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Full summary of Corporate Governance and Social Responsibility

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You don't like a summery of 100 pages long which include a lot of unnecessary stuf? This summary includes everything you need for the exam of Corporate Governance and Social Responsibility. It is a must have to get the best grade as possible for your exam and only 27 pages long! The summary in...

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  • December 18, 2021
  • 28
  • 2021/2022
  • Summary
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1. Introduction............................................................................................................................................... 2

2. Executive compensation............................................................................................................................. 2

3. Corporate Scandals and financial misconduct............................................................................................. 3

4. Board of directors I.................................................................................................................................... 3

5-6. Board of Directors II................................................................................................................................ 5

7. Shareholder activism I................................................................................................................................ 6

8. Shareholder activism II............................................................................................................................... 8

10. Payout policy......................................................................................................................................... 10

11. Passive ownership.................................................................................................................................. 12

12. Common ownership............................................................................................................................... 13

13. Ethical decision making.......................................................................................................................... 14

14. Guest Lecture “Green Finance”............................................................................................................... 15

15. Guest lecture “ESG Assurance”............................................................................................................... 16

16. CSR History, Measures and Criticism....................................................................................................... 17

17. CSR and shareholder’s interest............................................................................................................... 20

18. CSR and Firm value I: Investors............................................................................................................... 22

19. CSR and Firm value II: Customers and Employees....................................................................................23

20. Impact of CSR on Environment and Society.............................................................................................26

Blue: papers we need to know
Green: important BONUS assignments
Purple: Podcasts

,1. Introduction
Corporate Goverance: Large toolbox of internal and external mechanisms ensuring that the
firm is running according to its objective determined by shareholders/stakeholders.

Moral hazard: once a contract is signed, the agent starts to behave less responsibly/ in their
own interest
Adverse selection: when a prinicipal can’t distinguish between the “good and bad” guy.

Mitigate agency problems  complete contracts!!

Agency costs:
- Monitoring costs  costs of observing the agent and keeping a record of his
behavior
- Bonding costs  cost in order to signal credibly to the principal
- Residual loss  agent may not make decisions that maximize firm value

Agency problem:
- Perquisites (belongingen)  consumption by management
- Empire building  FCF problem; manager pursuing growth rate rather than
shareholders maximization

Expropriation of minority shareholders
- Tunneling: Firm A sells to Firm B at too low price
- Transfer pricing: Firm B overcharge for service/products to firm A
- Nepotism: Appointing family members to top management
- Infighting: Fighting among large (family) shareholders


2. Executive compensation
Compensation: base salary, bonus (backward looking  easy to manipulate.), Long term
incentive plan (stock options), retirement plan, insurance

US: base salary is minor whereas equity pay is important
EU: Base salary is quite important
Germany: bonus payment is important

Directors unwilling to challenge CEO because: friendship ties, value connections, avoid bad
atmosphere.

Measuring sensitivity executive pay:
β: Measuring average pay performance
sensitivity.

Paper: Are CEOs rewarded for Luck? (Bertrand, Mullainathan, 2001)
Measurements: (1) Oil prices in the oil industry, (2) industry-level exchange rates for firms in
traded good sector, (3) industry mean performance as proxy for economic fortune.

2

, Skimming theory: CEO can take control of compensation process and set their own pay in
good times.
Methodology: estimate performance due to luck 
Regress executive pay on luck-related performance
Regress executive pay on luck and governance 
Findings:
- Luck plays a huge role in executive pay
- CEO is at least as much rewarded for luck as general
- Pay for luck is weakend by corporate governance (Even more if shareholders are on
the board)
o Skimming story more believable
- because pay for luck is mitigated by governance  ruling out alternative explanation

How can good corporate governance reduce the ability of skimming?  due to better
monitoring/supervision by the board.

3. Corporate Scandals and financial misconduct
Who monitors the firm?  ALL stakeholders
After fraud is revealed, we find an AR about 20% 2 days after event.  short sellers
anticipate on discovery of financial fraud and help to uncover it

Top detector fraud:
1. Analyst 5. Shareholder 9. SEC
2. Auditor 6. Industry regulator 10. Short-seller
3. Competitor/client 7. Law firm
4. Employee 8. Media

4. Board of directors I
Board responsible for:
- Hiring managers, measure performance
- Define/approve major business decisions
- Overseeing executive compensation

Duality: One person chairman & CEO
Advantage Duality Disadvantage Duality
Strong leadership Reduce board independency (less people to
monitor the CEO)
No rivalry between CEO/ Chairman Increasing CEO entrenchment
Single spokesperson problem Monitoring executive directors and leading
the task management

Conventional independence  director is independent if she has neither financial nor
familial ties to the CEO or the firm.

Social ties could have a large impact on a director’s monitory and disciplinary capacity. (e.g.
CEO and board members studied together, military service together or same regional origin).
This could have a positive and negative effect.

3

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