Corporate Governance, Shareholder & Stakeholder Theories, Activism, and Board Roles

Shareholder Capitalism

is the idea the firm is accountable to the

shareholders- the primary purpose of a corporation is to maximize

returns for its shareholders, the owners of the company.

Stakeholder Capitalism

embodies the notion that the firm must

balance shareholder and stakeholder interests- the firm should serve

the interests of all stakeholders

Shareholder Theory

generate wealth by seeking to maximize profits to pass along to shareholders

Stakeholder Theory

ethical theory stating that social responsibility is paying attention to the interest of every affected stakeholder in every aspect of a firm's operation

Sarbanes-Oxley Act

A law passed by Congress that requires the CEO and CFO to certify that their firm's financial statements are accurate.

despite losing the proxy vote, Trian Partners influenced DuPont's corporate governance mainly by:

Prompting DuPont to undertake CEO change, business unit consolidation, and board refreshment.

Which defensive strategy did DuPont employ to counteract the activist campaign while maintaining shareholder confidence?

Launching a Proxy contest against Peltz by nominating additional independent experienced directors.

Which outcome best illustrates the long-term impact of Peltz's activism on DuPont's corporate trajectory?

Appointment of Edward Breen as CEO, leading to strategic restructuring aligned with activist goals.

How has the rise in directors with prior activism experience influenced corporate boards' handling of activist campaigns?

Increased activism experience leads to greater board preparedness, strategic anticipation, and a lower success rate for activist teams

What is a key risk associated with increased reliance on proxy advisory firms (like ISS and Glass Lewis) under the universal proxy regime?

Investors might overly depend on proxy advisors' evaluations despite limited information on directors' actual effectiveness

What challenges for the phenomenon of "activist swarms" present in contemporary shareholder activism?

Multiple activists targeting the same company with divergent agendas complicate shareholder voting and may fragment campaign effectiveness

What is a major concern about activists' involvement in strategic decision making without holding formal management roles?

Activists influence decisions but lack the legal responsibilities and accountability that directors have, raising questions about legitimacy

From the perspective of corporations as social institutions with broad stakeholder responsibilities, which of the following activist strategies aligns best with the positive externalities approach to shareholder activism?

Advocating for reforms that improve worker rights and ensure community welfare, even if they do not immediately boost profits.

In a capital budgeting scenario, which of the following is NOT an agency problem?

Managers maximizing firm value by selecting projects that increase shareholder wealth

Following recent safety incidents and public backlash, Boeing is reassessing its governance strategy. According to the stakeholder theory, which of the following approaches best aligns with Boeing's responsibilities?

Considering the interests of all parties affected by the company, including employees, customers, suppliers, and the community.

According to the principal-agent framework, who are considered the ultimate principals?

Shareholders

During the 2008 financial crisis, General Motors faced severe financial distress and eventually filed for bankruptcy. In such situations, conflicts often arise between shareholders and debtholders. Which of the following best describes a typical shareholder-debtholder conflict during a bankruptcy threat?

Debtholders bear the downside risk of failure, so shareholders may prefer riskier projects to maximize their residual gains, potentially harming debtholders.

Suppose Volkswagen's supervisory board blocks the restructuring even though the directors believe it would increase the company's long-term market value. Their primary reason is that factory closures would impose severe costs on employees and local communities. Which interpretation best fits this decision?

The board is applying stakeholder theory by allowing non-shareholder interests influence the decision.

Employee representation on Volkswagen's supervisory board can potentially improve governance, but it can also create a tradeoff. Which pairing best describes that tradeoff?

Employees may give the board useful information, but they may also resist changes that could improve the company's long-term value.

Snap Inc.'s issuance of non-voting shares primarily creates which agency problem?

Founders can maintain control while holding a minority of economic interest, increasing agency costs.

At RetailCorp, the board is predominantly made up of insiders closely connected to the CEO. When the CEO proposed a high-risk acquisition, the board approved it rapidly without thorough due dilligence. The acquitistion ultimately failed, resulting in significant losses and a sharp decline in stick price. Which of the following best explains the board's failure to prevent this outcome?

The board's over-reliance on management's information and lack of independent judgement reduced its ability to critically evaluate the CEO's proposal.

For a large public company, the primary responsibility of monitoring management typically falls to:

The board of directors

Suppose Volkswagen managers oppose closing factories and say they are trying to protect employees. However, the managers also know that the restructuring could eliminate senior management positions and reduce their own job security. If managers oppose the restructuring mainly to protect themselves, which concept best describes the situation?

Managerial agency conflict, because managers are placing their own job security and personal interests ahead of the firm's interests.

Duty of Care

The most fundamental duty a director owes to a corporation.

Business Judgment Rule

Protects directors from liability for decisions that turn out

poorly if exercising their duty of care

Duty of Loyalty

requires directors to act in the best interests of

the corporation and its shareholders, not for personal gain

Monitoring Role

The purpose of this role is to protect the interests of shareholders and, more broadly, all

stakeholders, by overseeing top management and preventing opportunistic or unethical

behavior.

For example: monitoring managers to reduce conflicts of interest

Advisory Role

This role positions the board as a source of expertise, guidance, and support to

senior management. Directors often bring diverse professional backgrounds and industry

experience, which can be leveraged to help executives make more informed decisions.

For example: providing guidance on getting funds from capital markets

Strategic (Decision Making)Role

This role involves the board's active participation in shaping and guiding the

company's long-term direction. While management develops and executes strategy, the

board plays a critical part in evaluating, approving, and monitoring it.

For example: approving budgets or rejecting a proposal for acquiring a company

Shareholders do not get a say in the day to day running of the company but

they do retain control over key areas, including

Hiring and firing members of the board of directors

Payout policies, such as share buybacks and dividend distributions

Approving mergers and acquisitions

If a major shareholder thinks Google's use of AI creates unacceptable risks, what can it

actually do? (The shareholder CANNOT simply order the CEO to stop an AI project)

Vote

Submit/support proposals

Vote against directors

Pressure the board

Shareholder activism refers to the range of actions taken by investors who seek

to influence a company's management or operations in response to dissatisfaction

with its performance.

This can include passive actions like buying or selling shares

More active measures such as purchasing significant stakes to impact decision

Making / submitting shareholder proposals

Initiating corporate takeovers