Week 8
What 2 agency problems does agency theory try to overcome?
- Adverse selection - Moral hazard
What are 3 main points of focus of the Shared Value Creation Framework?
- Expand customer base to bring in nonconsumers - Expand traditional firm value chains to include more nontraditional partners - Focus on creating new regional clusters
What are 2 external corporate governance control mechanisms?
- LBO - Poison pill
What are 5 guidelines for how to organize BoD to enable monitoring, controlling, and providing resources?
- Large - Independence - Expertise - Compensations - Meeting frequency
What are 4 things that make public corporations attractive to investors?
- Limited liability - Transferability of ownership - Legal personality - Separation of legal ownership and control
What are 2 Internal Corporate Governance Mechanisms?
- the Board of Directors - Executive Compensation
What is the Shared Value Creation Framework?
A model proposing that managers have a dual focus on shareholder value creation and value creation for society
What is a LBO?
A single investor/group of investors buys, with the help of borrowed money leveraged against the company's assets, the outstanding shares of a public company in order to take it private
What is Moral Hazard?
A situation in which information asymmetry increases the incentive of one party to take undue risks or shirt other responsibilities because the costs incur to the other party
What is Adverse Selection?
A situation that occurs when information asymmetry increases the likelihood of selecting inferior alternatives
What is Corporate Governance?
A system of mechanisms to direct and control an enterprise in order to ensure that is pursues its strategic goals successfully and legally
What is Agency Theory?
A theory that views the firm as a nexus of legal contracts
What is Business Ethics?
An agreed-upon code of conduct in business, based on societal norms
What are 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 prices sometime in the future
What is the goal of board composition?
Balance independence and expertise
What to corporate governance mechanisms do?
Better align the interests of principals and agents
What are 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
What are Outside Directors?
Board members who are not employees of the firm, but who are frequently senior executives from other firms or full-time professionals
What is a Poison Pill?
Defensive provisions to deter hostile takeovers by making the target firm less attractive
What is Shareholder Capitalism?
Shareholders have the most legitimate claim on profits as they are providers of necessary risk capital and are the legal owners of public companies
What is the CEO/Chairperson Duality?
Situation where the CEO of a public company is also the chairperson of the board of directors
What is the Board of Directors?
The centerpiece of corporate governance, composed of inside and outside directors who are elected by shareholders
What is the source of the Principal-Agent Problem?
the Separation of Ownership and Control