Corporate Governance and Legitimacy Overview
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Corporate Governance and Legitimacy Overview

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Questions and Answers

What is legitimacy in the context of corporate governance?

  • A legal requirement for business operations.
  • A process for evaluating employee performance.
  • A congruence between an organization’s activities and society’s expectations. (correct)
  • A method to increase company profits.

    • What is one principal way companies can improve corporate governance?

  • By limiting shareholder involvement.
  • By reducing employee benefits.
  • By enhancing transparency and accountability. (correct)
  • By increasing product prices.

    • What role do shareholders typically play in corporate governance?

  • Exerting pressure on corporate management for improvements. (correct)
  • Having no influence over company management.
  • Regulating business practices independently.
  • Determining company dividend policies exclusively.

    • Which model of corporate governance emphasizes the interests of shareholders?

    <p>The shareholder-primacy model.</p> Signup and view all the answers

    What does 'shareholder activism' refer to?

    <p>Shareholders demanding improved governance practices.</p> Signup and view all the answers

    What are the two levels of legitimacy discussed in corporate governance?

    <p>Micro and macro legitimacy.</p> Signup and view all the answers

    Which concept focuses on improving the relationship between companies and their investors?

    <p>Investor relations.</p> Signup and view all the answers

    What dynamic process allows a business to seek acceptance in society?

    <p>Legitimation.</p> Signup and view all the answers

    How much did CEO Robert Nardelli receive when ousted from Home Depot?

    <p>$210 million</p> Signup and view all the answers

    What was the ratio of CEO pay to that of the average worker in 2014?

    <p>216 to 1</p> Signup and view all the answers

    What is the purpose of clawback provisions?

    <p>To recover CEO pay after misbehavior</p> Signup and view all the answers

    What is the median pay for outside directors from 2003 to 2015?

    <p>$258,000</p> Signup and view all the answers

    What is the primary role of shareholders in corporate governance?

    <p>To own stock in the firm, giving them ultimate control</p> Signup and view all the answers

    Which type of director has no ties to the firm and is crucial for good corporate governance?

    <p>Outside directors</p> Signup and view all the answers

    Which of the following describes a 'golden parachute'?

    <p>Payment to executives upon a control change</p> Signup and view all the answers

    What issues can arise from excessive CEO pay in corporate governance?

    <p>It can lead to misalignment of interests between executives and shareholders</p> Signup and view all the answers

    What is the impact of SEC rules regarding executive compensation disclosure?

    <p>They have a moderating impact before implementation.</p> Signup and view all the answers

    What motivates top managers to pursue shareholder interests according to the market for corporate control?

    <p>Threat of a possible takeover</p> Signup and view all the answers

    What does the term 'backdating' refer to in the context of stock options?

    <p>Granting stock options allowing purchase at yesterday’s price</p> Signup and view all the answers

    Which group is primarily responsible for hiring individuals to manage the business on a daily basis?

    <p>Board of Directors</p> Signup and view all the answers

    Who is referred to as a 'tipper' in insider trading?

    <p>The person providing the inside information</p> Signup and view all the answers

    What does 'bullet dodging' refer to in executive compensation practices?

    <p>Delaying stock option grants until after bad news is released</p> Signup and view all the answers

    What is a major concern regarding CEO compensation related to firm performance?

    <p>It often lacks a clear relationship with the company's performance</p> Signup and view all the answers

    Which of the following accurately describes the method of corporate governance?

    <p>It is defined by the accountability and rights of various stakeholder groups</p> Signup and view all the answers

    What is one primary reason for boards to monitor CEO performance closely?

    <p>To dismiss poorly performing CEOs</p> Signup and view all the answers

    What does good faith refer to in the context of the Business Judgment Rule?

    <p>Acting in the best interests of the company</p> Signup and view all the answers

    What is a major concern raised by shareholders in the Shareholder Democracy Movement?

    <p>Inability to elect board members by a majority vote</p> Signup and view all the answers

    What role does the SEC primarily serve?

    <p>Protecting investor interests</p> Signup and view all the answers

    Why do some critics argue that the SEC is not effective?

    <p>For focusing more on businesses than on investors</p> Signup and view all the answers

    What is one potential impact of staggered board terms?

    <p>It can delay major changes in board membership for years</p> Signup and view all the answers

    What is a duty of management in relation to shareholders?

    <p>Providing transparency and information that affects investment decisions</p> Signup and view all the answers

    Which of the following actions is associated with shareholder activism?

    <p>Filing shareholder resolutions or lawsuits</p> Signup and view all the answers

    What is the key feature of the director-primacy model of corporate governance?

    <p>Corporations are considered independent legal entities.</p> Signup and view all the answers

    What does the term 'shareholder primacy' refer to in the Anglo-American model?

    <p>The expectation that corporations prioritize shareholder interests.</p> Signup and view all the answers

    Which of the following is a responsibility of a company's board of directors?

    <p>Balancing competing interests of various stakeholders.</p> Signup and view all the answers

    The term 'Golden parachute' most closely relates to which aspect of corporate governance?

    <p>A severance package for top executives upon termination.</p> Signup and view all the answers

    What is the primary purpose of the Say on Pay movement?

    <p>To allow shareholders to vote on executive pay packages.</p> Signup and view all the answers

    What does the concept of 'separation of ownership from control' imply?

    <p>Shareholders delegate decision-making authority to executives.</p> Signup and view all the answers

    Which law introduced accountability measures for corporate governance in 2002?

    <p>Accounting Reform and Investor Protection Act.</p> Signup and view all the answers

    What does the term 'proxy access' refer to in corporate governance?

    <p>The ability of shareholders to nominate candidates for the board.</p> Signup and view all the answers

    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).
    • 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

    • 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.

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