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Questions and Answers
What is legitimacy in the context of corporate governance?
What is legitimacy in the context of corporate governance?
What is one principal way companies can improve corporate governance?
What is one principal way companies can improve corporate governance?
What role do shareholders typically play in corporate governance?
What role do shareholders typically play in corporate governance?
Which model of corporate governance emphasizes the interests of shareholders?
Which model of corporate governance emphasizes the interests of shareholders?
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What does 'shareholder activism' refer to?
What does 'shareholder activism' refer to?
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What are the two levels of legitimacy discussed in corporate governance?
What are the two levels of legitimacy discussed in corporate governance?
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Which concept focuses on improving the relationship between companies and their investors?
Which concept focuses on improving the relationship between companies and their investors?
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What dynamic process allows a business to seek acceptance in society?
What dynamic process allows a business to seek acceptance in society?
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How much did CEO Robert Nardelli receive when ousted from Home Depot?
How much did CEO Robert Nardelli receive when ousted from Home Depot?
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What was the ratio of CEO pay to that of the average worker in 2014?
What was the ratio of CEO pay to that of the average worker in 2014?
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What is the purpose of clawback provisions?
What is the purpose of clawback provisions?
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What is the median pay for outside directors from 2003 to 2015?
What is the median pay for outside directors from 2003 to 2015?
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What is the primary role of shareholders in corporate governance?
What is the primary role of shareholders in corporate governance?
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Which type of director has no ties to the firm and is crucial for good corporate governance?
Which type of director has no ties to the firm and is crucial for good corporate governance?
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Which of the following describes a 'golden parachute'?
Which of the following describes a 'golden parachute'?
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What issues can arise from excessive CEO pay in corporate governance?
What issues can arise from excessive CEO pay in corporate governance?
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What is the impact of SEC rules regarding executive compensation disclosure?
What is the impact of SEC rules regarding executive compensation disclosure?
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What motivates top managers to pursue shareholder interests according to the market for corporate control?
What motivates top managers to pursue shareholder interests according to the market for corporate control?
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What does the term 'backdating' refer to in the context of stock options?
What does the term 'backdating' refer to in the context of stock options?
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Which group is primarily responsible for hiring individuals to manage the business on a daily basis?
Which group is primarily responsible for hiring individuals to manage the business on a daily basis?
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Who is referred to as a 'tipper' in insider trading?
Who is referred to as a 'tipper' in insider trading?
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What does 'bullet dodging' refer to in executive compensation practices?
What does 'bullet dodging' refer to in executive compensation practices?
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What is a major concern regarding CEO compensation related to firm performance?
What is a major concern regarding CEO compensation related to firm performance?
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Which of the following accurately describes the method of corporate governance?
Which of the following accurately describes the method of corporate governance?
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What is one primary reason for boards to monitor CEO performance closely?
What is one primary reason for boards to monitor CEO performance closely?
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What does good faith refer to in the context of the Business Judgment Rule?
What does good faith refer to in the context of the Business Judgment Rule?
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What is a major concern raised by shareholders in the Shareholder Democracy Movement?
What is a major concern raised by shareholders in the Shareholder Democracy Movement?
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What role does the SEC primarily serve?
What role does the SEC primarily serve?
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Why do some critics argue that the SEC is not effective?
Why do some critics argue that the SEC is not effective?
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What is one potential impact of staggered board terms?
What is one potential impact of staggered board terms?
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What is a duty of management in relation to shareholders?
What is a duty of management in relation to shareholders?
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Which of the following actions is associated with shareholder activism?
Which of the following actions is associated with shareholder activism?
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What is the key feature of the director-primacy model of corporate governance?
What is the key feature of the director-primacy model of corporate governance?
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What does the term 'shareholder primacy' refer to in the Anglo-American model?
What does the term 'shareholder primacy' refer to in the Anglo-American model?
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Which of the following is a responsibility of a company's board of directors?
Which of the following is a responsibility of a company's board of directors?
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The term 'Golden parachute' most closely relates to which aspect of corporate governance?
The term 'Golden parachute' most closely relates to which aspect of corporate governance?
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What is the primary purpose of the Say on Pay movement?
What is the primary purpose of the Say on Pay movement?
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What does the concept of 'separation of ownership from control' imply?
What does the concept of 'separation of ownership from control' imply?
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Which law introduced accountability measures for corporate governance in 2002?
Which law introduced accountability measures for corporate governance in 2002?
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What does the term 'proxy access' refer to in corporate governance?
What does the term 'proxy access' refer to in corporate governance?
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Study Notes
Legitimacy and Corporate Governance
- Legitimacy: Alignment between a business's actions and society's expectations.
- Legitimation: Process wherein a business strives to maintain its acceptance.
- Micro Level of Legitimacy: Adapting operational methods to perceived societal expectations.
- Macro Level of Legitimacy: Focus on the entire corporate system, emphasizing that businesses exist solely due to society's grant of legitimacy.
Problems in Corporate Governance
- The Need for Board Independence: Crucial for sound governance, separating outside directors (independent) from inside directors (tied to the firm).
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Issues Surrounding Compensation:
- CEO Pay-Firm Performance Relationship: Examining if CEO pay aligns with company performance.
- Excessive CEO Pay: Raises concerns about fairness and potential misalignment of incentives.
- Executive Retirement Plans and Exit Packages: Scrutiny on generous packages compared to worker benefits.
- Outside Director Compensation: Increasing compensation for board members.
- Transparency: SEC rules require disclosure of executive compensation, potentially moderating excessive pay.
- Governance Impact of the Market for Corporate Control: Mergers and acquisitions create an expectation that the threat of takeover motivates managers to prioritize shareholders. However, corporations often employ defense mechanisms like poison pills and golden parachutes.
- Insider Trading: Buying or selling securities using non-public, material information that could affect stock prices.
Improving Corporate Governance
- The Board’s Relationship with CEO: Boards are responsible for overseeing CEO performance and removing underperforming executives. Increased CEO firings indicate a shift towards greater accountability.
- Board Member Liability: The "Business Judgment Rule" protects board members acting in good faith, making informed decisions for the company's benefit, not their own.
The Role of Shareholders
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The Shareholder Democracy Movement: Arises from the perception that shareholders, despite being owners, may lack real power and their votes may not be considered. Aims to:
- Majority Vote: Electing board members by majority vote, not just a plurality.
- Banning Classified or Staggered Boards: Ensuring board members are elected within a shorter timeframe.
- Proxy Access: Giving shareholders the ability to propose board nominees.
The Role of the SEC
- The SEC protects investor interests, but critics argue that it favors businesses over investors. The SEC's failure to prevent the Bernie Madoff fraud raises concerns about its effectiveness.
Shareholder Activism
- History of Shareholder Activism: Longstanding efforts to influence corporate behavior.
- Shareholder Resolutions: Proposals submitted to the board for a vote.
- Shareholder Lawsuits: Legal actions taken by shareholders.
Investor Relations and Shareholder Engagement
- Most boards engage in communication with major investors.
- Corporations have obligations to shareholders, encompassing transparency and providing information affecting investment decisions.
An Alternative Model of Corporate Governance
- Anglo-American Model: Emphasizes shareholder primacy.
- Emerging Perspective: Director-primacy model, where the corporation is viewed as an independent legal entity owning itself.
- Director-Primacy Model: Boards function as mediating bodies, balancing stakeholder interests. While having duties to shareholders, they also consider other stakeholders.
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Description
This quiz explores key concepts of legitimacy in corporate governance, including the alignment of business actions with societal expectations. It delves into micro and macro levels of legitimacy, the importance of board independence, and issues concerning CEO compensation and fairness. Test your knowledge on these crucial aspects of effective governance.
