Finance Flashcards

STMP Chapter 13

How would you define corporate governance? a set of mechanisms used to manage the relationships (and conflicting interests) among stakeholders, and to determine and control the strategic direction and performance of organizations (aligning strategic decisions with company values)
What are two reasons to emphasize good corporate governance? •Apparent failure of corporate governance mechanisms to adequately monitor and control top-level managers’ decisions during recent times•Evidence that a well-functioning corporate governance and control system can create a competitive advantage for an individual firm
Historically, who manages firms in the US? How is this different today? US firms have historically been managed by their founders. However, throughout the 19th and earlier 20th century, firm size began to grow exponentially and increasingly adopt the corporate form of organization. Today, the corporate form of organization is the predominant form that most companies take
What are agency relationships? Agency relationships occur between principals and agents
What is the difference between a principal and an agent? Principals are owners of firms (shareholders) whereas agents are those individuals hired by principals to oversee their investments. Agents are managers of the modern corporation. So in effect, agency relationships occur when one party (principals) relinquishes decision making responsibility to agents (managers) for compensation.
Where do we see agency relationships today? We can see agency relationships between a variety of actors today.1. Between shareholders and top level managers.2. Between managers and their employees.3. Between paid consultants and their clients.4. Between the insured and the insurer.
Why agency conflicts occur in modern corporations? 1. Like all individuals, managers are self interested. Their interests inherently lie in their own well being, their survival, and their individual success. Agency conflicts occur when managers engage in activities that support their own interests and in those activities that do not maximize the profit maximization expectations of principals (shareholders).2. Another reason why these agency conflicts occur is because shareholders are distant from overseeing the day to day activities of managers.In combination, distance and the self interest of managers helps to prompt managers to engage in activities that are against the profit maximization goals of shareholders.
What is the relationship between diversification and the size and scope of a firm? Diversification increases the size and scope of firms. This added size and scope leads to a higher level of complexity that managers often demand to be compensated for.
What is the effect of concentrated ownership on the competitiveness of firms? To answer this question, we first must address what constitutes concentrated ownership. Large block shareholders are those who hold more than 5% of the firm’s outstanding stock. Firms that do not have concentrated ownership tend to not have a high degree of monitoring of managerial decision making. In addition, ownership that is widely dispersed tends to prevent shareholders from banding together, communicating, and coordinating their actions.Research has shown that concentrated ownership tends to provide better monitoring of managerial decision making and prompts managerial decisions that maximize shareholder value.
In what three ways can we classify board members? There are three ways in which we can classify board members:1. Board insiders are executives that currently work within the company. These individuals are elected to the board because they bring some unique skill or knowledge or competency that enhances the board’s decision making ability.2. Related outsiders are board members that are not employed by the firm. However, these individuals have some type of relationship (family, business, etc.) that compromises their ability to make independent strategic judgments.3. Independent directors are individuals that do not have some type of business or family relationship with the firm, nor do these individuals work for the firm. Independent directors are relied upon to help provide boards with independent advice and counsel.
What issues can independent board experience? 1. While independent directors do provide a high degree of monitoring of managers, these individuals are often too distant from the firm’s operations to have substantive knowledge about the firm’s operations.2. Another issue associated with independent directors is that they do not possess the level of skill and knowledge that managers possess. Hence, independent directors may not be able to make informed decisions about the activities of company managers.
What steps can be taken to enhance board effectiveness? 1. Today, many firms are taking steps to increase the diversity of board members. Diversity can come in many forms, including increasing the percentage of ethnic minorities and women. Diversity can come through bringing members onto board with diverse backgrounds including those with public service among others. Research has shown that greater diversity adds to more effective decision making, and this holds true in the board of director context as well.2. Another way in which firms are increasing the effectiveness of boards is by looking at the strength of firm’s internal accounting and managerial control systems.3. Today, more and more firms are taking steps to formally evaluate their own performance.4. Firms are also creating lead director roles.5. Finally, one of the more prevalent practices today are firms are changing the way boards are compensated.
What is the meaning of Gubernare? which means … Corporate governance relates to the governance of companies.
What is the agency problem? What are some solutions to it? The agency problem is a conflict of interest inherent in any relationship where one party is expected to act in another’s best interests. In corporate finance, the agency problem usually refers to a conflict of interest between a company’s management and the company’s stockholders.
What are four ethical concerns managers must consider?
Why is it important for strategic managers to understand the role governance plays in the operationof the firm
What is the role of the board of directors in running a public company?
What is the board’s primary job?
What is the board’s primary job?
What distinguishes inside from outside directors?
What mechanisms can companies use to align incentives of managers and owners?
How can a company’s culture encourage members to engage in unethical behaviors? Ethicalbehaviors?
Agency Problem the possibility of conflict of interest between the stockholders and management of a firm
Culture Beliefs, customs, and traditions of a specific group of people.
Fiduciary Duty A physician’s obligation to his or her patient, based on trust and confidence.
Outside Directors board members who are not employees of the firm, but who are frequently senior executives from other firms or full-time professionals
ShareholderPrimacy The belief that a corporation should be run, primarily or exclusively, for the benefit of its shareholders.
Agents intermediaries that represent either buyers or sellers on a permanent basis
Ethical Values one’s personal convictions about what is right and wrong
individual proprietorship owned and controlled by one person, known as the proprietor
Partnership A business in which two or more persons combine their assets and skills
Stakeholder A person or organization with an interest in a particular place or issue.
Board of Directors a group of persons elected by the stockholders to manage a corporation
Ethical behavior behavior that conforms to a society’s accepted principles of right and wrong
Pay forPerformance bases pay on one’s results
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.
stakeholder model a theory of corporate responsibility that holds that management’s most important responsibility, long-term survival, is achieved by satisfying the interests of multiple corporate stakeholders
Bonuses cash awards given to employees who achieve specific performance objectives
Staffing A management function that includes hiring, motivating, and retaining the best people available to accomplish the company’s objectives
Mission Statement a statement of the organization’s purpose – what it wants to accomplish in the larger environment
Principals (of money) denoting an original sum invested or lent.
stock-based compensation determining the fair value of employee services in compensatory stock-option plans
Corporate Governance the system of governing a company so that the interests of corporate owners and other stakeholders are protected
Compensation something, typically money, awarded to someone as a recompense for loss, injury, or suffering.
Strategy a plan of action or policy designed to achieve a major or overall aim.
Nexus of Contracts A model of the corporation suggesting that the firm is the sum total of its contracts with different stakeholders.
Property Rights the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it
Stock Grant stock given to employee as compensation/part of compensation
Corporation A business owned by stockholders who share in its profits but are not personally responsible for its debts
Structure the arrangement of and relations between the parts or elements of something complex.
Other Constituencylaws Laws that allow the board of directors to freely consider the needs of stakeholders other than shareholders when making critical strategic decisions for the firm.
proxy fight a technique used to gather enough stockholder votes to control a targeted company
Stock Option An agreement that grants the owner the option to buy a given number of shares of stock, usually within a set time period.

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