Corporate Governance and Agency Theory Quiz

A situation where one party (the principal) delegates a task to another party (the agent), who has the power to make decisions on the principal's behalf.

The costs associated with monitoring the agent's actions, guaranteeing agent performance, and accounting for potential losses due to the agent's actions.

The board of directors acts as a bridge between shareholders and management, ensuring both parties' interests are balanced.

A conflict of interest that occurs when the agent does not prioritize the principal's goals, potentially resulting in a divergence of interests.

The board's composition, including both internal executives and external independent members, helps balance the relationship between management and the board.

A situation where the interests of shareholders, the board of directors, and management align, often found in family-owned businesses.

A situation where the interests of shareholders and management align, potentially leading to a lack of oversight and potential conflicts of interest.

The overlap between shareholders, the board of directors, and management can create challenges in ensuring the interests of all parties are represented.

The idea that maximizing shareholder value leads to overall corporate value maximization, assuming efficient markets, and aligning manager incentives with shareholder interests.

A framework where the firm is seen as a network of agreements outlining rights and responsibilities for all stakeholders.

The right of a stakeholder to receive profits after all other claims, such as debt, are paid.

The right to make decisions regarding the use and control of an asset, like a company.

The practice of allocating residual control rights to shareholders to ensure they can influence key decisions, like dividends or board elections, to maximize shareholder value.

The risk that a controlling stakeholder might exploit their power to benefit at the expense of other stakeholders.

The potential for incomplete contracts and inefficient legal systems to allow controlling stakeholders to exploit others through loopholes in agreements.

Despite limitations, allocating ownership rights to shareholders helps to mitigate the costs of managing stakeholder relationships and ensuring long-term company success.

Combining the roles of Chairman and CEO concentrates power in one person, potentially limiting the board's independence from management.

An independent director with enhanced responsibilities, often chairing external advisor meetings and assessing the CEO, aimed to mitigate risks in CEO-Chairman overlap.

Specialized groups within the board, often led by independent directors, focusing on specific areas like audit, risk, and remuneration.

A committee responsible for overseeing financial reporting and auditing procedures, ensuring accuracy and transparency.

A committee that scrutinizes the company's risk management framework and identifies potential threats and vulnerabilities.

A committee responsible for setting and reviewing executive compensation policies, ensuring fairness and alignment with company performance.

A committee tasked with identifying and nominating qualified candidates for board membership, ensuring diversity and expertise.

A committee focusing on sustainability issues, environmental impact, and social responsibility, ensuring a company's long-term viability.

A framework of legal, institutional, and cultural elements that influence stakeholder impact on managerial decisions.

The Anglo-Saxon model emphasizes market forces and transparency. It's characterized by strong financial markets that can monitor and hold managers accountable, and it's common to see institutional investors and hostile takeovers.

The Germanic model focuses on stakeholder engagement and long-term value creation. It's characterized by strong employee representation and a more cooperative approach between management and shareholders.

The first line of defense involves the day-to-day activities of employees and managers. It includes internal controls and processes that are directly related to the business and its operations.

The second line of defense provides support and oversight to the first line. It's typically composed of risk management, compliance, and other specialized functions that help ensure that controls are being implemented effectively.

The third line of defense provides independent assurance that the company's risk management and control processes are effective. Internal audit is typically responsible for this role.

The primary objective of the third line of defense is to provide assurance that the first and second lines are operating effectively.

The three lines of defense work together to manage risks and controls effectively and ensure that the organization is operating in accordance with its objectives and compliance requirements.

A governing body composed solely of family members responsible for setting family objectives, defining family conduct within the business, and preparing future generations for management roles.

A meeting where family members share the company's financial performance, strategic plans, and long-term goals with shareholders.

A group of individuals responsible for overseeing the company's overall strategy and direction, composed of both family and non-family members.

The team charged with day-to-day operations and implementation of strategic plans, ideally with a mix of experienced family members and professional non-family managers.

A specialized committee formed to aid in decision-making and coordination within the senior management team, ensuring effective communication and collaboration.

Individuals who are not directly involved in the family business but provide valuable expertise and perspectives, contributing to better governance and decision-making.

Outsiders with a close connection to the family, such as family accountants or lawyers, offering specialized knowledge and support.

Individuals completely independent from the family with no prior relationship, providing impartial counsel and safeguarding the company's interests.

When a company is in a crisis, it should evaluate and potentially revise its strategy, values, interests, and resources based on its current ownership structure.

If a company prioritizes family values, there's a higher likelihood that the family will actively participate in the company's governance and management.

Companies seeking international growth often need to find new resources, which can lead to an increase in the number of shareholders.

Factors like government regulations, political systems, stakeholder representation, and the legal system can influence the types of businesses and strategies that thrive in a particular region.

Technology advancements present both opportunities and constraints for businesses, shaping their choices and possibilities.

Public companies often exhibit a weaker role for ownership compared to private companies, leading to greater control by the board of directors and management in strategic decision-making.

In public companies where ownership is weak, solutions may be needed to increase shareholder power in shaping the company's strategy.

Companies with concentrated ownership by a controlling shareholder will have a governance structure and management aligned with the owner's vision and needs, with the owner directly influencing strategic choices.