Podcast
Questions and Answers
What does the Sarbanes-Oxley Act aim to address?
What does the Sarbanes-Oxley Act aim to address?
The opposite of stakeholder theory is short-termism theory.
The opposite of stakeholder theory is short-termism theory.
True
What is corporate governance?
What is corporate governance?
The effective way of directing and controlling companies.
The OECD defines corporate governance as the system of ______ and control to guide organizations.
The OECD defines corporate governance as the system of ______ and control to guide organizations.
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What fulfills economic obligations to shareholders?
What fulfills economic obligations to shareholders?
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Match the following theories with their definitions:
Match the following theories with their definitions:
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What is the agency problem?
What is the agency problem?
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Which of the following is NOT mentioned as a method to ensure corporate managers act in the best interests of owners?
Which of the following is NOT mentioned as a method to ensure corporate managers act in the best interests of owners?
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Study Notes
Corporate Governance
- Corporate governance is the process of directing and controlling companies to ensure they act in the long-term best interests of stakeholders.
- It became prominent after the Enron and WorldCom scandals.
- The Sarbanes-Oxley Act (SOX Act) was enacted to strengthen corporate governance by focusing on board independence and improving financial reporting.
- It includes the appointment of independent directors detached from operational duties and without business dealings with the company.
Sarbanes-Oxley Act (SOX Act)
- The SOX Act is primarily a corporate governance regulation.
- It requires the evaluation of internal controls for reliable and transparent financial reporting.
- SOX enhances board independence, requiring more independent directors.
- It also includes oversight of audits of corporate financial statements, whistleblower policies, and transparent disclosures of financial and non-financial information.
OECD Definition of Corporate Governance
- The Organisation for Economic Co-operation and Development (OECD) defines corporate governance as a system of stewardship and control guiding organizations in fulfilling long-term economic, moral, legal, and social obligations towards stakeholders.
Stewardship and Control
- Management is responsible for day-to-day operations.
- Corporate governance involves oversight and monitoring of corporate performance and operating results, ensuring the business is run properly.
- This role is fulfilled by the board of directors.
Fulfillment of Obligations
- Corporate governance aims to fulfill long-term economic, moral, legal, and social obligations towards stakeholders, including investors, creditors, suppliers, employees, government regulators, and society.
- Economic obligations include providing sufficient returns to shareholders through dividends.
- Moral obligations include paying appropriate compensation to employees.
- Legal obligations include complying with legal requirements and contractual obligations.
- Corporate social responsibility is also a key objective.
Stakeholder Theory vs. Stockholder Theory
- Stockholder theory states that corporations exist for the benefit of shareholders.
- Stakeholder theory states that corporations exist for the benefit of all stakeholders, including employees, creditors, suppliers, government, and society.
Long-Term Sustainability
- The goal of corporate governance is to reconcile long-term customer satisfaction with shareholder value, benefiting all stakeholders and society.
- It aims to hold the board and senior management accountable for ethical behavior through regulations, performance standards, and ethical guidelines.
The Agency Problem
- The agency problem arises when managers (agents) use their authority for personal benefit, not the benefit of the owners (principal).
- This is common in companies with many shareholders, as direct management by all owners is impractical.
- Short-termism occurs when managers prioritize short-term profits over long-term growth.
- An example is self-dealing transactions where a manager benefits at the expense of the company, like an inflated purchase from their own business.
Solutions to the Agency Problem
- To ensure managers act in the best interests of owners, measures include:
- External and internal audits
- Board of directors oversight of managerial performance
- Management compensation tied to corporate performance and/or stock price
- Code of ethical conduct
- Internal controls
- Government regulation (e.g., Sarbanes-Oxley, SEC regulations)
Governance vs. Management
- Management handles day-to-day operations.
- Governance provides oversight and ensures alignment with long-term goals and stakeholder interests.
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Description
This quiz covers the principles of corporate governance and the key provisions of the Sarbanes-Oxley Act. Understand the importance of board independence, financial reporting transparency, and the impact of major corporate scandals. Test your knowledge on how these regulations shape corporate practices.
