Deck 18: Corporate Governance

Question 1

Explain how each of the following market forces helps reduce incentive conflicts between shareholders and management: a)the market for corporate control,b)the managerial labor market,and c)the product market.

Answer 1

The market for corporate control assures that,with sufficient financial disclosure,competing management teams could make hostile takeover offers for firms with poorly performing management teams.The U.S.has a relatively active takeover market.The managerial labor market rewards executives with a good track record by providing a greater number of offers (for other CEO positions and board positions)or greater compensation or both.The product market limits managerial agency problems through the price system.Companies with higher costs that have arisen through poor management will be more likely to fail because their profits will be reduced at the prevailing price.

Question 2

A closely held corporation is one that:

A)has all of its stock trade on the New York Stock Exchange.
B)uses bonds to raise most of its capital.
C)is free of all federal taxes and regulations.
D)is owned by a small group of investors that has limited or no publicly traded stock.

Answer 2

D

Question 3

Which of these groups is an external monitor in a publicly traded company?

A)Board of directors
B)Shareholders
C)Independent auditors
D)Top managers

Answer 3

C

Question 4

The incentive problem within the modern corporation is that the:

A)decision makers have stronger incentives to use assets productively than in small business where there is big separation of ownership and control.
B)decision makers have weaker incentives to use assets productively than in small business where there is a big separation of ownership and control.
C)decision makers have stronger incentives to use assets productively than in small business where there is no separation of ownership and control.
D)decision makers have weaker incentives to use assets productively than in small business where there is no separation of ownership and control.

Question 5

Identify a characteristic of the corporate form of organization.

A)The top management of such an organization has unlimited liability.
B)It does not have the discretion and authority to issue stock.
C)It has the legal standing of an individual and can participate in law-suits.
D)It is run by a board of directors elected by the government.

Question 6

A widely held corporation is one in which:

A)none of the owners control more than 5% of the shares.
B)the dominant blockholder controls 40% of the shares.
C)each blockholder controls exactly 25% of the shares.
D)none of the owners control more than 10% of the shares.

Question 7

In the United States,the board of directors of corporations have a fiduciary responsibility to:

A)set the prices of the products the corporation produces.
B)raise investment capital in their spare time.
C)operate the company on a day-to-day basis.
D)represent the interest of its shareholders.

Question 8

The Sarbanes-Oxley Act of 2002 attempts to reduce corporate fraud among top-level executives.Comment on the strengths and weaknesses of this act.

Question 9

In 2003,Sony Corporation announced reform in its management structure.The reform included an increase in the number of outside directors on the Board of Directors,a requirement to separate the Chairman of the Board from the CEO,and greater inclusion of outside directors on the Nomination Committee.Analyze these changes from the perspective of separation of decision control from decision management.

Question 10

The Wall Street Journal ("Boards Tie CEO Pay More Tightly to Performance," 2/21/06,p.A1)reports an increase in the number of major U.S.corporations that tie the CEO's stock options to performance targets.Comment on the wisdom of this trend,given the separation of ownership and control in U.S.corporations.

Question 11

Corporate governance refers to:

A)government control of the top management.
B)organizational architecture at the bottom-level of an organization.
C)organizational architecture at the middle-management level of an organization.
D)organizational architecture at the top of an organization.

Question 12

Which of these results from the separation of ownership and management in large publicly traded corporations?

A)Corporate managers have stronger incentives to rather quickly transfer control of the firm to less informed management teams.
B)Corporate managers have weaker incentives to transfer control of the firm to less informed management teams.
C)Corporate managers have stronger incentives to rather quickly transfer control of the firm to more informed management teams.
D)Corporate managers have weaker incentives to transfer control of the firm to more informed management teams.

Question 13

The principle of Economic Darwinism implies that:

A)publicly traded corporations have evolved unsuccessfully through the competitive process and are not here to stay and flourish.
B)publicly traded corporations have evolved successfully through the competitive process but they are not here to stay and flourish.
C)publicly traded corporations have evolved unsuccessfully through the competitive process but will be here to stay and flourish.
D)publicly traded corporations have evolved successfully through the competitive process and are here to stay and flourish.

Question 14

"Corporate governance" refers to aspects of the corporation like:

A)the corporate tax rate.
B)compensation given to the top management.
C)decentralization of decision rights to union workers.
D)government regulation of corporate health and safety.

Question 15

Which one of the following is implicit in applying "Economic Darwinism"?

A)Because X has been here,X may be the worst,but it should not be replaced by something else.
B)Because X has been here,X may be the best,but it should be replaced by something else.
C)Because X has been here,X is the worst,and it should replaced by something else.
D)Because X has been here,X is the best,else it would have been replaced by something else.

Question 16

Separation of ownership from control clearly expands the potential for principal/agent conflict.Why don't large corporations fail in large numbers because of this conflict?

Question 17

Provide an economic critique of the statement "U.S.corporate governance is overly focused on shareholders at the expense of employees and other corporate stakeholders."

Question 18

What are the shareholder incentives within a corporation?

Question 19

Closely held corporations are characterized by:

A)a small number of shareholders,each holding on to lots of shares for a long time.
B)a large number of shareholders,each holding on to a few shares for a long time.
C)stock that is freely traded only among a few shareholders.
D)stock that is not freely traded and often held by a few shareholders.

Question 20

What is managerial power theory and what are its implications?

Question 21

Adolph Berle and Gardiner Means argued that widely held corporations will be run inefficiently by professional managers.Yet large,publicly-traded corporations continue to produce the bulk of the free world's output.A widely held corporation survives because:

A)it can raise capital from diversified investors.
B)ownership and control are separate.
C)large corporations are given tax sops by the government.
D)its size insulates it from market competition.

Question 22

The ______ directs the organization's goals,objectives,and budgets.He/she oversees the investment of funds and manages associated risks,supervises cash management activities,executes capital-raising strategies to support a firm's expansion,and deals with mergers and acquisitions.

A)chief accounting officer
B)chief executive officer
C)chief financial officer
D)chief operating officer

Question 23

Which of the following types of shareholders can be categorized under institutional investors?

A)Traders
B)Inventory suppliers
C)Insurance companies
D)Blockholders

Question 24

Board members act in the best interests of the firm:

A)because they are legally required to do so.
B)when they do not own stock in the firm.
C)when they take an extremely cautious approach to ratifying decisions.
D)because they wish to maintain a good reputation in order to be offered other board positions.

Question 25

Bebchuk and Fried's managerial power theory states that:

A)the typical corporate board is not captured by managers.
B)all firms have about the same quality of governance.
C)product,labor,and takeover markets help limit executive pay but do not work perfectly.
D)managers want performance-based pay but such a reward system is usually inefficient.

Question 26

The cumulative voting system used by firms in the election of directors allows:

A)the prospective candidates for the board of directors to manipulate the federal laws and regulation.
B)the blockholders to elect some directors even though they are barred from participating in the internal decision making.
C)a large minority shareholder to elect some directors even if their election is opposed by the majority of shareholders.
D)large shareholders to nominate board members through the normal proxy process without any legal binding.

Question 27

Based on a historical perspective,we can say that the architecture of publicly traded corporations:

A)will continue operating in their current state and become stagnant.
B)will become highly vulnerable to fraud and scandals.
C)will soon become too powerful and unmanageable.
D)will continue to evolve and change over time.

Question 28

Adolph Berle and Gardiner Means argued that widely held corporations will be run inefficiently by professional managers.Their argument is based on:

A)inefficient product market structures.
B)an inefficient market for CEOs.
C)blockholders' control.
D)incentive conflicts between shareholders and managers.

Question 29

Which of these is true of shareholders?

A)They are the ultimate owners and have major decision authority in the management of the firm.
B)They are not the ultimate owners,yet have major decision authority in the management of the firm.
C)They are not the ultimate owners and have no decision authority in the management of the firm.
D)They are the ultimate owners but have no major decision authority in the management of the firm.

Question 30

Which of these is an external control mechanism faced by corporate boards and executives?

A)The market for lemons
B)The managerial labor market
C)The foreign exchange market
D)The stock market

Question 31

Shareholder voting rights should:

A)not be granted to management because of the agency problem.
B)be assigned only to small shareholders.
C)not be assigned to a founder who values control.
D)be assigned to those with residual-claim rights.

Question 32

Advancement opportunities for high level executives through tournament-type processes ("horse races"):

A)motivate greater executive effort.
B)encourage cooperation among executives.
C)provide benefits that outweigh their incentive costs.
D)thwart innovative activities.

Question 33

In the United States,incorporation occurs:

A)initially at the state level and then at the federal level,subject to state approval.
B)initially at the federal level and then at the state level,subject to federal approval.
C)at the federal level only.
D)at the state level only.

Question 34

Which of these is true of blockholders?

A)They participate more than small shareholders in the governance process because they internalize more of the benefits.
B)They add value to the corporation when they extract private benefits.
C)They are superior to institutional investors in their ability to reduce agency costs.
D)They should not be managers of the firm.