Corporate Governance Around the World

These flashcards cover the key concepts and definitions related to corporate governance and public corporations, highlighting weaknesses, agency problems, solutions, and the role of legal protections.

What is a public corporation?

A public corporation is a jointly owned organizational innovation by a multitude of shareholders that allows efficient sharing of risk and raising large amounts of capital.

What is the primary goal of financial management?

The primary goal of financial management is to maximize the wealth of shareholders.

What are some major weaknesses of a public corporation?

Weaknesses include conflicts of interest between managers and shareholders, ineffective boards, and the free rider problem that discourages shareholder activism.

What is corporate governance?

Corporate governance is the economic, legal, and institutional framework that distributes corporate control and cash flow rights among shareholders, managers, and other stakeholders.

Define agency problem.

The agency problem refers to the conflicts of interest between self-interested managers (agents) and shareholders (principals) of a firm.

What can shareholders do to alleviate the agency problem?

Shareholders can elect a board of directors, create incentive contracts, establish concentrated ownership, and promote accounting transparency.

How can debt act as a remedy for agency problems?

Debt creates obligations for interest payments, motivating managers to curb private perks and wasteful investments.

What role does the board of directors play in corporate governance?

The board of directors is responsible for safeguarding shareholders’ interests and can curb agency problems if independent of management.

What is the effect of concentrated ownership on corporate governance?

Concentrated ownership provides significant incentive for investors to monitor management effectively.

How does legal protection of investor rights vary across countries?

Legal protection of investor rights and law enforcement quality vary significantly, impacting corporate ownership patterns and capital market development.