Reading 29: introduction to corporate governance and other ESG considerations

Question 1

The theory that deals with conflicts of interest between a company’s owners and its creditors is most appropriately called:
structure theory.
stakeholder theory.
shareholder theory.

Answer 1

Stakeholder theory focuses on the conflicts of interest among owners and several groups that have an interest in a company’s activities, including creditors. (LOS 29.a)

Question 2

For which two of a company’s stakeholders does information asymmetry most likely make monitoring more difficult?
Suppliers and employees.
Employees and managers.
Managers and shareholders.

Answer 2

Information asymmetry can exist between a company’s shareholders and its managers because the company’s managers may be much more knowledgeable about the company’s functioning and strategic direction. This makes it more difficult for shareholders to monitor the firm’s managers and determine whether they are acting in shareholders’ interests. (LOS 29.a)

Question 3

The least likely item to be a requirement for good stakeholder management is:
maintaining effective communication with other stakeholders.
an understanding of the interests of several stakeholder groups.
the ability to put aside the interests of one’s stakeholder group.

Answer 3

The ability to manage the conflicting interests of company relations with stakeholders requires good communication with stakeholders and a good understanding of their various interests. (LOS 29.b)

Question 4

The type of voting that is most likely to allow minority stockholders a greater representation on the board of directors is:
majority voting.
supermajority voting.
cumulative voting.

Answer 4

With cumulative voting, shareholders get a vote for each share they own times the number of director elections each year and can give all their votes to a single candidate for the board. This helps minority stockholders to get more proportional representation on the board of directors. (LOS 29.c)

Question 5

The type of resolution most likely to require a supermajority of shareholder votes for passage is a resolution to:
acquire a company.
choose a board member.
approve the choice of an auditor.

Answer 5

Ordinary resolutions, such as those to appoint an auditor or elect a board member, require a simple majority. Acquisitions, mergers, takeovers, and amendments to the company bylaws often require a supermajority of more than 50% for passage. (LOS 29.c)

Question 6

The board of directors committee most likely to be responsible for monitoring the performance of a project that requires a large capital expenditure is:
the risk committee.
the audit committee.
the investment committee.

Answer 6

The investment committee reviews proposals for large acquisitions or projects and also monitors the performance of acquired assets and of projects requiring large capital expenditures. (LOS 29.c)

Question 7

Benefits of effective corporate governance and stakeholder management most likely include:
reduced risk of default.
more efficient related-party transactions.
greater control exercised by the most-interested stakeholders.

Answer 7

Reduced risk of default is among the benefits of effective corporate governance. Risks from poor corporate governance include related-party transactions by managers and opportunities for some stakeholder groups to gain advantage at the expense of others. (LOS 29.d)

Question 8

The method of ESG integration that does not exclude any sectors but seeks to invest in the companies with the best practices regarding employee rights and environmental sustainability is:
thematic investing.
positive screening.
negative screening.

Answer 8

Positive screening does not exclude any sectors but seeks to invest in the companies with the best practices. Negative screening typically excludes some sectors. Thematic investing refers to making an investment in a company or project in order to advance specific social or environmental goals. (LOS 29.e, 29.f)