Ethics and Corporate Governance - Week One Lecture

Corporate Governance (Cadbury / Thomsen & Conyon Definition)

The system by which companies are directed and controlled, operating through ownership structure, boards of directors, rewards, and rules.

Type-1 Agency Conflict

The conflict of interest occurring between owners (shareholders) and managers (executives), where managers may pursue personal perks or short-term gains over shareholder wealth.

Type-2 Agency Conflict

The conflict of interest between controlling (large) shareholders and minority (small) shareholders, where controlling owners may expropriate corporate resources for their own benefit.

Type-3 Agency Conflict

The conflict of interest between shareholders and non-shareholder stakeholders, such as lenders, employees, customers, or the broader community.

Adverse Selection in Agency Theory

An agency problem occurring before hiring, where an agent conceals or misrepresents private information (such as skill or experience) to obtain a job.

Moral Hazard in Agency Theory

An agency problem occurring after hiring, where an unmonitored agent takes self-serving or overly risky actions at the principal's expense.

Duty of Loyalty

The legal obligation requiring directors and managers to act honestly and in the best interests of the company and its shareholders rather than for personal gain.

Duty of Care

The legal obligation requiring directors to perform their roles with diligence, prudent judgment, and reasonable skill.

Comply-or-Explain Framework

A soft law principle used in corporate governance codes where companies must either adhere to best-practice recommendations or publicly justify their reasons for non-compliance.

Unitary Board Structure

A board structure consisting of a single governing body made up of both inside (executive) and outside (non-executive) directors, typical in the US and UK.

Two-Tier Board Structure

A governance system split into two distinct bodies: an executive board of top managers and a supervisory board of outside directors and stakeholder representatives, typical in Germany.

Free Cash Flow Hypothesis

The concept proposed by Jensen (1986) stating that issuing debt obligates managers to disburse cash for interest and principal payments, reducing excess cash that could be mismanaged.

Anti-Takeover Measures (ATMs)

Bylaw or charter provisions (such as poison pills or staggered boards) designed to deter hostile acquisitions, which can lead to managerial entrenchment.

Backward Recursion Problem

A limitation of reputational discipline where executives near retirement lose the incentive to protect their long-term professional reputation.

Optimal Level of Governance

The point where the efficiency gains of oversight equal the costs of implementation, preventing excess governance from slowing decisions or hurting firm performance.

Wall Street Walk

The mechanism by which public shareholders signal dissatisfaction with managerial decisions by selling off their equity stakes rather than attempting to intervene.