Chapter 12: Corporate Governance and Business Ethics

shared value creation framework

a model proposing that managers have a dual focus on shareholder value creation and value creation for society

leveraged buyout (lbo)

a single investor or group of investors buys, with the help of borrowed money (leveraged against the company's assets), the outstanding shares of a publicly traded company in order to take it private

moral hazard

a situation in which information asymmetry increases the incentive of one party to take undue risks or shirk other responsibilities because the costs incur to the other party

adverse selection

a situation that occurs when information asymmetry increases the likelihood of selecting inferior alternatives

corporate governance

a system of mechanisms to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally

agency theory

a theory that views the firm as a nexus of legal contracts

business ethics

an agreed- upon code of conduct in business, based on societal norms

stock options

an incentive mechanism to align the interests of shareholders and managers, by giving the recipient the right (but not the obligation) to buy a company's stock at a predetermined price sometime in the future

inside directors

board members who are generally part of the company's senior management team; appointed by shareholders to provide the board with necessary information pertaining to the company's internal workings and performance

outside directors

board members who are not employees of the firm, but who are frequently senior executives from other firms or full-time professionals

poison pill

defensive provisions to deter hostile takeovers by making the target firm less attractive

shareholder capitalism

shareholders-the providers of the necessary risk capital and the legal owners of public companies- have the most legitimate claim on profits

ceo/ chairperson duality

situation where the ceo of a publicly traded company is also the chairperson of the board of directors

board of directors

the centerpiece of corporate governance, composed of inside and outside directors who are elected by the shareholders