Instructor Manua l For Funda mentals

Instructor Manua l For Funda mentals of Corporate Finance 5th Canadian Edition By Berk, DeMarzo, Harford, Stangeland, Marosi (All Chapters 1-25, 100% Original Verified, A+ Grade)

All Chapters Arranged Reverse: 25-1

This is The Original Instructor Manual for 5th Edition, All other Files in The Market are Fake/Old/Wrong Edition. 1 / 4

25-1 Copyright © 2026 Pearson Canada Inc.Instructor's Manual

Chapter 25: Corporate Governance

Chapter Overview This chapter explores corporate governance, focusing on mitigating conflicts between managers and investors and preventing fraud. It begins with high-profile scandals, illustrating the impact of fraudulent practices and highlighting governance as a value-enhancing project.The chapter examines agency conflicts due to ownership and control separation, where managers may not act in shareholders' best interests. Mechanisms to address these include board monitoring, compensation policies, and shareholder actions, alongside other monitors like analysts and regulators. Board composition, director types, and the importance of independence are discussed, alongside equity-based compensation and complexities like stock options. Strategies to manage conflicts include managerial ownership, shareholder actions, and takeovers. Regulatory roles, such as the Sarbanes-Oxley and Dodd-Frank Acts, aim to improve governance and prevent fraud. The chapter also highlights global variations in governance practices, contrasting shareholder-focused models with stakeholder approaches, emphasizing the need for flexible, context-specific governance structures to enhance firm value.

List of Chapter Objectives

• See corporate governance as a response to principal-agent problems
• Know the role of the board, employees, lenders, analysts, and regulators in monitoring

managers

• Understand how compensation policies can help mitigate principal-agent problems
• Be familiar with the different ways shareholders can act to reduce the agency conflict
• Understand the major regulations and their role in corporate governance
• See similarities and differences in agency conflicts and how they are dealt with around the

world

• Evaluate corporate governance as a trade-off among costs and benefits that will not result in

a single solution for all firms

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25-2 Copyright © 2026 Pearson Canada Inc.Teaching Notes 25.1 Corporate Governance and Agency Costs This section introduces the concept of corporate governance as a system to mitigate conflicts of interest between managers and investors. It explains how the separation of ownership and control can lead to agency problems, where managers may prioritize their own interests over shareholder value. The section emphasizes the importance of aligning managerial incentives with shareholder goals through appropriate governance mechanisms.

25.2 Monitoring by the Board of Directors and Others This section discusses the role of the board of directors in monitoring managers. It categorizes directors into inside, grey, and outside directors, highlighting the importance of board independence. The section also explores the concept of a captured board and the influence of other monitors, such as security analysts, lenders, employees, and regulators.

25.3 Compensation Policies This section examines how compensation policies can align managerial and shareholder interests. It discusses the use of stock and options in executive compensation and explores the potential for manipulation and backdating.

25.4 Managing Agency Conflicts This section explores various strategies for managing agency conflicts, including increasing managerial ownership, direct shareholder action, and the threat of takeovers. It also discusses management entrenchment tactics and the role of activist funds.

25.5 Regulation This section discusses the role of government regulation in corporate governance. It examines the Sarbanes-Oxley Act and the Dodd-Frank Act in the United States, highlighting their key provisions and impact on corporate governance practices. The section also discusses the Cadbury Commission in the United Kingdom.

25.6 Corporate Governance Around the World This section compares and contrasts corporate governance practices across different countries. It discusses variations in shareholder protection, ownership structures, and the role of stakeholders. The section also explores the concepts of pyramids, dual-class shares, cross- holdings, and the stakeholder model. 3 / 4

25-3 Copyright © 2026 Pearson Canada Inc.

25.7 The Trade- Off of Corporate Governance This section emphasizes that corporate governance involves a complex trade-off between costs and benefits. It highlights the need for a flexible approach to governance, tailored to the specific circumstances of each firm and the cultural context in which it operates.

Discussion Questions with Suggested Answers

• How can the board of directors effectively monitor managerial actions and ensure they align

with shareholder interests, especially given the potential for captured boards?Suggested Answer: Boards can enhance their monitoring effectiveness through several measures. First, prioritizing board independence by appointing a majority of outside directors with no material ties to the company is crucial. These directors should be nominated and elected through a transparent process independent of the CEO's influence. Second, establishing robust committees, especially audit and compensation committees, comprised solely of independent directors with relevant financial expertise, can strengthen oversight. Third, regular evaluations of the board's performance and individual director contributions, coupled with term limits, can prevent complacency and entrenchment. Finally, fostering open communication channels for whistleblowers and encouraging direct engagement with shareholders can provide valuable insights and accountability. By implementing these practices, boards can minimize the risk of capture and better fulfill their fiduciary duty to shareholders.

• Discuss the pros and cons of using stock options as a significant component of executive

compensation. How can potential abuses, such as backdating, be prevented?Suggested Answer: Stock options incentivize executives to enhance shareholder value by linking their compensation to stock price performance. This alignment of interests can motivate executives to make decisions that benefit the company in the long term. However, options can also encourage excessive risk-taking and short-term focus, as executives may prioritize immediate stock price gains over sustainable growth. Moreover, options can be susceptible to manipulation, such as backdating, where grant dates are retroactively chosen to coincide with lower stock prices, maximizing executive gains. To prevent such abuses, regulations like timely reporting of option grants (within two days in the U.S.) are essential. Independent compensation committees with the authority to hire external consultants can also play a crucial role in ensuring fair and transparent option granting practices. Furthermore, clawback provisions, allowing the recovery of erroneously awarded compensation, can deter manipulation and promote accountability.

• How can shareholders exercise their power to influence corporate governance and address

concerns about management decisions, even when faced with management entrenchment?

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