W1 Flashcards
(56 cards)
What is corporate governance?
Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled to align the interests of shareholders, managers, and stakeholders.
What is the main goal of corporate governance?
The goal is to reduce fraud and mismanagement, ensure transparency and accountability, and enhance long-term firm value.
What is an agency conflict?
Agency conflict occurs when the interests of shareholders diverge from those of managers, who may prioritize personal goals over maximizing firm value.
What are agency costs?
Agency costs include monitoring costs, bonding costs, and residual losses incurred to align interests between shareholders and managers.
What is the Shareholder Model according to Milton Friedman?
The Shareholder Model asserts that a firm’s primary responsibility is to maximize shareholder profits while operating legally and competitively.
What is the Stakeholder Model?
The Stakeholder Model broadens the firm’s responsibility to include the interests of employees, customers, communities, and the environment.
What is the Enlightened Shareholder Model?
It seeks to maximize long-term shareholder value while considering broader societal and stakeholder impacts.
What is internal consistency in corporate governance?
Internal consistency refers to aligning the goals of managers with those of shareholders through effective incentives.
What incentives align managers with shareholders?
Stock ownership, performance-linked bonuses, and the threat of dismissal.
What are the roles of the Board of Directors?
The Board hires/fires the CEO, approves major decisions, oversees financial reporting, and ensures strong internal controls.
What are the types of Board members?
Inside directors (employees), Gray directors (business associates), and Outside directors (independent).
What is board capture?
Board capture occurs when the board becomes loyal to the CEO rather than to shareholders, compromising oversight.
What factors contribute to board capture?
CEO dominance in nominations, long CEO tenure, and lack of independent board members.
Who are other monitors besides the board?
Shareholders, securities analysts, lenders, employees (whistleblowers), and the SEC.
What does a well-designed executive compensation package include?
Base salary, performance bonuses, stock options, restricted shares, deferred compensation, and severance pay.
What is a golden parachute?
A large severance package for executives triggered typically by mergers or takeovers.
What are stock options?
Contracts that give executives the right to buy company stock at a fixed price, incentivizing them to raise firm value.
What is stock option backdating?
Retroactively setting option grant dates to when stock prices were lower, often illegally inflating gains.
What does the Sarbanes-Oxley Act require regarding stock options?
It mandates the prompt disclosure of stock option grants to prevent backdating abuses.
What are shareholder tools for direct action?
Submitting proposals, say-on-pay votes, withholding votes for directors, and initiating proxy contests.
What is a proxy contest?
An attempt by dissident shareholders to replace the board by proposing an alternative slate of directors.
What is a hostile takeover?
An acquisition attempt that is resisted by the current management, usually aimed at replacing failing leadership.
What was the purpose of the Sarbanes-Oxley Act (SOX)?
To strengthen internal controls, increase financial reporting accuracy, and restore investor confidence post accounting scandals.
What was the purpose of the Dodd-Frank Act?
To introduce reforms like say-on-pay votes, clawbacks, and transparency in executive compensation after the 2008 financial crisis.
