Citigroups Inc Overhaul Report

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Siyan Zhou
Dr. Corvey
Puh 307
Individual Assignment
3/8/2022
PUH 307 Individual Assignment- Insurance Coverage
For this assignment, you will utilize the material presented in the Overview of Insurance lecture
to answer the following questions:
1. We purchase insurance because, as humans, we are typically risk-averse. In general, we prefer
certain outcomes over uncertain ones. In class, we talked about both health insurance and
homeowner’s insurance (house fire example). There are many other types of insurance we
purchase because we are risk-averse.
a. Name one example of another type of insurance someone might purchase.
Long-term disability cover is a type of insurance that individuals should purchase.
b. In your own words, describe why someone would choose to purchase this type of
insurance. (2-3 sentences)
A long-term disability insurance cover ensures that an individual’s daily expenses are
catered for in the event that they encounter an accident or accident. It provides a source of
income for an individual when they cannot go to work and thereby receive a salary or
compensation. Long-term disability coverage guarantees an income for a maximum of three
years but costs only a small percentage of an individual’s annual salary. Therefore it is
recommendable to procure such an insurance cover to act as a safety net.
2. For each of the scenarios below, determine whether the scenario is an example of moral
hazard or adverse selection and explain your answer.
Joseph has asthma. He takes a prescription medication for his asthma but occasionally has an
asthma attack and has to go to the emergency room. He purchased a health insurance plan and
makes sure that he renews it every year because he knows he needs his medication, and he may
need to go to the emergency room if he has an attack.
a. Is this an example of moral hazard or adverse selection?
Joseph’s case is an example of adverse selection.
b. Explain why you chose your answer for part a. (2-3 sentences)
Siyan Zhou
Dr. Corvey
Puh 307
Individual Assignment
3/8/2022
Joseph’s case is adverse selection because he has accurate and detailed information about
his asthma attacks, something that the insurance company doesn’t. Therefore, it can be
considered to be asymmetrical information that he takes advantage of and exploits even before
signing up for a health insurance plan.
Samantha has a very generous health insurance plan that limits her copayments (the amount she
pays out-of-pocket) to a very small amount. Because her copayments are so small, she goes to
the doctor often; maybe more often than she really needs to.
c. Is this an example of moral hazard or adverse selection?
Samantha’s case is an example of a moral hazard.
d. Explain why you chose your answer for part c. (2-3 sentences)
Samantha’s case is a moral hazard because she changes her behavior after taking up her
insurance plan, which she knows very well covers most of the payments for a doctor’s
appointment. Additionally, she doesn’t act in good faith because she goes to the doctor more
often than she should, thereby increasing the insurance company’s likelihood of getting more
claims.
Institution
Ilonal
SHAREHOLDER ACTIVISTS AND CORPORATE GOVERNANCE
In the 1980s, large activist shareholders, labelled “corporate raiders,” would buy significant
stakes in companies and often seek to increase the debt load, sell off business units reducing
diversification, and downsize by laying off many workers. If the firms did not respond as the ac
tivist shareholders required, they would make the company pay a premium on the shares they
?
bought, often called “greenmail” Today activist investors are doing many of the same things,
but they are often supported by institutional investors who follow the activist investors’ lead
or support them in their activities, especially shareholder votes. The number of activist firms
is growing as is the amount of money being deployed. In 2017, activist fund groups deployed
$62 billion in their campaigns, more than twice the amount of money spent in 2016. Approx-
imately 20 percent of U.S. activists funds was spent on buying shares of global companies, as
opportunities in the United States decrease.
One of the strategies these activist investors pursue is to pressure firms to allow activist nominat-
ed representatives to stand for election for the targeted company’s board. Another strategy gaining
momentum is access to the proxy process to include shareholder resolutions for shareholder votes.
This access has been
allowed by the courts,
and encouraged by U.S.
Securities and Exchange
Commission (SEC) efforts
to require more proxy
voting action opportu-
nities to shareholders.
Thus, regulators’ decisions
have allowed more open
proxy voting access by
shareholders. As such,
firm shareholders are able
to vote on strategic issues
IVE
presented by activist
shareholders as well as
PS
directly nominating board
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members who represent
their interests.
Activist firms are chal-
lenging large and visible
Nelson Peltz, CEO of Trian Fund Management L.P., now sits on the
firms such as DuPont, Proc
board at P&G.
tor & Gamble (P&G), Nestlé,
General Electric, and Lowe’s among others. For example, P&G fought a proxy battle with Trian Fund
Management L.P. representatives, headed by CEO Nelson Peltz, for board seats. Even though P&G
won the proxy vote, P&G still offered Peltz a board seat. In taking the board seat, Peltz personally
also dropped a board seat (possibly because he was sitting on too many boards to be effective) on
Mondolez, a food company, which board position Trian had gained on a previous investment.
Often activist investors seek stock buybacks and increases in dividends as well as selling
off”non-performing businesses.” For example, Carl Icahn, a famous activist investor, held
6.7 percent in Newell Brands and in a settlement was allowed four board seats in addition
to appointing a new board chair. However, Starboard and its allied funds hold a stake of just
under 5 percent in Newell brands and are trying to oust the remaining board members and
replace the CEO.Starboard has been among the most aggressive activist investors in seeking
to remove all board members when it buys shares. It described Newell as a conglomerate
Heidi Guna CNBCANBOU Photo Banketty Images
5
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short-term value through leadership changes, stock buybacks, and break-ups, others want the
opposite to happen; they first “short” the stock and then make arguments that create turmoil and
a perception of weakness within the company, resulting in the lowering of the company share
price and increasing the value of a short position. Pershing Square Capital Management firm was
shorting Herbalife, but instead of going down the stock increased. Ackman’s fund has been losing
shareholders because it has made some large but poor investments such as the one in Herbalife.
Although activism has caused some chaos among firms’ board of directors, it has made for
overall better, albeit more intense, governance and has given more voice to shareholders on
strategy issues, points that are pertinent to the topic of our book. For example, activists have
pursued more intense long-term compensation packages, which have provided better long-
term performance such as more investment in R&D activities. On the other hand, the greatly
added pressure to perform has led some firm leaders to cook the books” and thus has led to
more fraud. As you read through this chapter, these issues will become clearer as the various
governance devices are defined and their purpose explained.
Sources:C. English, 2018, Activist Peltz leaving Mondelez board to join P&G), New York Post, www.nypost.com, February 13;
L. Fortado, 2018, Investing: activism enters the mainstream, Financial Times, www.ft.com, February 13;C. Lombardo, 2018,
Starboard pursuing proxy fight at Newell Brands despite deal with Icahn, Wall Street Journal, www.wsj.com, April 4: E
Price, 2018, Investors are pulling out of Bill Ackman’s hedge fund at a rapid pace’, Fortune, www.fortune.com, April 5;
5. Terlep & D. Benoit, 2018, Starboard to launch proxy fight to replace entire Newell brands board, Wall Street Journal
www.wsj.com, February 8:5. Dean, 2017, What is an activist investor? Telegraph, www.telegraph.co.uk, May 10, M. IR
Denes, I.M. Karpoff, & V. B. McWilliams, 2017, Thirty years of shareholder activism: A survey of empirical research, Joumal
of Corporate Finance, 44:405-424: C. Flammer & P. Bansal, 2017, Does a long-term orientation create value? Evidence from
a regression discontinuity, Strategic Management Journal, 38(9): 1827-1847;CP Skroupa, 2017, 2017 and beyond-major
trends shaping shareholder activism, Forbes, www.forbes.com, October 27;W. Shi, B.L. Connelly, & R. E. Hoskisson, 2017,
External corporate governance and financial fraud: Cognitive evaluation theory insights on agency theory prescriptions,
Strategic Management Journal, 38(6): 1268-1286; 5. Terlep, 2017. Activist Nelson Peltz gets key boost in P&G proxy fight,
Wall Street Journal, www.wsj.com, September 29
A designed
s the Opening Case suggests, corporate governance is a complex set of structures
designed to provide firm oversight of major strategic issues. At a broader level, it
reflects the type of infrastructure provided by individual nations as the frameworks
within which companies compete. Given that we are concerned with the strategic
management process firms use, our focus in this chapter is on corporate governance in
companies (although we do also address governance at the level of nations). Some of the
potential pitfalls of corporate governance, such as establishing true checks and balances
in the system of governance, are highlighted by the discussion of activist shareholders
in the Opening Case.
Comprehensive in scope and complex in nature, corporate governance is a respon-
sibility that challenges firms and their leaders. Evidence suggests that corporate gov-
ernance is critical to firms’ success, and dealing appropriately with this challenge
is important. Because of this, governance is an increasingly important part of the
strategic management process. For example, if the board makes the wrong deci.
sions in selecting, governing, and compensating the firm’s CEO as its strategic
leader,
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Citigroups Inc Overhaul

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