Chapter 9 (2) Flashcards
What is the primary focus of corporate governance?
A) To enhance the profits of individual employees
B) To align the interests of shareholders, management, and the board of directors
C) To reduce the number of shareholders in a corporation
D) To increase the power of management over shareholders
B
How does corporate governance impact a corporation?
A) It focuses on short-term profitability only
B) It helps determine the direction and performance of the corporation
C) It limits the involvement of shareholders in decision-making
D) It prioritizes the interests of the board of directors over shareholders
B
According to Robert Monks and Nell Minow, what does corporate governance define?
A) The profits of the company
B) The relationship among various participants in determining the direction and performance of corporations
C) The amount of shareholder dividends
D) The legal obligations of the corporatio
B
The primary participants in corporate governance, according to Monks and Minow, are the shareholders,
board of directors, and employees
F. Robert Monks and Nell Minow, two leading scholars in corporate governance, define it as the
relationship among various participants in determining the direction and performance of corporations.
The primary participants are the shareholders, the management (led by the CEO), and the board of
directors
Who are the primary owners of a corporation?
A) The CEO
B) The employees
C) The shareholders
D) The board of directors
C
What is the role of management in a corporation?
A) To oversee the activities of the board of directors
B) To manage the day-to-day operations of the company
C) To represent the interests of shareholders in decision-making
D) To elect the board of directors
B. Led by CEOs
Who is responsible for overseeing the management of the corporation?
A) The employees
B) The shareholders
C) The board of directors
D) The customers
C
Who typically leads the management team of a corporation?
A) The chief financial officer (CFO)
B) The chief executive officer (CEO)
C) The chief operating officer (COO)
D) The board chairperson
B
What is the primary task of the board of directors in corporate governance?
A) To run the day-to-day operations of the company
B) To oversee the activities of management and ensure alignment with shareholder interests
C) To directly manage the company’s financial performance
D) To hire employees for the corporatio
B
How are members of the board of directors selected?
A) They are appointed by the CEO
B) They are elected by the shareholders
C) They are chosen by the company’s employees
D) They are selected by government regulators
B
How does good corporate governance affect investment decisions?
A) It has no effect on investment decisions
B) It can lead to higher security prices for companies with sound practices
C) It discourages investors from investing in companies
D) It leads to lower security prices for companies
B
What is the “corporate governance premium”?
A) A reduction in company profits due to good governance
B) A higher valuation and increased investment in companies with strong governance practices
C) A premium that companies must pay for good governance
D) A tax imposed on companies with strong governance
B
How does the corporate governance premium vary between countries?
A) It is the same in all countries
B) It is larger for firms in countries with sound corporate governance practices
C) It is smaller in countries with better corporate governance standards
D) It is based solely on company size, not governance practices
B
What is the relationship between good governance and financial performance?
A) Good governance always guarantees superior financial performance
B) Good governance is sometimes associated with superior financial performance, but not always
C) Financial performance is not affected by corporate governance
D) Companies with good governance always perform poorly financially
B
The corporate governance premium is smaller for firms in countries with sound corporate governance
practices compared to countries with weaker corporate governance standards.
F. The corporate governance premium is larger for firms in countries with sound corporate governance
practices compared to countries with weaker corporate governance standards.
Sound governance practices always leads to superior financial performance.
F. Sound governance practices often lead to superior financial performance. However, this is not always the
case.
What is the general assumption about practices such as independent directors and stock options?
A) They are guaranteed to result in poor financial performance
B) They are generally assumed to result in better financial performance
C) They have no effect on financial performance
D) They always result in long-term gains for the company
B
Why might independent directors not always contribute to better financial performance?
A) They are always too involved in company operations
B) They may lack the necessary expertise or involvement
C) They are not compensated enough
D) They have too much control over the company’s decisions
B
What is a potential negative effect of granting stock options to the CEO?
A) They encourage CEOs to make decisions that focus on short-term share price increases
B) They help CEOs make decisions that benefit the long-term performance of the company
C) They have no significant impact on a CEO’s decision-making
D) They discourage CEOs from taking risks
A
What is the primary purpose of a corporation?
A) To allow one party to control all operations
B) To allow different parties to contribute capital, expertise, and labor for mutual benefit
C) To focus only on maximizing shareholder profits
D) To provide employees with ownership stakes in the company
B
What benefit do shareholders (investors) receive from their participation in a corporation?
A) They have unlimited liability for the corporation’s debts
B) They can participate in the profits of the enterprise without being responsible for its operations
C) They must take on the daily responsibilities of running the company
D) They are required to manage the operations of the corporation
B
What right do shareholders have in a corporation?
A) The right to make all operational decisions
B) The right to elect directors who have a fiduciary obligation to protect their interests
C) The right to directly manage day-to-day activities
D) The right to control all financial transactions within the company
B
What is the central concept of agency theory?
A) The relationship between stockholders and external auditors
B) The relationship between the owners (principals) and managers (agents)
C) The interaction between competitors in a market
D) The control of operations by the board of directors
B
In the context of agency theory, who are the “principals”?
A) The managers of the company
B) The employees who work for the company
C) The owners of the firm, typically stockholders
D) The customers of the company
C
In agency theory, who are the “agents”?
A) The shareholders who invest in the company
B) The suppliers and contractors who work with the company
C) The individuals hired by the principals (stockholders) to manage the company, typically the management
D) The external auditors who review the company’s financials
C
Central to agency theory is the relationship between two primary players, the principals (stockholders)
and agents (management)
T
Which of the following best describes the first problem in agency theory?
A) Principals and agents share the same goals and interests.
B) The goals of the principals (shareholders) and the agents (management) conflict.
C) The agent always acts in the best interest of the principal.
D) The principal has full control over the agent’s actions.
B
What is a primary reason for the conflict of interest between principals (shareholders) and agents (management)?
A) Agents want to maximize the shareholders’ profits at any cost.
B) Principals and agents have the same attitude toward risk.
C) Principals and agents have differing attitudes toward risk.
D) The principal always monitors the agent’s actions closely.
C
Which of the following is the second problem in agency theory?
A) The agent can easily be monitored by the principal.
B) The principal has difficulty verifying what the agent is actually doing.
C) The agent’s actions are always aligned with the principal’s goals.
D) There is no conflict between the goals of the agent and the principal.
B
A corporation is a mechanism created to allow different parties to contribute capital, expertise, and labor
for the maximum benefit of each party. Management is able to participate in the profits of the enterprise
without taking direct responsibility for the operations.
F
Agency theory is concerned with the problem that arises when the goals of the agents conflict with those
of the surrounding community members.
F
Agency theory is concerned with the problem that arises when it is difficult or inexpensive for the
principal to verify what the agent is actually doing.
F. expensive
Agency theory is concerned with resolving two problems that can occur in agency relationships. Which
of the following is not one of those problems?
A. Goals conflict between principals and agents.
B. Verification of actual agency activity is expensive and difficult to obtain.
C. Principals and agents have differing attitudes toward risk.
D. Stockholders and management align with external stakeholders
D
For the maximum benefit of each part, a corporation is a mechanism created to allow different parties to
contribute all of the following except
A. buildings.
B. capital.
C. expertise.
D. labor.
A
The primary participants in corporate governance do not include the
A. shareholders.
B. financial institutions.
C. management (led by the chief executive officer).
D. board of directors.
B
Which of the following best describes a potential conflict of interest between shareholders and managers?
A) Managers may prioritize their personal interests over shareholders’ interests.
B) Shareholders always have the same goals as managers.
C) Managers avoid pursuing personal perks to focus only on shareholder value.
D) Shareholders manage the daily operations of the company.
A
Which of the following actions is an example of a manager acting opportunistically, according to agency theory?
A) Executives cutting unnecessary costs to maximize shareholder value.
B) A manager spending corporate funds on personal perks or non-essential items.
C) A manager focusing only on long-term strategic projects that benefit shareholders.
D) A manager refusing to engage in power struggles within the organization
B
Why might executives prefer diversification strategies more than shareholders?
A) Diversification increases the company’s short-term profits.
B) Diversification reduces executives’ personal risk, such as the potential loss of employment.
C) Shareholders prefer executives to take on higher levels of risk.
D) Diversification has no impact on executive job security.
B
Which of the following is true about executives with large stock holdings?
A) They tend to favor diversification strategies that are inconsistent with shareholder interests.
B) They are less likely to align their strategies with the long-term interests of shareholders.
C) They are more likely to pursue diversification strategies that increase long-term returns for shareholders.
D) They prioritize personal job security over shareholder value when deciding on diversification.
C
Why is it necessary to have governance mechanisms in modern corporations?
A) To ensure that managers act in their own self-interest.
B) To prevent managers from acting opportunistically and misaligning with shareholders’ interests.
C) To centralize control in the hands of a few executives.
D) To allow shareholders to disengage from corporate decision-making.
B
What is the primary goal of managerial incentive packages?
A) To increase the personal wealth of executives regardless of company performance.
B) To encourage actions that benefit shareholders and promote the long-term success of the company.
C) To allow managers to avoid any form of oversight or accountability.
D) To reduce the need for shareholder activism and Board involvemen
B
Which of the following is a key feature of managerial incentive packages designed to align management’s interests with shareholders?
A) The incentive package should be designed to reward short-term profitability only.
B) The package must encourage actions that benefit shareholders and increase the long-term value of the company.
C) The package should only focus on rewarding managers with fixed salaries, regardless of company performance.
D) The package should focus on reducing the amount of oversight and accountability for management.
B
What do managerial incentives, also referred to as contract-based outcomes, primarily consist of?
A) Managerial performance reviews
B) Reward and compensation agreements for managers
C) Company profit-sharing schemes
D) Employee feedback systems
B
One of the most critical roles of the board of directors is to create incentives that align the interests of
the CEO and top executives with the interests of shareholders.
T
According to the Business Roundtable, representing the largest U.S. corporations, the most important
quality of a good board of directors is that they do not get involved in critiquing company strategies.
F. do get involved
What is the primary role of the board of directors according to the Business Roundtable?
A) To manage daily operations of the company
B) To act as an intermediary between managers and shareholders
C) To provide financial investments for the company
D) To select a new product line for the company
B
According to the Business Roundtable, what should board members avoid doing?
A) Ensuring that the CEO’s plans align with the company’s long-term goals
B) Overseeing the CEO’s implementation of strategic plans
C) Micromanaging the CEO and circumventing their role
D) Reviewing risk assessments and approving budgets
C
What does the Business Roundtable recommend for the board when it comes to the CEO’s role?
A) The board should circumvent the CEO’s decisions when necessary
B) The board should micromanage the CEO to ensure the company’s success
C) The board should provide strong oversight without undermining or circumventing the CEO’s role
D) The board should leave all decisions up to the CEO without oversight
C
Which of the following best describes CEO duality?
A) The CEO serving as the sole decision-maker in a company
B) The CEO also holding the position of chairman of the board of directors
C) The CEO reporting to the employees regularly
D) The CEO working independently from the board
B
According to the text, what do effective boards focus on?
A) Compliance and financial reviews
B) Critical issues where they can add value, including strategic alternatives
C) Diversification and performance evaluation
D) Day-to-day operations of the company
B
What is a characteristic of ineffective boards?
A) They spend time on forward-looking strategic issues
B) They focus mostly on compliance, financial reports, diversification, and performance evaluation
C) They allocate most of their time to long-term company goals
D) They discuss value drivers and resource reallocation
B
What is one way boards are becoming more active in holding CEOs accountable for performance?
A) By focusing primarily on financial compliance
B) By dismissing underperforming CEOs and being transparent about it
C) By reducing the CEO’s compensation
D) By offering performance bonuses to CEOs
B
According to governance experts, what is recommended regarding the independence of directors?
A) Directors should have a close relationship with the CEO and company
B) The majority of directors should be independent of the CEO and company
C) Directors should primarily be former managers of the company
D) Directors should be chosen based solely on their financial expertis
B
What is discouraged in corporate governance practices regarding interlocking directorships?
A) CEOs serving on the boards of multiple companies simultaneously
B) CEOs serving on each other’s boards
C) CEOs having no board affiliations outside their own company
D) Directors sitting on multiple boards within the same industry
B
hat is the recommendation regarding stock ownership for directors?
A) Directors should not own any stock in the company
B) Directors should own significant stock in the company to align with shareholders’ interests
C) Directors should only own stock in other companies they are affiliated with
D) Directors should own stock only if the company is publicly traded
B
In order to have effective board operations, firms need to cultivate engaged and committed boards.
T
What is one key action to enhance board dynamics for effective operations?
A) Limit board members’ time commitment to avoid burnout
B) Cultivate engaged and committed boards
C) Focus solely on financial reviews and compliance
D) Reduce the number of meetings to streamline decision-making
B
