Final Study Guide 10&13

Question 1

The role of the Board of Directors

Answer 1

To steer the corporation towards corporate governance policies that support long-term sustainable growth in shareholder value

Question 2

The role of management

Answer 2

To create an environment in which a culture of performance with integrity can flourish

Question 3

The role of shareholders

Answer 3

To vote from a long-term perspective as voting decisions influence corporate governance

Question 4

The Five Elements of Corporate Governance

Answer 4

Known for convenience as CLASS, they are:
Culture, Leadership, Alignment, Systems, Structure

Question 5

The mgmt of strategic risks needs a structure that allows:

Answer 5

• Central Risk monitoring at the senior levels
• Dispersed awareness of risks at all levels (decentralization)

Question 6

Is Bromiley and Rau report based on empirical evidence?

Answer 6

Yes

Question 7

Empirical study of 3,400 firms during the period of
1991 to 2010 indicated

Answer 7

positive relationship of effective risk mgmt to organizational performance outcomes and corporate value creation

Question 8

Effective risk management

Answer 8

The firm’s ability to respond effectively to major risk events so the volatility in its corporate cash flows and earnings are reduced compared to industry peers

Question 9

Typical Value of Firm calculation by risk managers

Answer 9

VOF = PV of future cash flows - Financial Distress costs

Question 10

The authors view of VOF calculation

Answer 10

VOF = PV of future cash flows - Financial Distress costs + the present value of opportunities realized from “Slack” [financial flexibility]

Question 11

Financial flexibility or Slack

Answer 11

ability to raise funds to deal with a strategic risk/opportunity

Question 12

Innovative risk-taking is more likely to occur when there is …

Answer 12

slack

Question 13

Findings indicate that strategic risk management creates

Answer 13

corporate value

Question 14

Stochastic risks are called

Answer 14

“pure risks” by insurers and have only downside potential. They are NOT normal business risks

• Known unknowns (probability distribution is known)
• Unknowable unknowns (probability distribution is unknown)

Question 15

Stochastic risks are mitigated by

Answer 15

1. Risk Management that aims to reduce the frequency AND the severity of the event
2. Risk transfer through purchase of insurance policies

Question 16

Specific benefits of SRM include

Answer 16

1. Maintenance of an optimal capital structure, which
   minimizes the cost of capital
2. Increase and protect the company’s cash flows from loss
3. Reduction of the cost of financial distress