Week 8

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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


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