Deck 13: Shareholder Rights and Corporate Governance

Question 1

Shareholders must rely exclusively on the board of directors to protect their interests.

Answer 1

False

Question 2

It is illegal in the United States to offer stock trade tips to clients based on public information.

Answer 2

False

Question 3

Institutional investors are sometimes referred to as:

A) Main Street investors.
B) Wall Street investors.
C) Inside investors.
D) Outside investors.

Answer 3

B

Question 4

Which of the following statements is not true about shareholders?

A) They are the legal owners of business corporations.
B) They own equal shares of company assets.
C) They are investors in the company.
D) Managers pay close attention to their needs and interests.

Question 5

The two main types of investors that own shares of stock in U.S.corporations are individuals and institutions.

Question 6

It is the responsibility of the board of directors and its audit committee to engage an independent accounting firm to audit the financial statements prepared by management.

Question 7

A corporation's shareholders have a right to inspect the company's books for any reason.

Question 8

The activism of institutional shareholders has often worsened company performance.

Question 9

When boards of directors meet without management present,they are more likely to have completely candid discussions about a company's affairs.

Question 10

Which of the following is not true about institutional investors?

A) Institutions invest their funds by purchasing shares of stock in corporations.
B) The proportion of institutional ownership of stock in the U.S. has declined slowly since the 1960s.
C) Pension funds and university endowments are examples of institutional investors.
D) Institutions accounted for 63 percent of the value of all equities owned in the U.S. in 2010.

Question 11

In 2014,of the following nations,the fastest growing stock market was in:

A) United States.
B) Japan.
C) India.
D) Indonesia.

Question 12

The ratio of average executive to average worker pay tends to increase during recessions and fall during periods of economic expansion.

Question 13

Stock options represent the right to buy a company's stock at a set price for a certain period.

Question 14

Institutional investors have little incentive to hold their shares and organize to change management policy.

Question 15

Investors may receive an economic benefit from the ownership of stock by receiving:
A)

A) Interest.
B) Dividends.
C) Capital gains.
D) Both B and C, but not

Question 16

The Organization for Economic Cooperation and Development (OECD),representing 34 nations,issued a revised set of principles of corporate governance to serve as a benchmark for companies and policymakers worldwide.

Question 17

Investors always choose to invest in the stock of companies that pay high dividends.

Question 18

Shareholders have become an increasingly powerful and vocal stakeholder group in corporations.

Question 19

Since the 1960s,growth in the numbers of institutional investors in the United States has been phenomenal.

Question 20

Boards of directors in the United States are required to staff their compensation committees exclusively with outside directors.

Question 21

Which of the following arguments supports the concept of high executive compensation?

A) Inflated executive pay helps U.S. firms compete with foreign rivals.
B) High executive pay drives away talented middle managers who feel unfairly compensated.
C) High salaries provide an incentive for innovation and risk-taking.
D) There is currently a surplus of qualified executive candidates.

Question 22

The "agency problem" arises when:

A) Owners manage the company on their own behalf.
B) There is no separation of ownership and control in a company.
C) Managers act in their own interest, rather than in the interest of shareholders.
D) Shareholders act in their own interest, rather than in the interest of the board.

Question 23

One of the main reasons that American executives are paid so much is:

A) Pay is set by the compensation committees of the board, largely comprised of other CEOs who have an interest in pushing compensation up.
B) Qualified individuals are scarce, because most current CEOs were born during the "baby bust" years of the Great Depression.
C) High executive compensation in other nations puts upward pressure on the salaries of U.S. executives.
D) Most executives are paid based on their performance, and rising compensation reflects the excellent performance of their firms.

Question 24

Which of the following is not a function of board committees?

A) The executive committee works closely with top managers on business matters.
B) The audit committee reviews the company's financial reports.
C) The compensation committee administers and approves salaries and benefits.
D) The finance committee works closely with the human resources department to fund employee salaries.

Question 25

Which of the following is not an example of fulfilling social objectives through stock ownership?

A) Selling stock of companies that did business in South Africa when it had a policy of racial discrimination.
B) Divesting from Chinese companies that made products using forced labor.
C) Selling stock of companies with a below-market rate of return.
D) Not investing in Burmese companies that had been accused of human rights abuses.

Question 26

The audit committee is required by U.S.law to be:

A) Composed entirely of outside directors.
B) Financially literate.
C)
C) Headed by the company's CEO.
D) A and B, but not

Question 27

Corporate governance involves the exercise of control over a company's:

A) Finance and accounting departments.
B) Entire corporate direction.
C) Manufacturing facilities.
D) Marketing and human resources departments.

Question 28

How are directors (members of corporate boards)selected?

A) Shareholders elect the directors from a list of candidates.
B) The company's CEO appoints the directors.
C) The nominating committee elects the directors.
D) Shareholders with the greatest proportional ownership in the company become directors.

Question 29

Which of the following is true about corporate boards?

A) Corporate boards average 12 members.
B) About half of the directors are "outside" directors.
C) Only one-third of all companies have at least one woman on their board.
D) About 13 percent of board members are Latino.

Question 30

Which of the following arguments opposes the idea of high executive pay?

A) High salaries provide an incentive for innovation and risk taking.
B) Not many individuals are capable of running today's large, complex organizations.
C) Top athletes and entertainers make a lot of money, so top executives should, too.
D) High salaries divert resources that could be used to invest in the business.

Question 31

In 2008 and early 2009,share values declined sharply as the global economy fell into a severe recession.This type of stock market is referred to as a:

A) Bull market.
B) Volatile market.
C) Bear market.
D) None of the above.

Question 32

The activism of institutional investors in other countries has been spearheaded by:

A) U.S.-based pension and mutual funds that in recent years acquired large stakes in foreign countries.
B) Foreign institutions that were granted new rights by their governments.
C) Managers who became less active in proxy battles on a global level.
D) The rising number of individual investors in public service companies.

Question 33

Social investors seek to eliminate from their investment portfolios companies that:

A) Pollute the environment.
B) Discriminate against employees.
C) Make dangerous products like tobacco or weapons.
D) All of the above.

Question 34

A reason for institutions becoming more assertive in promoting the interests of their member investors is:

A) It is difficult for institutions to sell their holdings.
B) Institutional investors are rarely able to influence management policy.
C) Institutions have greater flexibility in selling stocks.
D) Institutions have nominated members on the finance committee of the board of directors.

Question 35

The board committee that administers and approves salaries and benefits of high-level managers in a company is called the:

A) Executive committee.
B) Human resources committee.
C) Nominating committee.
D) Compensation committee.

Question 36

In 2015,slightly more than what percent of U.S.boards had separated the positions of CEO and board chairman?

A) 12 percent.
B) 31 percent.
C) 50 percent.
D) 72 percent.

Question 37

Which of the following is a key feature of effective boards of directors?

A) Hold regular meetings without the CEO present.
B) Fill all important positions on the board with managers with insider knowledge of the firm.
C) Combine the duties of the board chairman and the chief executive.
D) Ensure that no outside members are included on the board.

Question 38

Which of the following is not a legal right of shareholders?

A) To vote on members for the board of directors.
B) To vote on major mergers and acquisitions.
C) To vote on changes in the corporate charter and proposals.
D) To vote on who will become chief executive officer (CEO).

Question 39

In 2013,median compensation for directors at the largest U.S.corporations was around:

A) $150,000.
B) $240,000.
C) $550,000.
D) $1,200,000.

Question 40

The directors of a company are a central factor in corporate governance because they:

A) Exercise formal legal authority over company policy.
B) Have the highest stake in the performance of the company.
C) Have a moral responsibility to fulfill the needs of both the company's employees and customers.
D) Inherited the business from their predecessors.

Question 41

Which of the following is not an instance of "insider trading"?

A) An auditor using nonpublic information about the company to invest in its stock.
B) A marketing executive briefing stock analysts on the company's sales performance.
C) The CEO's cousin buying stock after the CEO mentioned a pending offer to buy the company.
D) A stock broker passing an "inside tip" to a client, but not trading for his or her own account.

Question 42

Identify and provide an example for each of the five major legal rights afforded to shareholders.

Question 43

In your opinion,how is the relationship between modern corporations and their shareholders changing? Explain and justify your argument.

Question 44

This law tightened regulation on issuers of complex securities,especially those related to subprime mortgages:

A) Sarbanes-Oxley Act.
B) Dodd-Frank Act.
C) Affordable Care Act.
D) Securities and Exchange Act.

Question 45

The mission of the Securities and Exchange Commission (SEC)is to:

A) Protect shareholders' rights by making sure that stock markets are run fairly.
B) Protect companies from hostile takeovers.
C) Ensure that institutional investors do not take control of company management.
D) Ensure that the federal treasury receives its share of the revenues from stock trading.

Question 46

The Securities and Exchange Commission outlaws:

A) Any manipulative or deceptive device used to trade stocks.
B) Compensating company executives with stock options.
C) Trading in stocks by institutions.
D) Buying stock in a company for which you work.

Question 47

Describe a current trend in corporate governance,providing a real example.

Question 48

What are the key features of effective boards of directors?

Question 49

Why have U.S.institutions become more active as investors? How has this trend spread to other countries?

Question 50

Reports filed with the SEC provide information on a company's:

A) Sales and earnings.
B) Depreciation by line of business.
C) Details of foreign operations.
D) All of the above.

Question 51

Do you think U.S.executives are compensated too highly? Why or why not?

Question 52

What is insider trading? Explain how the courts have defined this practice.