Corporate Governance Lecture Notes

These flashcards cover key vocabulary and concepts related to corporate governance from the lecture notes.

Corporate Governance

A system of mechanisms used to manage relationships among stakeholders and control a firm’s strategic direction and performance.

Separation of Ownership

The distinction between the shareholders (owners) who invest capital and the managers (agents) who make operational decisions.

Agency Theory

A relationship where one party (principal) hires another (agent) to make decisions on their behalf.

Agency Costs

Costs incurred from monitoring managers, aligning incentives, and controlling opportunism.

Managerial Opportunism

When managers exploit information or power for personal gain, such as inflating short-term earnings.

Internal Corporate Governance Mechanisms

Structures within a company, such as ownership concentration, board of directors, and executive compensation, that help manage and direct the firm’s administration.

Board of Directors

An elected group representing shareholders that oversees management and ensures compliance with laws and ethical standards. They are typically categorized as Inside Directors and Outside Directors.

Inside Directors

Officers of the firm who also serve on the Board of Directors.

Outside Directors

Independent members of the Board of Directors who are not involved in the firm’s daily operations.

Ownership Concentration

The percentage of shares held by large shareholders, which affects the monitoring power of these shareholders.

Executive Compensation

Compensation structures designed to align managers’ goals with those of the shareholders, typically through performance-based pay.

Market for Corporate Control

A mechanism where external investors acquire underperforming firms and replace ineffective management.

Stewardship Code

Sets guidelines for ethical corporate oversight, particularly in Japan and the UK.

CEO Duality

A situation where the CEO also serves as the Chair of the Board.

Sustainability and ESG

Factors increasingly linked to firm valuation, including Environmental, Social, and Governance considerations.

Board Diversity

The inclusion of varied perspectives in a board, including gender, race, and expertise, to enhance decision-making.

Shareholder Activism

When investors push for changes in a company to promote transparency and accountability.