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UNISEMINAR

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Corporate Governance

Maastricht 2nd Edition Academic Year 12/13


Table of Contents


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Introduction I – X Section 1: Introduction to Corporate Governance 001 – 028 Section 2: Boards of Directors and Complex Corporate Structures 029 – 093 Section 3: Corporate Governance Codes and Models 094 – 149 Section 4: Agency Theory, Incentive Systems and Financial Performance 150 – 179 Section 5: Board Practices and the Market for Corporate Control 180 – 228 Section 6: Governance and Risk 229 – 248 Section 7: Shareholder Activism 249 – 277 Section 8: EGS and Shareholder Value 278 – 298 Section 9: Pay for Performance 299 – 333 Section 10: The Perfect Board and the Future of Corporate Governance 334 – 361 Notes, Feedback, Contact

Table of Contents


Literature

X / X


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TThhiiss LLeeaarrnniinngg CCaarrdd SSeett ccoovveerrss tthhee ffoolllloowwiinngg lliitteerraattuurree:: Tricker, B. (2012), Corporate Governance, Chapter 1, 2, 3, 4, 5, 6, 7, 8, 10, 12, 13, 17, 18 Tirole, J. (2006), Theory of Corporate Finance, Chapter 1 Berk and DeMarzo, Corporate Finance, Chapter 28.5 and 29.6 + all relevant articles Please note that we recommend you to read the literature (especially the quantitative articles) in addition to learning with these cards, as it is not possible to cover all theoretical details of this course with a learning card set. The combination of both (reading + practice with cards) will be the key to your good grade.

Literature


3 / 361

Chapter 1: Corporate Governance: A subject whose time has come

Explain the difference between corporate governance and management.

-‐ Concept -‐


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MMaannaaggeemmeenntt is responsible for running the enterprise from strategic planning to day-‐to-‐day activities.

GGoovveerrnniinngg bbooddiieess are responsible for ensuring that the business is run in a proper way and that it is running in the right direction.

Chapter 1: Corporate Governance: A subject whose time has come


10 / 361

Chapter 2: Governance and Management

Which three key actors are generally adressed by codes of corporate governance?

-‐ 3 Points -‐


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KKeeyy aaccttoorrss iinn ccoorrppoorraattee ggoovveerrnnaannccee

Management Board of Directors Shareholders


11 / 361

When ful�illing its duties the board of directors is involved in all of the following activities eexxcceepptt:

a. Formulating corporate strategy b. Providing accountability to shareholders and other

external parties c.  Ensuring that corporate decisions are executed d.  Monitoring and supervising

-‐ Multiple Choice -‐



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cc.. EEnnssuurriinngg tthhaatt ccoorrppoorraattee ddeecciissiioonnss aarree eexxeeccuutteedd This is not one of the duties of the board of directors. Instead this duty is more likely to lie with the middle management of a company.


12 / 361


A private limited company may not offer shares to the public. This type of organization faces

less stringent requirements when registering as a company.

-‐ True/False -‐


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TTrruuee.. Tricker (2012), p. 38


32 / 361


What is a two-‐tier board structure and how does it relate to the process of co-‐

determination?

-‐ Concept -‐


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A ttwwoo-‐-‐ttiieerr bbooaarrdd ssttrruuccttuurree requires companies to have both a upper, supervisory board and a lower, management board or committee. The supervisory board consists exclusively of non-‐executive directors whereas the management board only includes executives.


à  The process of co-‐determination requires that one half of the supervisory board represents employee interests and the other half shareholder interests.

à  While members of the management board attend supervisory board meetings they have no voting rights. The supervisory board has the ability to appoint and remove members from the executive board.


Name the main arguments in favor and against appointing a retiring CEO as a chairman!

-‐ Concept -‐

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Chapter 4: The Governance Partnership


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Chapter 4: The Governance Partnership

PPrroo CCoonnttrraa

Retiring CEO as Chair-‐man

A retiring top executive could bring:   years of experience   knowledge, and   connections to the board as its chairman.

Dif�iculties between the chairman and the new CEO could arise. It likely that a person who has been a successful CEO tends to interfere in the day-‐to-‐day running of the business.


53 / 361

Chapter 7: Functions of the Board

Name all of Porter‘s �ive forces!

-‐ 5 points -‐


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Chapter 7: Functions of the Board

Rivalry within Industry

Threat of New Entrants

Bargaining Power of Customers

Threat of Substitutes

Bargaining Power of Suppliers

PPoorrtteerr‘‘ss 55 FFoorrcceess


77 / 361

Chapter 10: The Governance of Listed Companies

Name four bene�its for dual listing.

-‐ 4 Points -‐


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Chapter 10: The Governance of Listed Companies

Continuing existing successful businesses

Protecting brand names

Taxation bene�its

Sustaining national pride


120 / 361

Chapter 6: Models of Corporate Governance

Name at least seven out of the ten forces for convergence in corporate governance codes

around the world.

-‐ 7 Points -‐


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Securities regulations for listed companies

International accounting standards

Global concentration of audit practices

Globalization of companies

FFoorrcceess ooff CCoonnvveerrggeennccee

Raising capital on overseas stock exchanges

International institutional investors

Private equity funding

Cross-‐border mergers of stock markets

Similar codes of good practice around the world

Research publications, journals and conferences


122 / 361


Identify �ive forces for differentiation in corporate governance around the world.

-‐ 5 Points -‐


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Legal differences in company law

Differences in standards in the legal process

Stock market differences (e.g. market capitalization or liquidity)

Differences in ownership structures

Differences in culture, history and ethnic groupings


125 / 361

The state at the national or provincial level has maintained ownership control of most of

China’s listed companies. Draw the regulatory structure.

-‐ Figure-‐

Chapter 17: Corporate Governance Around the World


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State regulators

Listed Chinese company

Stock exchange listing rules

Independent outside auditors


Tricker (2012), p. 444


127 / 361


What are the main differences between the German-‐style corporate governance structure

and the Chinese structure?

-‐ Concept -‐


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GGeerrmmaann MMooddeell

  Equal number of shareholder and employee representatives

  Supervisory board between shareholders and management board

  Board has power to hire and �ire directors

CChhiinneessee MMooddeell

  Minimum proportion of employees on board is one third

  Supervisory board has no responsibility on share-‐holders’ behalf for ROI

  Board has nnoo power to hire or �ire directors


130 / 361


During the 1990s, Russia attempted to transfer ownership to the people through three forms of voucher privatization. List these three forms.

-‐ 3 Points -‐


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FFrreeee ddiissttrriibbuuttiioonn ooff vvoouucchheerrss to all Russian citizens, which could be exchanged for company shares or invested in voucher investment funds.

11

IInnvveessttmmeenntt tteennddeerrss, in which investors had to make substantial investments to redevelop companies. 22

LLooaann-‐-‐ffoorr-‐-‐sshhaarreess aauuccttiioonnss: the government provided �inance from the federal budget for the purchase of shares in public companies that were put up for auction.

33


131 / 361


Brazilian company law and the Code of Best Practice of Corporate Governance have three unusual corporate governance features. Name

and explain these three features.

-‐ 3 Points -‐


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FFaammiillyy ccoouunncciill

FFiissccaall ccoouunncciill

  inspect the work of the board   review the activities of the company to ensure compliance with legal and statutory duties

  provide an opinion on the annual management report and on board proposals (e.g. investment projects)

  discuss family issues and the alignment of its members' expectations with those of the other shareholders

  preserve longer-‐term family values; formalize succession planning for family members in mgmt. and on the board

AAddvviissoorryy bbooaarrdd

  preferably made up of independent members   allows independent members to contribute to the organization and gradually improve its corporate governance


160 / 361

Tirole (2006)

What is the difference between explicit and implicit incentives?

-‐ 2 Points -‐


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Tirole (2006)

  Managers‘ concern about their future   Advancement   Praise

  Bonuses   Stock options   Perks

Explicit incentives Implicit incentives


161 / 361

Tirole (2006)

What does a manager‘s compensation package usually consist of? Which parts are

incentivizing?

-‐ 3 Points -‐


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Tirole (2006)

((ii)) = incentivizing: induce the manager to internalize the owner‘s interest

Bonus Stock-‐based

incentives

Salary

((ii)) ((ii))


177 / 361

Core, Holthausen & Larcker (1999)

Explain what Core et al.‘s (1999) �indings imply for the relationship between �irms‘ governance

structures and their future performance.

-‐ Concept -‐


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Core, Holthausen & Larcker (1999)

PPoooorr ggoovveerrnnaannccee ssttrruuccttuurreess are associated with greater agency problems in �irms. The severeness of agency problems in turn is positively related to CEO compensation. Firms with greater agency problems have appeared to ppeerrffoorrmm wwoorrssee than those with less pronounced agency problems.

Governance structures

Future �irm perfor-‐mance

Agency problems

CEO compensa-‐tion

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