Jeopardy Notes

Question 1

What is insider trading

Answer 1

When someone trades on material, non-public information, that they have a duty to keep confidentia

Question 2

Tipping

Answer 2

When someone shares non-public, material information about a
corporation,

even if no trade is made-> it is a criminal offence

Question 3

Sarbanes Oxley Act

Answer 3

This Act was passed in 2002 in response to Enron’s failure,

Question 4

say on pay

Answer 4

implemented by the Dodd-Frank Act lets
shareholders voice their opinion on executive compensation.

shareholders can talk but vote is non binding so corp can do waht they want

Question 5

clawback provision

Answer 5

The Dodd-Frank Act mandated this “crabby” provision in all CEO compensation packages.

allows corp to take back bonus if fraud or misrep happened

Question 6

vesting period

Answer 6

Options give executives a right to purchase shares at a set price after this period, no tailoring required.

After the vesting period, shares may be purchased at their exercise price, which - hopefully - is lower than the share’s actual price; otherwise, it doesn’t make sense to exercise the option!

Question 7

vesting period

exercise price

share price

Answer 7

DEFINE THESE ALL

Question 8

ratcheting

Answer 8

Benchmarking CEO pay can lead to this effect,

Though compensation consultants benchmark pay to establish external parity (i.e., alignment with industry norms), using median CEO pay to inform compensation packages leads to continuous increases in CEO pay overtime.

Question 9

hedging

Answer 9

When a CEO purchases a put option on their corporation’s stock, they engage in this activity

Hedging can dilute equity-based incentives, because it allows a CEO to make money if the stock goes up or if it goes down.

Question 10

golden parachute

Answer 10

This clause in a CEO’s
compensation package mitigates against them saving their job by sabotaging a hostile takeover bid

Golden parachutes can also act as a takeover defence. On the other hand, golden parachutes may be viewed as a waste of the corporation’s money.

Question 11

what is a golden parachute

Question 12

Most new CEOs are
hires.

Answer 12

internal

70-80%

Question 13

when would you bring an external ceo

Answer 13

A company performing poorly is more likely to bring in an
candidate
at CEO.

starbucks gap

Question 14

A board with more
directors
is more likely to fire a poor-performing
CEO.

Answer 14

independant

The evidence also shows boards where directors have a lot of shares and companies with major institutional investors are also more likely to fire a bad CEO.

Question 15

horse race

Answer 15

When two candidates are pitted against each other to become CEO, all bets are off, in this succession model.

The downside to a horse race is the losing candidate may leave the company. Disney is trying to avoid this by creating the brand new position of Chief Creative Office for its “losing” horse race candidate.

Question 16

inside-out model

Answer 16

When a company develops internal talent but also looks at external candidates for
CEO it’s this succession model, also the name of a
2015 Pixar film.

Question 17

busy director

Answer 17

on 3+ boards

busy directors=poor corp gov standards

Question 18

dual mandate

Answer 18

Monitoring and advising is known as this mandate of the board.

Question 19

audit committe

Answer 19

This board committee must be independent in both the
US and Canada.

Boards must be majority independent in the United States; majority independence is only recommended in Canada.

Question 20

staggeered board

Answer 20

A takeover defence to stall an activist investor taking over majority control of the board is called this unsteady term.

Question 21

succession planning

Answer 21

Only 5% of boards have a committee for this important activity.

Question 22

who do boards hire

Answer 22

ceo

Question 23

benchmarking

Answer 23

Compensation consultants engage in this kind of analysis to inform CEO pay, looking at comparator
companies of similar size in similar industries.

Benchmarking involves looking at companies of similar size, revenue, and industries to get a sense of external parity (industry norms) in CEO pay.

Question 24

The two theories of CEO pay are
optimal contracting and rent extraction

Answer 24

Optimal contracting says CEO pay is the result of efficient market processes, whereas rent extraction says CEO pay is the result of market failure.

Question 25

coo/president

Answer 25

An executive position in which to place someone you may want to groom to takeover as CEO.

Question 26

What is BCE Inc. v. 1976 Debenture holders

Answer 26

The case provides directors owe a fiduciary duty to the corporation, which can include the weighing of stakeholder interests including employees, customers, the government, and the environment This 2008 Supreme Court of Canada case opened the door to a board's consideration of stakeholder interests while exercising their fiduciary duty to the

Question 27

CEOs who underperform are more likely to be terminated)

Question 28

CEO turnover is not very sensitive to performance (i.e., termination rates for CEOs who underperform are not much higher than those for CEOs who outperform).

Question 29

which boards more likely to fire ceo

Answer 29

- Boards that are not “busy” - Boards with high percentage of outside directors - Directors own large percentage of shares - Shareholder base concentrated among handful of institutions

Question 30

why is labour pool so small for ceos

Answer 30

*Shrinking pool of talented leadership available due to widespread business retirements * Downsizing of middle management and flattening of organizations the past decade have created a shortage of executive talent

Question 31

why succession plan for ceos?

Answer 31

Reduce costs * Reduce anxiety/fear * Prepare for CEO * Prepare for crises situations

Question 32

4 models of ceo succesion planning

Answer 32

*External candidate * President and/or COO (heir-apparent) * Horse race * Inside-outside mode

Question 33

special ceo cases

Answer 33

* Interim CEOs * Director-CEOs

Question 34

Internal CEOs receive lower first-year total compensation

Answer 34

* External CEOs must be bought out of contracts * Companies in poor financial condition have to pay more to attract a qualified candidates

Question 35

inside out model

Answer 35

Company develops internal talent and simultaneously evaluates external candidates. * (+) Internal candidates develop new skills and experiences * (+) Levels the field between internal and external candidates * (-) Requires significant planning and oversight

Question 36

interim ceo

Answer 36

Previously used in situations of emergency, the practice no longer necessarily reveals shortcoming in the planning process. Instead it can be implemented to

Question 37

director-ceos

Answer 37

A director assumes the role of the CEO.

Question 38

reason for ceo pay

Answer 38

* Attract talent * Retain talent * Motivate executive to create value for shareholders

Question 39

reaasons for ceo departure

Answer 39

Retirement Recruited Dismissed Disagreement with the Board Company takeover

Question 40

whos more likely to fire a ceo

Answer 40

high percentage of independent directors directors who own large percentages of shares major institutional investors are more likely to fire an unperforming CEO

Question 41

if ceo gets Salary –only

Answer 41

CEO could be unmotivated to take risks Could "shirk" = not put in any effort May be more likely to self-deal, acting in their own self-interests at the expen

Question 42

golden parachute

Answer 42

Definition: clause in employment contract of an executive that gives a large pay-out if the CEO is terminated Pro: ◦ Discourage the executive from trying to save their job at the expense of the corporation Con: ◦ Could be seen as a waste of the corporation’s money

Question 43

Most common reasons for execution on clawback provisions: ◦ Financial restatement ◦ Ethical misconduct ◦ Violation of non-compete clause

Question 44

Blackout periods

Answer 44

A blackout period is a specific window of time when insiders ( executives, directors, and employees with access to material non- public information) are prohibited from trading the company’s stock Companies impose blackout periods—often before earnings releases or major announcements—to prevent insider trading

Question 45

rule 1051-b

Answer 45

* Instruct a third-party broker to execute purchase or sale of shares when certain conditions are met (price, timing, formula, etc.) * After that, insider has no say over the transaction * Can be modified or cancelled in good faith, subject to cooling off periods * Cannot have material, non-public info when adopting or amending plan * Must fill out forms disclosing the trade

Question 46

insider info

Answer 46

material non-public duty to keep confidential