Lecture 3

Question 1

What fiduciary duties do managers have towards shareholders?

Answer 1

1. Duty of loyalty
2. Business ethics
3. Act in best interest of shareholder

Question 2

How do you incentivize a CEO?

Answer 2

• Making them partial owner to align same interests
• Principles of compensations: transparency, accountability, fairness

Question 3

Who determines CEO’s compensation?

Answer 3

Compensation committee of independent directors and voted by shareholders at the AGM

Question 4

What could lead to problems regarding the compensation committee?

Answer 4

1. Independent directors have personal ties with CEO
2. CEO is in the compensation committee

Question 5

What are the drawbacks to a performance-based bonus on the accounting performance?

Answer 5

1. Backward-looking
2. Short-term focus
3. Incentives for earnings management
4. Strategically set lower targets

Question 6

Explain claw-back clause

Answer 6

If an employee gets paid on false info, they have to give the money back

Question 7

Explain vesting period

Answer 7

Time an employee must stay within a company to earn stocks or retirement plan

Question 8

Board of directors is the market solution to what?

Answer 8

To agency problems in organizations

Question 9

What is the responsibility of the board of directors?

Answer 9

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

Question 10

What is the difference between an one-tier board system and a two-tier board system?

Answer 10

One-tier: only board of directors
Two-tier: one executive board (management) and one supervisory board (supervision)

Question 11

What are the components of the board diversity?

Answer 11

• Ethnic diversity
• Gender diversity
• Skill diversity
• Culture diversity

Question 12

What does the chairman do and they are often …?

Answer 12

Control’s the board’s meeting agenca
-> CEO’s

Question 13

Is the board of directors effective?

Answer 13

Often not because:
1. Executive directors: can’t monitor themselves (CEOs are often board directors)
2. Non-executive directors: lack strong incentives
- Low financial stake
- Too busy with other boards
- Often loyal to CEO

Question 14

What is a staggered board?

Answer 14

Board members are divided into classes -> only one class stand for election each year

Question 15

What are the pros of a staggered board?

Answer 15

• Continuity & stability
• Supports long-term planning

Question 16

What are the cons of a staggered board?

Answer 16

• Reduces shareholder influence
• Weakens board accountability