Red Robin Gourmet Burgers is an upscale restaurant chain in the Northwest. The chain’s former chairman, Michael Snyder, encouraged employees to be “unbridled” in everything they did. Unfortunately, Snyder was too unbridled with his use of some of the company’s assets. The company reported the issue to the Securities and Exchange Commission, saying that the chairman’s improprieties involved “use of chartered aircraft and travel and entertainment expenses, including charitable donations.” After an audit of travel logs, Snyder repaid the company $1.25 million. In addition, Snyder owned a large stake in a company that was on opposite sides of transactions with Red Robin, a clear violation of the company’s code of ethics governing conflicts of interest. Snyder has since stepped down and the company has moved to improve its corporate governance.

Instructions

a. Explain how governance violations such as those described as taking place at Red Robin Gourmet Burgers can have an impact on capital budgeting outcomes.

b. Do you believe that improved corporate governance practices can result in improved returns to capital investments in companies? Explain why or why not.