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
What type of expertise should be included on a board to enhance its effectiveness?
A) Directors with experience in corporate finance only
B) Directors with experience and connections relevant to the company’s goals (e.g., international expansion, operational efficiency)
C) Directors with only legal or regulatory experience
D) Directors with no prior industry experience
B
According to the text, what is the ideal size for an effective board?
A) 1-3 members
B) 5-11 members
C) 12-15 members
D) More than 20 members
B
What should boards balance their focus on?
A) Only the company’s financial performance
B) Only strategic future direction
C) The past, present, and future of the company
D) External factors unrelated to company operatio
C
How can boards get a broader view of the company’s operations?
A) By holding all meetings in the company’s headquarters
B) By rotating board meetings to different operating units and sites to engage with key managers
C) By focusing only on financial data from the headquarters
D) By limiting the board’s interactions with managers
B
What does an effective board do to maintain trust and transparency?
A) Limit communication between directors and management
B) Foster open, team-oriented dialogue with free-flowing information and mutual respect among directors
C) Focus solely on compliance and avoid discussing sensitive topics
D) Ensure that decisions are made behind closed doors
B
What major factor influenced changes in board structures and behaviors in S&P 500 firms?
a) Increased competition in the industry
b) Regulatory and investor efforts in response to financial crises and corporate scandals
c) Technological advancements in corporate governance
d) Expansion into global markets
B
According to a 2011 Harvard Business Review article, what was a notable trend regarding the average age of board members?
a) The average age of board members decreased significantly.
b) The percentage of boards with an average age of 64 or older increased.
c) The average age of board members remained constant.
d) There was no noticeable change in the average age of board members.
Answer: b) The percentage of boards with an average age of 64 or older increased.
B
What trend was observed regarding the gender composition of boards in the aftermath of financial crises and corporate scandals?
a) The percentage of female board members decreased.
b) The percentage of board members who were female increased.
c) Gender composition remained unchanged.
d) There were no women on boards in 2011.
B
What change occurred in the size of boards as a result of regulatory and investor efforts following corporate scandals?
a) The percentage of boards with more than 20 members increased.
b) The percentage of boards with 12 or fewer members increased.
c) The size of boards remained the same.
d) The percentage of boards with fewer than 5 members increased
B
How did the pay for board members change in response to corporate scandals and financial crises?
a) Board members were paid less to curb expenses.
b) The average pay for directors increased.
c) Board member pay remained unchanged.
d) Pay was reduced for directors but increased for executives.
B
What is one key change in board composition that occurred as a result of the regulatory and investor response to corporate scandals?
a) The percentage of independent directors increased.
b) The percentage of executive directors increased.
c) The percentage of external auditors increased.
d) The number of board committees decreased.
A
Changes in board of director configurations since 1987 indicate that board directors were paid more in
2011, were older, were more often female, and were independent from the company (not insiders).
T
What change occurred in director pay following the financial crises and corporate scandals?
a) The average pay for directors decreased.
b) The average pay for directors remained the same.
c) The average pay for directors increased.
d) Directors’ pay was eliminated.
C
What drove the changes in board composition as noted in the 2011 article?
a) Internal company initiatives to reduce costs and simplify management.
b) Regulatory and investor efforts in response to financial crises and corporate scandals.
c) The desire to expand global business opportunities.
d) Shifts in consumer preferences and marketing strategies.
B
Which of the following is a right of individual shareholders?
a) The right to veto management decisions
b) The right to sell stock
c) The right to set the executive compensation
d) The right to directly control day-to-day operations
B
Which right allows individual shareholders to participate in board elections?
a) The right to bring legal suits for damages
b) The right to vote proxies, including the election of board members
c) The right to access company financial reports
d) The right to liquidate the company
B
According to shareholder rights, who has the right to bring legal suits for damages if directors or managers fail in their duties?
a) Institutional shareholders only
b) Individual shareholders only
c) Both individual and institutional shareholders
d) Neither individual nor institutional shareholders
B
Which of the following is not a right of institutional shareholders?
a) The right to vote proxies in board elections
b) The right to sell stock
c) The right to bring legal suits for damages if directors or managers fail in their duties
d) The right to access certain company information
C
What is the residual right of individual shareholders in the event of a company’s liquidation or bankruptcy?
a) The right to receive the full value of their investment first
b) The right to vote on the company’s reorganization plan
c) The right to certain residual rights after creditors and other claimants are paid off
d) The right to be repaid immediately before creditor
C
Which of the following is true regarding institutional shareholders compared to individual shareholders?
a) Institutional shareholders have the right to bring legal suits for damages if directors fail in their duties, unlike individual shareholders.
b) Institutional shareholders have the same rights as individual shareholders in all aspects of corporate governance.
c) Institutional shareholders do not have the right to bring legal suits for damages if directors or managers fail in their duties, unlike individual shareholders.
d) Institutional shareholders cannot vote in board elections.
C
What does the right to access company information enable shareholders to do?
a) Influence corporate strategy
b) Participate in management decision-making
c) Review financial statements and other relevant information
d) Overrule decisions made by the CEO
C
In order to minimize the temptation for managers to act in their own self-interest, governance
mechanisms exist for implementation consideration. Which of the following is not a primary means for
monitoring managerial behavior?
A. a board of directors that acts in the best interests of shareholders to create short-term value
B. shareholder activism in which owners view themselves a shareowners
C. a board of directors that acts in the best interests of shareholders to create long-term value
D. managerial incentives to align management interests with those of the stockholders
A
Which of the following is one of the primary means of monitoring the behavior of managers?
a) Government regulation
b) Committed and involved board of directors
c) Outsourcing management oversight
d) Limiting shareholder voting rights
First, there are two primary means of monitoring the behavior of managers which include: (1) a
committed and involved board of directors that acts in the best interests of the shareholders to create
long-term value and (2) shareholder activism, wherein the owners view themselves as shareowners
instead of shareholders and become actively engaged in the governance of the corporation. Finally, there
are managerial incentives, sometimes called contract-based outcomes, which consist of reward and
compensation agreements.
Which of the following is NOT one of the primary means of monitoring managerial behavior?
a) A committed and involved board of directors
b) Shareholder activism
c) Managerial incentives
d) Government regulation of managerial actions
D
Individual and institutional shareholders have the same rights that include all of the following except
A. right to sell stock.
B. right to vote the proxy.
C. the right to bring suit for damages, if the economy declines.
D. certain residual rights following the liquidation of the company, once creditors and claimants are
paid.
C
What does shareholder activism refer to?
a) Shareholders’ passive role in corporate governance
b) Shareholders ensuring that managerial actions align with maximizing shareholder value
c) Shareholders primarily focusing on short-term profits
d) Shareholders avoiding any engagement in corporate governance
B
Which group of investors holds over 50% of all listed corporate stock in the U.S.?
a) Individual retail investors
b) Institutional investors
c) Government entities
d) Hedge funds
B
How are institutional investors shifting their approach to corporate governance?
a) They are becoming short-term traders focused on quick profits.
b) They are increasingly acting as permanent shareholders, engaging actively in corporate governance.
c) They are selling off their stock and moving to other markets.
d) They are avoiding involvement in company management.
B
CalPERS, the California Public Employees Retirement System, manages over 240 billion dollars in
assets. As an example of shared activism, they review all short- and long-term performance figures for
each of the firms in which they invest and request changes in the governance structure of those firms,
when they feel the firm is not responsive to their concerns.
T
What type of initiatives are institutional investors increasingly advocating for as part of their governance actions?
a) Short-term financial gains
b) Social initiatives
c) Executive compensation increases
d) Stock buybacks
B
Shareholders rely on CEOs to adopt policies and strategies that maximize the value of their shares. To
motivate CEOs to maximize the value of their companies, boards of directors can consider all of the
following options except one. Which one is it?
A. Boards can require that the CEOs become substantial owners of company stock.
B. Salaries, bonuses, and stock options can be structures to provide rewards for superior performance.
C. Salaries can be structured to provide penalties for poor performance.
D. Dismissal for poor performance is not an option.
D
Which of the following is a key policy to motivate CEOs to maximize shareholder value?
a) Providing job security and minimal performance pressure
b) Requiring CEOs to become substantial owners of company stock
c) Offering high fixed salaries without performance-based bonuses
d) Allowing CEOs to work without any oversight or accountability
B
What is the purpose of structuring salaries, bonuses, and stock options in a way that rewards superior performance and penalizes poor performance?
a) To create a generous compensation package regardless of company performance
b) To encourage CEOs to act in the best interest of shareholders by linking compensation to company performance
c) To provide CEOs with financial incentives unrelated to company success
d) To limit the CEO’s control over strategic decisions
B
Which of the following policies is NOT one of the three basic policies for motivating CEOs?
a) Requiring CEOs to own substantial company stock
b) Making dismissal for poor performance a realistic threat
c) Linking salaries and bonuses to the performance of the company
d) Providing unlimited bonuses for every CEO achievement regardless of company performance
D
Which of the following is an example of a performance-based incentive for a CEO?
a) A fixed salary with no performance-related bonuses
b) Stock options that become valuable if the company’s stock price increases
c) A generous severance package regardless of company performance
d) A one-time bonus for meeting financial targets, without future performance incentives
B
Boards of directors have responded to financial crises, corporate scandals, regulator obligations, and
investor requests for structural changes. In the 2011 Harvard Business Review study of the changes in
configuration of boards since 1987, which change has been brought about by government legislation?
A. Percentage of boards that have an average age of 64 or older has increased.
B. Average pay for directors has increased.
C. Percentage of boards with 12 or fewer members has increased.
D. Percentage of the directors that are independent has increased.
D
CEO duality refers to a situation in which the CEO
A. formulates and implements strategies.
B. serves as both the CEO and the chair of the board of directors.
C. is responsible for acting as CEO and serving on the compensation committee.
D. is responsible for acting as CEO and Chief Operating Officer (COO)
B
According to the Unity of Command perspective, which of the following is a key benefit of CEO duality?
a) CEO duality can create potential conflicts of interest between the CEO and the chairman.
b) One person holding both roles can act more efficiently and effectively.
c) CEO duality increases confusion and delays decision-making processes.
d) The separation of roles between the CEO and chairman enhances company responsiveness.
B
Which of the following would support the Unity of Command school of thought regarding CEO duality?
a) CEO duality creates confusion and misalignment between company leadership.
b) CEO duality can lead to better shareholder service by aligning decision-making and leadership.
c) The roles of CEO and chairman should always be separated to avoid too much power in one person’s hands.
d) Separating the CEO and chairman roles ensures more independence and accountability.
B
Which of the following statements would be most aligned with the Unity of Command perspective on CEO duality?
a) CEO duality causes unnecessary conflicts between the CEO and the chairman.
b) CEO duality removes confusion and streamlines decision-making.
c) CEO duality leads to weaker company leadership and poor accountability.
d) Separation of roles between the CEO and chairman creates a more efficient decision-making structure.
b
According to the Unity of Command perspective, how does CEO duality affect leadership within a company?
a) It creates division between the leadership roles, slowing down decision-making.
b) It removes confusion and promotes unity across the board of directors and management.
c) It leads to conflicts between the CEO and the board, diminishing company effectiveness.
d) It makes leadership roles less clear, leading to mixed messages for employees.
B
Which of the following is NOT a benefit of CEO duality from the Unity of Command perspective?
a) Enhanced efficiency and effectiveness in leadership
b) Clear focus on both operational objectives and company strategy
c) Elimination of confusion and conflict between the CEO and chairman
d) Increased decision-making conflicts and slow responses to issues
D
According to advocates of CEO duality, which of the following is a potential risk of separating the CEO and chairman roles?
a) Slower decision-making and potential conflicts between the CEO and chairman
b) More efficient decision-making and enhanced company responsiveness
c) Stronger accountability and oversight over executive decisions
d) Greater clarity in leadership roles and reduced confusion
A
In choosing sides concerning CEO duality, two schools of thought exist. Which of the following would
not be a consideration for the Unity of Command school of thought?
A. One person holding both roles will be able to act more efficiently and effectively.
B. CEO duality provides smoother strategic decision making.
C. CEO duality creates unit across the board of directors and managers of a company.
D. CEO duality slows down decision-making.
D
Which of the following is a key argument in favor of separating the roles of CEO and chairman under Agency Theory?
a) CEO duality can lead to efficient decision-making by a single leader.
b) Separation of roles helps prevent a CEO from having too much control and influence over board decisions.
c) CEO duality ensures smoother succession planning and reduces power struggles.
d) CEO duality ensures that shareholders’ interests are better aligned with executive compensation.
B
According to Agency Theory, why should the roles of CEO and chairman be separated?
a) To increase the CEO’s power and control over the company
b) To avoid a conflict of interest and ensure proper board monitoring of the CEO
c) To make it easier for the CEO to set their own agenda
d) To allow the CEO to serve both roles without any checks on their authority
B
According to Agency Theory, what is the risk of CEO duality in terms of CEO succession?
a) CEO duality prevents smooth CEO succession and creates power struggles.
b) CEO duality simplifies CEO succession by consolidating power in one person.
c) CEO duality eliminates any concerns about the legitimacy of executive pay.
d) CEO duality encourages efficient succession planning.
A
According to Agency Theory, why is it problematic if the CEO also serves as chairman of the board?
a) The CEO will have too little influence over the company’s direction.
b) The CEO will be able to block the board’s ability to monitor their performance effectively.
c) The CEO will be forced to act in the best interests of the board instead of shareholders.
d) The CEO’s decisions will always align with the interests of the shareholders.
B
In choosing sides concerning CEO duality, two schools of thought exist. Which of the following would
not be a consideration for the agency theory school of thought?
A. CEO duality complicates the issue of CEO succession.
B. CEO duality reinforces popular doubts about the legitimacy of the system as a whole.
C. CEO duality can create conflicts of interest that can negatively affect the interests of the
shareholders.
D. Firm performance always is improved under CEO duality
D
When firms like Siebel Systems, Disney, Oracle, and Microsoft separated the roles of CEO and chairman
of the board, they were creating CEO duality.
F
What is the purpose of appointing a lead director in companies where the CEO also serves as chairman?
a) To give the CEO complete control over both management and governance.
b) To help balance the power of the combined CEO/chairman role and provide independent oversight.
c) To replace the CEO in case of poor performance.
d) To manage day-to-day operations of the company alongside the CEO.
B
What is the primary role of external governance control mechanisms?
a) To ensure managerial actions lead to the maximization of shareholder value without harming other stakeholders.
b) To provide managers with complete autonomy in decision-making.
c) To reduce the role of shareholders in corporate governance.
d) To guarantee that all employees are treated equally in terms of compensation.
A
Which of the following is NOT considered an external governance control mechanism?
a) Market for corporate control
b) Auditors
c) Governmental regulatory bodies
d) Board of directors
D
In the context of external governance control mechanisms, which of the following can be a consequence of failure in internal controls?
a) Increased shareholder value and financial performance.
b) Managers acting opportunistically, leading to shirking, on-the-job consumption, and excessive diversification.
c) Complete alignment between managerial goals and shareholder goals.
d) Decreased external scrutiny and regulation.
B
What is a corporate raider likely to do when the market value of a firm falls below its book value?
a) Increase executive compensation packages.
b) Launch a hostile takeover to acquire the company.
c) Promote corporate social responsibility.
d) Offer to buy back shares from shareholders at a premium.
B
The market for corporate control is primarily concerned with:
a) Increasing the number of shares traded on the stock market.
b) The potential for corporate raiders to acquire companies when stock prices fall below book value.
c) Enhancing communication between management and shareholders.
d) Regulating executive compensation and bonuses.
B
In the event of failure in internal controls, what is the typical response from shareholders?
a) They would likely increase their investments in the company.
b) They would likely sell their stock, causing the stock price to decline.
c) They would engage in direct negotiation with the company’s management.
d) They would focus on long-term investments rather than short-term stock price fluctuations.
B
The risk of being acquired by hostile raiders is often referred to as the takeover constraint.
T
In trying to assure that managerial actions lead to shareholder value maximization, a risk can come
about if the market value of a firm becomes less than its book value. The risk is
A. it becomes an attractive takeover target.
B. the firm will be delisted by the stock exchange.
C. the Securities and Exchange Commission will not allow it to declare dividends until the market value
once again exceeds the book value.
D. the firm will be unable to service its debt
A
By takeover constraint, we mean
A. constraints placed by the firm on raiders who want to take over the firm.
B. legal constraints that limit the ability of the raiders to acquire a firm.
C. provisions in the charter of a company that prevents it from attempting a takeover of other
companies.
D. the risk of being acquired by a hostile raider
D
It is generally argued that the takeover constraint deters management from
A. engaging in opportunistic behavior.
B. considering acquiring other companies.
C. declaring dividends.
D. increasing the level of borrowing of a firm
A
When a corporate raider successfully acquires a company through a hostile takeover, which of the following is most likely to happen?
a) The company will undergo a significant expansion into unrelated business areas.
b) Underperforming management may be fired in favor of more effective leadership.
c) The company will focus solely on increasing its stock dividends.
d) The company will implement extensive corporate social responsibility programs.
B
What is a “poison pill” in the context of defense tactics against takeovers?
A) A financial strategy where the company increases its stock value to attract acquirers.
B) A provision that makes the company less attractive to potential acquirers by issuing large one-time dividends financed by debt.
C) A method of distributing stock to employees to dilute the ownership of hostile acquirers.
D) A tactic where the company merges with another firm to prevent takeover attempts
B
Which of the following is most likely to be considered a “greenmail” tactic?
A) The company offers stock options to employees to prevent a hostile takeover.
B) The company buys back stock from a potential acquirer at a premium price to stop a takeover.
C) The company issues new shares to make a takeover more expensive for the acquirer.
D) The company grants lucrative severance packages to top executives.
B
What is the purpose of “golden parachutes” in the context of defending against hostile takeovers?
A) To attract more investors by offering them a share of company profits.
B) To provide top managers with large severance packages if they are fired due to a takeover, making the takeover more expensive for the acquirer.
C) To protect shareholders by issuing additional shares during a takeover attempt.
D) To offer financial incentives to potential acquirers to purchase the company.
C
Auditors are appointed by the Securities and Exchange Commission to audit company financial
statements
F. But auditors are appointed by the firm being audited.
External governance control mechanisms include all of the following except
A. auditors.
B. analysts.
C. competitors.
D. media
C
he failure of many auditing firms to raise red flags about accounting irregularities in companies such as
Enron and WorldCom is generally attributed to all of the following factors except the
A. desire to get future auditing contracts from the company.
B. desire to get consulting work from the company because most audit firms also do consulting work.
C. fact that auditors are appointed by the firm.
D. failure of U.S. audit firms to hire technically qualified professionals.
D
What is one key responsibility of commercial and investment banks in corporate governance?
A) To conduct in-depth research on firms and issue stock recommendations.
B) To lend money to corporations and ensure loan covenants are followed.
C) To manage stock buybacks for corporations.
D) To offer advice on mergers and acquisitions.
B
What is the role of stock analysts in corporate governance?
A) To set loan interest rates for borrowing firms.
B) To conduct in-depth research and recommend whether investors should buy, hold, or sell stocks.
C) To ensure corporate governance practices are adhered to in companies.
D) To monitor a company’s adherence to loan covenants.
B
What is one reason analysts’ recommendations are often more optimistic than warranted by objective facts?
A) Analysts are highly objective in their evaluations.
B) Analysts often lack access to company data or management interactions.
C) Analysts’ firms may have lucrative investment banking relationships with the companies they cover.
D) Analysts are always highly critical in their evaluations of companies.
C
What kind of information do analysts typically have access to that helps them make their recommendations?
A) Access to insider trading data and confidential market strategies.
B) Industry knowledge, interactions with company management, and access to company data.
C) Exclusive access to confidential investment banking deals.
D) Detailed market forecasts made by central banks and government agencies.
B
Which of the following is a potential conflict of interest for analysts?
A) Analysts are paid based solely on the accuracy of their recommendations.
B) Analysts have no contact with the companies they cover.
C) Analysts work for firms that have investment banking relationships with the companies they analyze.
D) Analysts are pressured to issue more sell recommendations.
c
What tends to happen if analysts issue negative recommendations?
A) Their compensation increases.
B) They risk upsetting company management and potentially losing investment banking business.
C) Their firms reward them with promotions.
D) Their firms may provide them with more resources for research.
b
Stock analysts generally issue more sell recommendations than buy recommendations.
F.
The reasons analyst recommendations are often more optimistic than warranted by an objective analysis
of the facts include all of the following except that
A. many analysts fail to grasp the gravity of the problems facing a company.
B. sell recommendations generate lower commissions than buy recommendations.
C. the firms for which analysts work may have lucrative investment banking relationships with the firm.
D. analysts are often pressured by their superiors to overlook negative information.
B
Which of the following sectors typically receives more government regulation due to its societal importance?
A) Technology and media
B) Banking, utilities, and pharmaceuticals
C) Retail and hospitality
D) Entertainment and sports
b
Which of the following is a key regulatory requirement for public corporations?
A) They must limit the number of shares they issue to avoid market volatility.
B) They must disclose substantial financial information to regulatory bodies like the SEC.
C) They must seek government approval for all new products.
D) They must undergo annual audits by a government agency.
b
What must public corporations disclose under the regulatory requirements for financial transparency?
A) The names of all shareholders.
B) Only the company’s profits and losses.
C) Executive compensation packages, quarterly and annual financial performance, and insider stock trading.
D) The personal details of all company executives.
c
Public companies are required by law to disclose information regarding executive compensation
packages.
t
All of the following are types of information that a firm is required to disclose except
A. quarterly and annual filings of financial information.
B. stock trading by insiders.
C. details of new products under development.
D. details of executive compensation packages
c
Which of the following is a key provision of the Sarbanes-Oxley Act of 2002 regarding auditors?
A) Auditors must conduct audits every three years.
B) Auditors are prohibited from engaging in certain nonaudit services and must retain records for at least five years.
C) Auditors must disclose financial transactions of the company.
D) Auditors can audit companies indefinitely without rotation.
b
What must CEOs and CFOs of publicly-listed companies do under the Sarbanes-Oxley Act?
A) Fully disclose off-balance-sheet finances and vouch for the accuracy of financial information.
B) Avoid selling any stock during the year.
C) Submit financial statements to the government annually.
D) Hire independent auditors to review their company’s financials.
a
What restriction does the Sarbanes-Oxley Act impose on executives regarding stock sales?
A) Executives must hold all their shares for at least five years.
B) Executives must disclose stock sales promptly and cannot sell shares when other employees are restricted from doing so.
C) Executives can only sell shares once a year.
D) Executives are not required to disclose stock sales under any circumstances.
b
The Sarbanes-Oxley Act of 2002 requires that CEOs and CFOs of publicly-listed companies must reveal
off-balance-sheet finances and vouch for the accuracy of information provided.
t
The Sarbanes-Oxley Act of 2002 stipulates that executives of a firm will still be able to sell their shares
in the firm when other employees cannot.
f
