Final Study - 9&10

Question 1

Who is in the center of Freeman’s Stakeholder Wheel

Answer 1

The Firm

Question 2

External Relations Risk

Answer 2

Adverse business consequences resulting from poor communications or damaged relationships with those with public voices, including media, consumer relations, stock analysts, politicians, rating agencies, other key stakeholders, balancing opposing requirements

Question 3

Not all Stakeholders are equal because

Answer 3

• The priority given to satisfying the needs and interests of each stakeholder
• The power a stakeholder has to facilitate or impede the achievement of an activity’s objective

Question 4

Variables affecting stakeholders’ relative importance and influence

Answer 4

• Legal hierarchy
• Control of strategic resources
• Negotiating position
• Possession of specialist knowledge & skills

Question 5

Are all Stakeholders Formal Organizations?

Answer 5

No

Question 6

Mitigating External Relationship (Stakeholder) Risk Steps

Answer 6

1. Answer the question: what is our purpose?
   That will help to define which stakeholders we will prioritize
2. Goal is to find a win-win with key stakeholders
3. Values are essential: we need to find common values or at least values we can agree on
4. These do not typically emerge from business
   negotiations: we need conversations that get at common values
5. Win‐win is not always possible. In that case the goal
   is tradeoff or compromise

Question 7

Credit rating agencies assign credit ratings (such
as “AAA” or “not investment quality”) to what types of companies?

Answer 7

companies/entities that issue debt

Question 8

The credit rating is designed to

Answer 8

provide information on the creditworthiness of the company and its debt instruments (bonds, preferred stock, collateralized securities)

Question 9

Generally, the better the credit rating, the less

Answer 9

interest the company pays to borrow money (loans from banks, issuing bonds)

Question 10

Three large agencies control 95% of the ratings business

Answer 10

Moody’s, Standard & Poor’s (S & P), Fitch Ratings

Question 11

What best specializes in insurance company ratings

Answer 11

AM

Question 12

A ratings downgrade or lowering of the credit rating may increase

Answer 12

the interest rate at which a company borrows money; may lower the stock price of the company; and may trigger the default of the company’s debt

Question 13

Country risk enters into the credit rating of
companies doing

Answer 13

business internationally

Question 14

Country risk assessment sub-factors

Answer 14

• Economic risk
• Institutional and governance effectiveness risk
  (includes risks known as “political risk”)
• Financial system risk
• Payment culture and rule-of-law risk

Question 15

country risk assessment, ranking

Answer 15

‘1’ to ‘6’ (strongest to weakest) is assigned to each of the following four sub factors

• Country risk index is the average of the sub
  factors

Question 16

Institutional & governance effectiveness risk

Answer 16

Crises in emerging markets are caused by political instability, high external debt, unsustainable financial policies, heavy dependence on exports, and unstable financial markets.

Question 17

Financial system risk for developed markets

Answer 17

Global default studies show significant correlation of defaults with weak points in business cycles and banking crises

Question 18

Payment culture and rule-of-law risk

Answer 18

This risk focuses on: Property rights, contract rights, enforceability, and corruption.

Question 19

Economic risk

Answer 19

• Relative income levels and changes in income
• Economic diversity and volatility

Question 20

External Indicators Used to Assess Payment Culture and Rule-of-law Risk

Answer 20

• World Bank Governance Indicators
• ‘Corruptions Perception Index’
• World Bank ‘Doing Business In’ Indicator
• Standard & Poor’s analytics

Question 21

Rating Agency Relationship Management

Answer 21

• Enhance the communications, and dialogue with your analyst
• Ensure that there is understanding and agreement on key rating issues
• Be easy to interact with, provide information requested on a timely basis
• Establish an honest, direct, friendly, transparent
  relationship with your rating analysts

Question 22

What is Corporate Governance?

Answer 22

A system of rules, practices, and processes by which a corporation is directed and controlled.

Question 23

What is Corporate Governance Risk?

Answer 23

The risk of unexpected events or actions by insiders that are inconsistent with the requirements, processes, procedures, controls imposed by the organization’s corporate governance structure, such as fiduciary breaches, bad conduct

Question 24

The “agency problem” suggests

Answer 24

the professional management’s interests may not align with the interests of the shareholders

• Hence, the need for Corporate Governance to mitigate the agency problem

Question 25

The equation for agent and shareholders

Answer 25

Agent = Management / Principal = Shareholders