options, shares of company stock or employer contributions to a tax-advantaged retirement plan

Question 8

CEO Succession meaning

Answer 8

Making a plan for a new person to replace the CEO

Question 9

Responsibilities of Board of Directors

Answer 9

-To represent the owners or shareholders
- To monitor and advice the management and mitigate agency problem
- To hire and fire management
- To provide strategic guidance

Question 10

One-tier vs Two-tier Board system

Answer 10

One-tier: Has CEO, Chairman, other executive and nonexecutive directors. Has representatitves of shareholder. [US, UK, most other countries]
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Two-tier: one executive board (management) and one supervisory board (supervision). The latter is e.g. government and labour union [Germany, Austria, Netherlands, Denmark]

Question 11

CEO turnover meaning

Answer 11

New CEO tend to appoint board members that they trust

Question 12

Cons of staggered board

Answer 12

-Reduces shareholder influence
-Weakens board accountability
-Governance concerns

Question 13

Audit comitee responsibilities

Answer 13

-Oversee financial reporting and internal control
-Appoint, assess, review control system and auditors

Question 14

Renumeration comittee responsibilitie

Answer 14

Ensure accountability of the firm and formal and transparent process for executive compensation

Question 15

Nomination comittee responsibilities

Answer 15

-Appoint executives and ensure balance of skills, experience
-CEO succession

Question 16

Risk committee

Answer 16

Making risk management strategies