Answers to end-of-chapter questions

© Oxford University Press 2019. All rights reserved.

Answers to end-of-chapter questions The questions at the end of each chapter are intended to give you an opportunity to test whether you have really grasped some of the salient features in the chapter. The answers are typically brief: they are not intended to be exam-style responses. If you find any difficulty, please refer back to the textbook.

PART 1 Principles

Chapter 1 Corporate governance: a frontier subject

• Corporate governance is about the exercise of power over corporate entities.
• The key concept of a joint-stock, limited-liability company, separate from the

owners, has many of the legal property rights of a real person—to contract, to sue and be sued, to own property, and to employ. The company has a life of its own, giving continuity beyond the life of its founders, who could transfer their shares in the company. Crucially, the owners’ liability for the company’s debts is limited to their equity investment.

• Ownership is the basis of power over the joint-stock, limited-liability company.
• Berle and Means (1932) drew attention to the growing separation of power

between the executive management of major public companies and their increasingly diverse and remote shareholders.

• The Bullock Report—The Report of the Committee of Inquiry on Industrial

Democracy (1977)—proposed a continuation of the unitary board, but with worker representative directors.

• The Corporate Report (1975) called for all economic entities to report publicly and

to accept accountability to all those whose interests were affected by the directors’ decisions.

• In Australia, Alan Bond, Laurie Connell of Rothwells, and the Girvan Corporation;

in Japan, Nomura Securities and The Recruit Corporation; in the United States, Ivan Boesky, Michael Levine, and Michael Milken of Drexel, Burnham, Lambert; in the United Kingdom, the Guinness cases and Robert Maxwell’s companies.

• The first report on corporate governance in 1992 came from Sir Adrian Cadbury in

the United Kingdom and was on the financial aspects of corporate governance.(Corporate Governance, 4e Bob Tricker) (Solution Manual all Chapters) 1 / 3

Tricker: Corporate Governance, 4th edition

Answers to self-test questions

© Oxford University Press 2019. All rights reserved.

The committee he chaired was set up in response to various company collapses.

The report called for:

● wider use of independent outside, non-executive directors; ● audit committees as a bridge between board and external auditor; ● separation of the roles of chairman of the board and chief executive.

• Bear Stearns, Fannie Mae and Freddie Mac, AIG (American International Group),

and Lehman Brothers.

• The Hilmer report argued that governance is about performance as well as

conformance: ‘the board’s key role is to ensure that corporate management is continuously and effectively striving for above-average performance, taking account of risk . . . (although) this is not to deny the board’s additional role with respect to shareholder protection.’

Chapter 2 Governance and management

• To define the rights and duties of members, and to lay down the rules about the

way it is to be governed.

• A private company may not offer its shares for sale to the general public; a public

company can.

• The management process runs the enterprise; the governance process oversees

management and ensures that the enterprise is running in the right direction. See: the ‘governance circle and management triangle’ model.

• Performance (strategy formulation and policy-making) and conformance

(supervising executive activities and accountability).

• This question tests your understanding of page 34 of the textbook .

6. Companies House: www.companieshouse.co.uk

• The great 1929 financial crash in the United States. The mission of the US

Securities and Exchange Commission is to protect investors; to maintain fair, orderly, and efficient markets; and to facilitate capital formation. Among the key participants in the securities world that the SEC oversees are securities exchanges, securities brokers and dealers, investment advisers, and mutual funds. 2 / 3

Tricker: Corporate Governance, 4th edition

Answers to self-test questions

© Oxford University Press 2019. All rights reserved.

• This structure can be found in many small, family firms and start-up businesses,

where the company has not reached the stage at which it needs non-executive directors. The all-executive director board is also found frequently in the board structures of subsidiary companies operating in corporate groups.

• The typical board of a company listed in the United States has one or two

executive directors—the CEO (sometimes in the combined role of chairman/CEO), the chief finance officer, and perhaps the chief operating officer— with three or four times that number of independent outside directors.

• In the two-tier board structure, the supervisory board, which consists entirely of

non-executive members, oversees the work of the executives in the management board. Half of the supervisory board members represent capital (the shareholders) and half represent labour (the employees). In practice, members of the executive board attend meetings of the supervisory board, but have no vote.The executive members present their strategies, management plans, and budgets to the supervisory board for comment and approval. If necessary, the supervisory board refers matters back to the executives for further consideration. The supervisory board can then review and assess subsequent managerial performance. The power of the supervisory board lies in its ability to appoint to and remove members from the executive board.

Chapter 3 Theories, philosophies, and concepts of corporate governance

• Agency theory is based on the premise that a director will maximize his or her

own personal utility (interests) and cannot be expected to act in the best interests of the shareholder. Stewardship theory follows the legal perspective that directors can be trusted to fulfil their fiduciary duty to shareholders.

• In essence, agency theory assumes that directors may put their own interests

ahead of those of the shareholders, who have delegated responsibility for corporate governance to them. To protect shareholder interests, boards are required to report regularly to them with audited financial accounts, disclosures of directors’ interests, and various other reports.

• ‘’Agency theory involves a contract under which one or more persons (the

shareholders) engage other persons (the directors) to perform some service on

• / 3