Corporate governanCe Questions with
answers 100% CorreCt
In practice it still happens often as even former CEOs become chairs.
So who are the principals of German PLCs? ✔✔ 1) Shareholders
2) Employees
Shareholders and Employees elect supervisory board (agent):
- Shareholders: 66% for large PLCs and 50% for small
- Employees: 33% for large PLCs and 50% for small
Supervisory board elect executive board (agent)
Large PLC is more than 2000 employees.
Internal CG: Co-determination ✔✔ Social Market Economy:
1) Article 14: Private ownership carries social obligations
2) Work Constitution Act
.....
Internal CG: Supervisory Board (NEDs only) ✔✔ Membership: 20 (AG) - 10 (European Company):
1) 1/3 or 1/2 employee representatives
2) 2/3 or 1/2 shareholder representatives: NEDs from banks, blockholders, suppliers, customers (few
independent NEDs):
- Benefit: Operational expertise (resource dependency theory) & fairness (stakeholder theory)
- Disadvantage: Lack of independence (PA theory); bribes to employee representatives; expertise
3) Multiple directorships (code: no more than 6, legally up to 10) (resource dependency theory vs.
busyness hypothesis)
4) From 2016 large PLCs are supposed to have 30% female directors (stakeholder theory, legitimacy
theory, different perspectives)
Empirical evidence of board structure? ✔✔ 1) Employee representatives:
,- Comparatively low levels of industrial stride
- Bribery scandals (VW, ThyssenKrupp)
2) Significant power of supervisory committee chairs:
- Empire building (VWs decision to takeover Porsche)
- Replacement of successful CEOs
- Spying scandals (e.g. Deutshe Bahn)
3) Executive directors:
- Empire building (e.g. Porsche's attempt to takeover VW)
- Spying scandals
4) NEDs qualification and commitment in question
5) Cross-directorship networks can reduce firm risks during volatile economic conditions (recessions)
6) Long-term orientation & mutual support e.g. R&D investment, low gearing, stability during recessions.
Internal CG: Executive Contracts ✔✔ 1) Usually long-term contracts (max 6 years)
2) Advisory vote on executive compensation but poor disclosure of remuneration details
3) Public debate about:
- "Premiums for failure" relative to job-cuts
- Golden goodbyes after poor performance & corruption and CG scandals.
- "Reasonable limits of remuneration"
4) Drive for more performance related pay led to strong increases in total executive remuneration in
large listed German companies:
- Inconclusive evidence on pay/performance
- Pay related mainly to firm size instead of performance
- Evidence of "soft-landings" despite laws which are supposed to prevent this.
Pros and Cons of shareholder rights and ownership distribution ✔✔ Advantages:
- Interest and ability of blockholders to control managers
- Long term interests of investors (R&D, low gearing
- Network reduces supply/sales/finance risks (stability during recessions) --> resource dependency
theory.
,Disadvantages:
- If managers control cross-shareholdings they might insulate eachother from external shareholders (PA
theory and managerial misbehaviour)
- Majority investors might exploit minority investors by pursuing perks or related party transactions
(property rights theory)
- Minority shareholders have little opportunity to defend their rights --> low FDI.
Internal CG of China? ✔✔ 1) Legacy of central planning
- Industry dominated by state owned entreprises (SOEs)
2) Consequences for liberalisation
- Attempt to reform SOEs via "contract responsibility" gains
- Township and village entreprises (TVEs)
- SOEs turned into holding companies for non-commercial assets and commercial companies to be listed
on stock markets.
Who are the principals in China? ✔✔ 1) Central, regional or government (society)
2) Shareholders
Insider or outsider system (China)? ✔✔ Insider System as:
- High ownership concentration
- Frequent interlocking share ownership
- High incentive for large blockholders to participate in internal control
- Loose rules on minority shareholder protection
- Small and illiquid stock market
- Low portfolio diversification
- Hostile takeovers are rare
PA relationships in China? ✔✔ PA (Managers and Shareholders)
PP conflict with the communist party or government as a "shadow director":
- Support of political objectives and interests
+ Access to resources and contracts (RD-Theory)
Minority shareholder protection in China ✔✔ 1) State's policy is not to maximise shareholder wealth so
it may use its control for other purposes than value-maximisation. This exploits minority shareholders.
, 2) Not just a problem in firms with state blockownership but also in firms where communist party has
influence without owning many shares.
Majority shareholders in China ✔✔ CG)SOE:
- Incentive to select knowledgeable representative and engage in monitoring.
- Positive impact on firm performance
- Benefits come from SOE investors.
- Tight control via government.
(LG)SOE:
- Benefits go to SOE investors.
- Less pressure from government
SAMB:
- Benefits go to government departments, not SAMBs.
- Managers are civil servants who lack expertise.
- Distant control via government.
- Negative effect on firm performance.
FAMILY OWNERSHIP:
- Founder family
- Managerial representation of family
- Shared benefits of control vs private benefits of control
Board structure of China ✔✔ - Both EDs and NEDs
- Two tier board
- CEO Chair duality (often secretary of communist committee)
- 1/3 of directors should be INEDs
- Supervisory board of minimum 3 members with 1/3 representing employees (often communists).
- Guanxi is important
Pros and Cons of CSR from shareholder value view? ✔✔ 1) Depends on shareholder objectives
answers 100% CorreCt
In practice it still happens often as even former CEOs become chairs.
So who are the principals of German PLCs? ✔✔ 1) Shareholders
2) Employees
Shareholders and Employees elect supervisory board (agent):
- Shareholders: 66% for large PLCs and 50% for small
- Employees: 33% for large PLCs and 50% for small
Supervisory board elect executive board (agent)
Large PLC is more than 2000 employees.
Internal CG: Co-determination ✔✔ Social Market Economy:
1) Article 14: Private ownership carries social obligations
2) Work Constitution Act
.....
Internal CG: Supervisory Board (NEDs only) ✔✔ Membership: 20 (AG) - 10 (European Company):
1) 1/3 or 1/2 employee representatives
2) 2/3 or 1/2 shareholder representatives: NEDs from banks, blockholders, suppliers, customers (few
independent NEDs):
- Benefit: Operational expertise (resource dependency theory) & fairness (stakeholder theory)
- Disadvantage: Lack of independence (PA theory); bribes to employee representatives; expertise
3) Multiple directorships (code: no more than 6, legally up to 10) (resource dependency theory vs.
busyness hypothesis)
4) From 2016 large PLCs are supposed to have 30% female directors (stakeholder theory, legitimacy
theory, different perspectives)
Empirical evidence of board structure? ✔✔ 1) Employee representatives:
,- Comparatively low levels of industrial stride
- Bribery scandals (VW, ThyssenKrupp)
2) Significant power of supervisory committee chairs:
- Empire building (VWs decision to takeover Porsche)
- Replacement of successful CEOs
- Spying scandals (e.g. Deutshe Bahn)
3) Executive directors:
- Empire building (e.g. Porsche's attempt to takeover VW)
- Spying scandals
4) NEDs qualification and commitment in question
5) Cross-directorship networks can reduce firm risks during volatile economic conditions (recessions)
6) Long-term orientation & mutual support e.g. R&D investment, low gearing, stability during recessions.
Internal CG: Executive Contracts ✔✔ 1) Usually long-term contracts (max 6 years)
2) Advisory vote on executive compensation but poor disclosure of remuneration details
3) Public debate about:
- "Premiums for failure" relative to job-cuts
- Golden goodbyes after poor performance & corruption and CG scandals.
- "Reasonable limits of remuneration"
4) Drive for more performance related pay led to strong increases in total executive remuneration in
large listed German companies:
- Inconclusive evidence on pay/performance
- Pay related mainly to firm size instead of performance
- Evidence of "soft-landings" despite laws which are supposed to prevent this.
Pros and Cons of shareholder rights and ownership distribution ✔✔ Advantages:
- Interest and ability of blockholders to control managers
- Long term interests of investors (R&D, low gearing
- Network reduces supply/sales/finance risks (stability during recessions) --> resource dependency
theory.
,Disadvantages:
- If managers control cross-shareholdings they might insulate eachother from external shareholders (PA
theory and managerial misbehaviour)
- Majority investors might exploit minority investors by pursuing perks or related party transactions
(property rights theory)
- Minority shareholders have little opportunity to defend their rights --> low FDI.
Internal CG of China? ✔✔ 1) Legacy of central planning
- Industry dominated by state owned entreprises (SOEs)
2) Consequences for liberalisation
- Attempt to reform SOEs via "contract responsibility" gains
- Township and village entreprises (TVEs)
- SOEs turned into holding companies for non-commercial assets and commercial companies to be listed
on stock markets.
Who are the principals in China? ✔✔ 1) Central, regional or government (society)
2) Shareholders
Insider or outsider system (China)? ✔✔ Insider System as:
- High ownership concentration
- Frequent interlocking share ownership
- High incentive for large blockholders to participate in internal control
- Loose rules on minority shareholder protection
- Small and illiquid stock market
- Low portfolio diversification
- Hostile takeovers are rare
PA relationships in China? ✔✔ PA (Managers and Shareholders)
PP conflict with the communist party or government as a "shadow director":
- Support of political objectives and interests
+ Access to resources and contracts (RD-Theory)
Minority shareholder protection in China ✔✔ 1) State's policy is not to maximise shareholder wealth so
it may use its control for other purposes than value-maximisation. This exploits minority shareholders.
, 2) Not just a problem in firms with state blockownership but also in firms where communist party has
influence without owning many shares.
Majority shareholders in China ✔✔ CG)SOE:
- Incentive to select knowledgeable representative and engage in monitoring.
- Positive impact on firm performance
- Benefits come from SOE investors.
- Tight control via government.
(LG)SOE:
- Benefits go to SOE investors.
- Less pressure from government
SAMB:
- Benefits go to government departments, not SAMBs.
- Managers are civil servants who lack expertise.
- Distant control via government.
- Negative effect on firm performance.
FAMILY OWNERSHIP:
- Founder family
- Managerial representation of family
- Shared benefits of control vs private benefits of control
Board structure of China ✔✔ - Both EDs and NEDs
- Two tier board
- CEO Chair duality (often secretary of communist committee)
- 1/3 of directors should be INEDs
- Supervisory board of minimum 3 members with 1/3 representing employees (often communists).
- Guanxi is important
Pros and Cons of CSR from shareholder value view? ✔✔ 1) Depends on shareholder objectives
