Practice question · Match the pairs
Match each governance mechanism to the problem it attacks.
- Independent board
- Stock options
- External audit
- Takeover threat
- Monitoring managers the owners cannot watch
- Aligning manager wealth with firm value
- Disciplining persistent mismanagement via the share price
- Verifying the accounts managers report
Hints
- Each mechanism narrows the gap between two sets of interests.
- One works by making the manager an owner too.
Show the answer
- Independent board → Monitoring managers the owners cannot watch
- Stock options → Aligning manager wealth with firm value
- External audit → Verifying the accounts managers report
- Takeover threat → Disciplining persistent mismanagement via the share price
Why
Four guardrails, one target: shrinking the gap between the agent’s interest and the principal’s.
Practise Corporate Governance
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