Corporate Governance Chapter 1

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Which stakeholders can directly or indirectly influence a firm's corporate governance?

- Suppliers of Finance - Employees - Suppliers - Costumers - The state - Competition - Social norms - Intermediaries

What are the basic corporate governance problems according to agency theory?

Conflicts of interest between owners and managers. Creates costs for owners and gives rise to the need for monitoring and interest alignment. Often not possible for owners to avoid. Growing firms require more capital and an increased shareholder base gives rise to the need for a professional manager.

What are the two views of a firm? and what do they imply?

Firm-orientation: focus is on survival of the firm. Owner-orientation: Focus is on maximizing profit.

What does the G20 OECD corporate governance principles consist of?

Framework Shareholders Institutional investors Stakeholders Disclosure Boards

When does an agency problem arise?

When somebody (agent) is doing something for somebody else (principal).

what is a Principal, and what is an Agent

a Principal is the term for a Shareholder an Agent is the term for a manager

Explain the principle "Disclosure"

The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.

Explain the principle "Boards"

The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board's accountability to the company and the shareholders.

Explain the principle "Framework"

The corporate governance framework should promote transparent and fair markets, and the efficient allocation of resources. It should be consistent with the rule of law and support effective supervision and enforcement.

Explain the principle "Shareholders"

The corporate governance framework should protect and facilitate the exercise of shareholders' rights and ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

Explain the principle "Institutional investors"

The corporate governance framework should provide sound incentives throughout the investment chain and provide for stock markets to function in a way that contributes to good corporate governance.

Explain the principle "Stakeholders"

The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.

How do we define agency costs

as the sum of: (I) The monitoring expenditures by the principal (II) The bonding expenditures by the agent (III) The residual loss

How do we define corporate governance?

as the system by which companies are directed and controlled


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