Session 6 Flashcards
What is corporate governance?
Mechanisms used to manage relationships among stakeholders and determine and control the strategic direction and performance of organizations.
- eastablish harmony between firm owners and top-level managers
What is an agency relationship?
When one party delegates decision-making responsibility to a second party for compensation.
What problems can arise due to agency relationships?
- Principal and agent might have different interests/goals (e.g. owner and manager)
- Agent makes decisions that result in pursuing goals that conflict with those of the principal
What is managerial opportunism?
Seeking of self-interest with deceit. It prevents maximization of shareholder wealth
Arrive due to divergent interests of agents and principals
What is a shareholder letter?
Provides a broad overview of a firm’s operations throughout the year to shareholders. Normally one per year
Financial results, stock price, market position, plans
What are agency costs?
Sum of incentive costs, monitoring costs, enforcement costs, financial losses incurred by principals because of governance mechanisms.
Larger in diversified firms
What are the four mechanisms to prevent problems associated with separation of ownership and control?
- Ownership concentration: Amount of stock owned
- Board of directors: individuals responsible for representing the firm’s owners by monitoring top-level managers’ strategic decisions
- Executive compensation: Salary, bonuses, long-term incentives to align manager with shareholders’ interest
- Market for corporate control: Purchase of firm that is underperforming in order to improve strategic competitiveness
What is ownership concentration?
diffuse ownership (large nb owners) produces weak monitoring and control of managerial decisions
High degrees of ownership concentration increases the probability that managers’ decisions will be designed to maximize shareholder value.
Institutional owners can significantly influence strategies as they can force managers/BoD to make decisions that are in the best interest of shareholders’
What is Board of directors
Elected individuals who are responsible for acting in the owners’ best interest by formally monitoring and controlling the firm’s top-level managersh
What are the 3 classifications of members of the board of directors
Insiders: CEO/top lvl managers
Related outsiders: Individuals univolved in day-to-day operations but who have relationship (family memebers, banks, legal, ex CEO)
Independent outsiders: Completely independent of the firm’s day-to-day operations and other relationships
What is executive compensation
Governance mechanism that seeks to align interest of amangers and owners through salaries, bonus, long-term inventives
What is the relationship between governance mechanisms and ethical behavior?
Corporate governance mechanisms used by ethically responsible leaders and companies increase the likelyhood the firm will be able to at least minimally satisfy all stakeholders’ intereest
What is Milton Friedman’s profit maximization view?
- Argues against social responsibility, primary goal should be to optimize profits
- Only social responsibility of business is to use its resources to maximize profit
What is Stakeholder Theory?
- Business has obligation to create value for range of stakeholders. not just shareholders.
- Creates trade-offs in its returns to investors but can lead to a more sustainable business with fewer risks
What are the four parts of CSR pyramid?
- Economic responsibility: profitable enough to reward creditors and shareholders
- Legal responsibility: act legally
- Ethical responsibility: Follow ethical principles held by society
- Discretionary responsibilities: Voluntary obligations
