Corporate Governance cheat sheet

Agency problem: separation of ownership (shareholders) and control (managers) creates scope for managers to pursue private benefits at owners' expense.

Three classic governance mechanisms: board monitoring, incentive alignment (equity pay), and external control markets (takeovers, proxy contests).

Shareholder primacy vs stakeholder models: primacy maximises residual claims; stakeholder models weigh employees, creditors, and community interests.

Principal-agent mitigants: independent directors, audit committees, separation of CEO and chair, and clawback provisions.

Ownership concentration trade-off: blockholders reduce monitoring costs but can extract private benefits from minority holders.

Takeover defences: staggered boards, poison pills, and supermajority merger provisions raise acquisition cost and entrench incumbents.

Say-on-pay is typically advisory; binding votes are rarer and usually require specific charter or statutory authority.

Governance quality proxies: board independence ratio, CEO duality, insider ownership, and anti-takeover provision count.

Piercing the corporate veil requires abuse of the separate legal personality, typically fraud, sham, or undercapitalisation.

Directors' duties: care (informed, good-faith decisions), loyalty (no conflicts), and statutory duties such as disclosure and filing.

Business judgment rule shields informed, disinterested directors from liability for good-faith decisions, even if outcomes are poor.

Derivative actions let shareholders sue on the company's behalf; demand futility or board refusal is generally required first.

Insider trading prohibition covers material non-public information and tippees who knowingly receive it.

Related-party transactions require disclosure and, where material, independent approval to satisfy fair-dealing standards.

Mandatory disclosure regimes: periodic reports, proxy statements, and beneficial ownership thresholds (commonly 5%).

Whistleblower protections generally prohibit retaliation against employees reporting suspected violations.

Groupthink symptoms: illusion of invulnerability, self-censorship, pressure on dissenters, and premature consensus.

Board size effect: larger boards improve resource access but slow decision-making and dilute individual accountability.

CEO duality concentrates power; independent chair structures improve monitoring but can blur accountability lines.

Psychological safety predicts voice and error reporting; low safety suppresses dissent and escalates hidden risk.

Anchoring and confirmation bias distort board evaluation; structured pre-mortems and red teams reduce them.

Information asymmetry: management controls board packets; independent director access to internal audit reduces it.

Social loafing rises with group size; clear role assignment and individual pre-meeting positions mitigate it.

Succession planning quality correlates with board engagement; ad hoc emergency searches are costlier and riskier.

Accrual earnings = net income; cash flow = operating cash flow; divergence signals earnings quality issues.

Earnings quality indicators: high accruals relative to cash, frequent restatements, and aggressive revenue recognition.

Beneish M-score flags earnings manipulation; higher scores indicate greater likelihood of manipulation.

Altman Z-score predicts bankruptcy risk; lower scores indicate greater financial distress.

Free cash flow = operating cash flow − capital expenditures; used for dividends, buybacks, and debt reduction.

DuPont decomposition: ROE = net margin × asset turnover × equity multiplier.

Goodwill impairment signals overpayment in acquisitions; it does not affect cash flow but hits reported earnings.

Strategic governance link: capital allocation discipline and disclosure quality reduce cost of capital.