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Questions and Answers
What is a potential benefit of having higher corporate governance ratings, according to prior research?
What is a potential reason for investors to value companies with higher corporate governance ratings?
What is an aspect of corporate governance that can be included in Corporate Governance Reporting (CGR)?
What is a potential competitive advantage of well-governed companies?
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What is a potential indicator of corporate governance performance that could be included in CGR?
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What is a potential risk that may be reduced by having higher corporate governance ratings?
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What is a major risk facing an organization in achieving its economic, social, and environmental goals?
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What is a key aspect of an organization's corporate governance structure?
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What is an important indicator of an organization's sustainability performance?
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What is a crucial mechanism for an organization to address major risks?
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What is a key factor that can affect an organization's cost of equity capital?
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What is a common metric used to evaluate an organization's corporate governance?
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What is a critical component of an organization's internal controls?
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What is an important aspect of an organization's compliance with applicable laws and regulations?
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What is the main purpose of corporate governance ratings?
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What is the primary focus of corporate governance reporting?
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What is one of the categories used by Governance Metrics International (GMI) in its scoring algorithm?
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What is the purpose of corporate governance rating systems?
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What is an important aspect of corporate governance reporting?
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What should corporate governance reporting provide?
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What is a key aspect of GMI's scoring algorithm?
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What should corporate governance reporting focus on?
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Study Notes
Corporate Governance Rating
- National and international organizations, such as ISS, The Corporate Library, Standard & Poor's, Moody's, Core Ratings, GMI, and Glass Lewis & Co., have developed and published corporate governance ratings.
- These ratings are used by shareholders to assess their stock returns and by bondholders to determine the costs of lending.
- GMI's scoring algorithm considers hundreds of metrics relevant to governance quality and risk assessment, categorized into six areas: board accountability, financial disclosure, shareholder rights, executive compensation, takeover defenses, and reputation/regulatory problems.
Corporate Governance Reporting
- Corporate governance reporting (CGR) goes beyond mandatory periodic financial reports or filings with regulatory bodies.
- CGR reports on a company's vision, strategies, and missions in creating stakeholder value, and its financial, economic, social, and environmental indicators.
- CGR entails assessing the quality and effectiveness of an organization's corporate governance and reporting findings to interested stakeholders.
Key Requirements for Corporate Governance Reporting
- Disclose all relevant information about the effectiveness of the company's corporate governance.
- Focus on the company's sustainability performance.
- Provide transparent information about the company's performance and its impacts on all stakeholders.
- Assess the company's responsiveness to the needs of its stakeholders.
Key Items to Include in Corporate Governance Reporting
- The percentage of independent and non-executive directors on the board.
- The existence of an audit committee comprising all independent and financially literate directors.
- The adequacy of internal controls.
- Corporate governance principles and mechanisms to which the organization adheres.
- The status of the organization's compliance with applicable laws, rules, regulations, and standards.
- The organization's financial and non-financial KPIs.
Additional Items to Include in Corporate Governance Reporting
- The company's objectives and management's vision to achieve these objectives.
- Major share ownership and voting rights.
- A summary of financial position and results of operations.
- The compensation policy for directors and officers.
- Significant issues relevant to employees and other stakeholders.
- The corporate governance structure, including aspects, principles, and functions.
- Material information on sustainability performance.
- The company's initiatives on risk management, including foreseeable risk factors and responses.
- The company's voting system (majority vs. plurality).
- The duality of CEO positions or separation of the positions of the chairperson of the board and the CEO.
The Value of Corporate Governance
- Well-governed companies are expected to have a competitive advantage over poorly governed companies.
- Investors value corporate governance policies and practices of public companies and consider governance factors in their investment decision-making process.
- Companies with higher corporate governance ratings/indexes outperform those with lower ratings as measured by stock returns.
- Firms with higher corporate governance ratings have lower cost of equity capital due to perceived lower agency risk, lower systematic risk, and lower idiosyncratic risk.
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Description
This quiz assesses your understanding of the relationship between corporate governance and investment decisions, including how governance policies affect stock prices and competitiveness.
