Chapter 29
Corporate Governance
I. Chapter Outline
The following chapter outline is correlated to the PowerPoint Lecture Slides. The PowerPoint slides
are referenced in bold. Alternative Examples to selected textbook examples are also available in the
PowerPoint Lecture Slides and are also referenced in bold.
29.2 Monitoring by the Board of Directors and Others (Slide 9)
• Types of Directors (Slides 10–11)
29.3 Compensation Policies (Slide 16)
• Stock and Options (Slide 16)
• Pay and Performance Sensitivity (Slides 17–18, 20–21)
• Figure 29.1 CEO Compensation (Slide 19)
29.4 Managing Agency Conflict (Slide 22)
• Direct Action by Shareholders (Slides 23–25)
29.5 Regulation (Slide 29)
• The Sarbanes-Oxley Act (Slide 29)
• Interview with Lawrence E. Harris
• The Cadbury Commission (Slide 30)
• Dodd-Frank Act (Slide 31)
• Insider Trading (Slide 32)
29.6 Corporate Governance Around the World (Slide 33)
• Protection of Shareholder Rights (Slide 33)
• Controlling Owners and Pyramids (Slides 34–40)
122 Berk/DeMarzo • Corporate Finance, Fourth Edition, Global Edition
• Figure 29.3 Pesenti Family Pyramid, 1995 (Slide 39)
• The Stakeholder Model (Slide 41)
• Table 29.1 Employee Participation in Corporate Governance in OECD Countries (Slide
42)
• Cross-Holdings (Slide 43)
29.7 The Trade-Off of Corporate Governance (Slide 44)
II. Learning Objectives
29-1 Define corporate governance, and describe its role in the successful reduction of agency
problems.
29-2 Describe the roles of the following in corporate governance:
29-4 Discuss the costs and benefits of having managers as shareholders, in terms of proper
corporate governance.
29-6 Identify alternatives available to shareholders if the board fails to act in their interests.
29-8 Describe the provisions of the Exchange Acts of 1933 and 1934, the Sarbanes-Oxley Act of
2002, and the Dodd-Frank Act of 2010, which attempt to improve shareholder protections.
29-9 Compare corporate governance practices across countries. Specifically, address the following:
a. Common-law versus civil-law countries
III. Chapter Overview
The chapter begins with a brief description of recent corporate scandals, and the apparent lack of
corporate governance that allowed them to happen. Firm value can be increased if good governance is
in place. The chapter begins by discussing various governance mechanisms and regulations that are
designed to prevent certain acts that are not in the best interest of shareholders. The chapter concludes
with a discussion of international corporate governance.
29.1 Corporate Governance and Agency Costs
Here the authors define corporate governance, and describe how it is necessitated by agency conflicts.
©2017 Pearson Education, Ltd.
29.2 Monitoring by the Board of Directors and Others
A great deal of academic research has been devoted to corporate governance. This section
summarizes the most widely accepted views. The authors first define inside, gray, and outside
directors. There is some evidence that the proportion of outside directors (labeled board
independence) matters for major activities such as firing CEOs and making acquisitions. Board
29.3 Compensation Policies
Again, there is a great deal of academic research in this area, so this chapter mentions the most widely
accepted findings. The premise is that incentive-based compensation will alleviate agency problems
29.4 Managing Agency Conflict
Evidence has shown that greater managerial ownership results in fewer value-reducing actions by
managers. However, it also makes managers harder to fire. If all else fails, shareholders may take
direct action to mitigate agency problems. That action can take the form of a shareholder resolution.
©2017 Pearson Education, Ltd.
29.5 Regulation
The four major pieces of U.S. legislation that are discussed in this section are the Exchange Acts of
1933 and 1934, the Sarbanes-Oxley Act (SOX), and the Dodd-Frank Act. The discussion of SOX
centers on three ways the legislation is meant to improve the accuracy of information. Those are (1)
29.6 Corporate Governance Around the World
This section describes several governance issues in other countries. In particular, the authors point out
that the degree to which investors are protected in the United States is among the best in the world.
Some researchers claim that a country’s legal regime determines its level of investor protection. They
found that common law countries typically offered more protection, while civil law countries offered
29.7 The Trade-Off of Corporate Governance
No one structure works for all firms. The costs and benefits of a governance system depend on
Berk/DeMarzo • Corporate Finance, Fourth Edition, Global Edition 125
IV. Spreadsheet Solutions in Excel
There are no spreadsheet solutions for this chapter.