Final Rehearsal

What is the core definition of Corporate Governance (CG)?

The system that directs and controls companies, aiming to solve the owner–manager agency problem and create long‑term value.

Name the classic CG problem and its two main parties.

The agency problem between dispersed shareholders (principals) and managers (agents).

List the three headline principles of the G20/OECD CG code.

Transparency / Disclosure, Equitable Treatment of Shareholders, Board Responsibilities.

Differentiate corporate governance from management.

Governance decides who decides & monitors

State the gist of Chapter 2 on CG theories.

Starts with classic agency theory then widens to contract, transaction‑cost, behavioural and sociological perspectives.

Define “information asymmetry.”

A situation where one party, typically managers, has better information than the other, enabling moral hazard or adverse selection.

Explain “enlightened agency theory.”

A view blending economics with psychology, sociology, law and politics, recognising multiple stakeholders and long‑term value.

Name the five “lines of defence” (Chapter 3).

Corporate culture → External regulation → Ownership structure → Boards of directors → Incentive systems.

What is “comply or explain”?

Soft‑law approach where firms follow a governance code or publicly explain deviations.

Give two reasons national CG systems differ (Chapter 4).

Ownership dispersion/concentration

Contrast bank‑based vs. market‑based financial systems.

Bank‑based: concentrated owners, relationship lending

State the main takeaway of Chapter 5 (Codes & Regulation).

Governance is a mix of voluntary codes and mandatory law that has spread globally since Cadbury (1992).

Define “Sarbanes‑Oxley Act”.

2002 U.S. law imposing stringent internal‑control, audit‑committee and disclosure rules after Enron/WorldCom.

What does “GRC” stand for?

Governance, Risk, Compliance.

Describe the “three‑lines‑of‑defence” model in compliance.

1) Management owns risks

Name four performance metrics covered in Chapter 7.

EVA, ROIC, Tobin’s Q, Total Shareholder Return (TSR).

Summarise Friedman’s view on CSR.

The sole social responsibility of business is to increase profits within the rules of the game.

Define “double materiality.”

Reporting principle capturing both how sustainability issues affect the firm and how the firm affects society/environment.

Why does ownership concentration matter?

Large block‑holders can monitor management cheaply, mitigating free‑rider problems of dispersed shareholders.

What is investor “stewardship”?

Long‑term, engaged monitoring by institutional investors through voting and dialogue.

List the four main board theories.

Agency, Resource‑Dependence, Stewardship, Behavioural.

Contrast one‑tier with two‑tier board systems.

One‑tier: single board with executives and non‑executives

What is the 4S model of board tasks?

Service, Strategy, Succession, Supervision.

State two determinants of board effectiveness beyond structure.

Boardroom behaviour/dynamics

Explain “say‑on‑pay.”

Shareholders’ advisory or binding vote on executive remuneration reports.

Give two elements of pay mix that align incentives.

Performance shares/options

How can boards influence strategy?

Approving and challenging strategic plans, ensuring alignment with purpose and risk appetite.

Differentiate planned vs. emergency CEO succession.

Planned: orderly, long‑term pipeline

What is risk governance?

Board‑level oversight of identifying, assessing and monitoring principal risks, and defining risk appetite.

Name two frameworks boards use in IT governance.

COBIT

Why are tech‑savvy directors increasingly important?

Digital disruption, cybersecurity and AI demand informed oversight and strategic guidance.

Agency Theory – Assumptions

Assumes principals and agents are rational, self‑interested utility‑maximisers.

Agency Theory – Information Asymmetry

Managers (agents) know more than shareholders (principals), creating incentive or agency problems.

Information Asymmetry Types

Two generic forms: moral hazard (hidden action) and adverse selection (hidden knowledge).

Generic Agency Problems

Type 1: owners vs managers, Type 2: majority vs minority owners, Type 3: shareholders vs stakeholders (CSR issues).

Psychological Critique of Agency Theory

Behavioral research shows humans are not always rational or solely self‑interested, so agency theory may need refinement.

Political Theory of Corporate Governance

Corporate governance is fundamentally shaped by politics—mainly via law—producing international differences in systems.

Sociological Perspective on Governance

Networks, norms, and other informal institutions influence governance beyond formal legal structures.

Resource Dependence Theory & Boards

Firms reduce uncertainty by appointing non‑executive directors linked to critical external resources.

Stewardship Theory (Trust‑based Governance)

Shareholders can be better off trusting managers as stewards rather than relying solely on control mechanisms.

Stakeholder Theory

Firms should consider and balance the interests of all stakeholders, not just shareholders.