Deck 10: Corporate Governance

Question 1

A top-level manager's reputation is a dependable predictor of future behaviour.

Answer 1

False

Question 2

Generally, the board of directors can be classified as insiders, unrelated insiders, outsiders and unrelated outsiders.

Answer 2

False

Question 3

In diversified firms, agency costs decrease.

Answer 3

False

Question 4

Most hostile takeover attempts result from the target firm's refusal to sell because of its good performance.

Question 5

Because their investment in firms is passive in nature, large-block shareholders are unlikely to represent a powerful governance mechanism.

Question 6

To ensure greater accountability and improved performance, boards have become more inclusive with regard to gender, nationality and professional experience.

Question 7

CEOs having higher pay differentials than other top management team members often perform better, as CEOs are motivated to steer their firm to greater success.

Question 8

Boards with many members from the firm's top management team tend to have weak monitoring and control systems for managerial decisions.

Question 9

In order for the boards to function objectively, some believe that it is most effective for boards not to participate in setting the boundaries for their firms' business ethical behaviours.

Question 10

To ensure greater accountability and improved performance, boards have established and consistently use informal processes to evaluate their performance.

Question 11

The primary role of the board of directors is to monitor and control top-level executives to protect owners' interests.

Question 12

As a governance mechanism, the market for corporate control is ineffective when internal controls fail.

Question 13

Because top management decisions are usually complex and non-routine, determining executive compensation is complicated.

Question 14

Corporate governance is the set of mechanisms used to manage the relationship among stakeholders, which in turn determines and controls an organisation's direction and performance.

Question 15

A severance package (golden parachute) may encourage a CEO doing a poor job to depart.

Question 16

Managerial opportunism is the where the individual acts without self-interest, putting the needs of the company and shareholders before his own.

Question 17

Executive compensation, ownership concentration and the matrix organisational structure are all examples of internal governance mechanisms.

Question 18

Corporate governance involves oversight in areas where owners, managers and members of boards of directors may have conflicts of interest.

Question 19

Large-block shareholders typically own at least 10 per cent of a corporation's issued shares.

Question 20

An agency relationship exists where at least one person delegates decision-making responsibility to a second party for compensation.

Question 21

As more shareholders own fewer shares of stock, their incentives to monitor managerial decisions:

A)decrease
B)increase
C)are not relevant
D)remain constant

Question 22

An agency relationship exists when one party delegates:

A)decision-making responsibility to a second party
B)financial responsibility to employees
C)strategy implementation actions to functional managers
D)ownership of a company to a second party

Question 23

The primary reason for the large compensation packages of CEOs is that:

A)they include incentives for specific performance outcomes
B)executives are paid bonuses for exemplary firm performance
C)diversification activity increases the size of the firm
D)stock and stock options are included in the total compensation

Question 24

Managerial employment risk is reduced by:

A)decreased managerial responsibility
B)increased diversification
C)effective governance mechanisms
D)increased shareholder participation in decision making

Question 25

________ will produce the highest returns for a firm's owners.

A)The separation of ownership and managerial discretion
B)Appropriate executive compensation and proper human resource policies
C)Managerial control, the separation of ownership and specialisation
D)Risk bearing and balanced risk taking

Question 26

Product diversification can result in what two benefits to managers that shareholders do not enjoy?

A)Increased compensation and larger severance packages
B)Larger severance packages and greater managerial control
C)Greater managerial control and reduced employment risk
D)Reduced employment risk and increased compensation

Question 27

Without complete information about the reasons and expected outcomes of strategic initiatives, an outsider-dominated board of directors may emphasise:

A)financial evaluations
B)strategic objectives
C)increased diversification
D)long-term goals

Question 28

The separation between a firm's owners and managers creates a(n) ________ relationship.

A)agency
B)governance
C)control
D)dominant

Question 29

Generally, a board member who has some information about a firm's day-to-day activities is classified as a(n):

A)related outsider
B)related insider
C)outsider
D)insider

Question 30

The primary objective of corporate governance is to:

A)determine and control the direction, but not the performance, of an organisation
B)ensure that the interests of top-level managers are aligned with the interests of shareholders
C)lobby legislators to pass laws that are aligned with the organisation's interests
D)resolve conflicts among corporate employees

Question 31

Opportunism is both:

A)a threat and an opportunity
B)a lifestyle and a selfish undertaking
C)an attitude and a set of behaviours
D)a benefit and a personal risk

Question 32

Which one of the following is not a reason why executive compensation is a complicated governance mechanism?

A)A number of other factors affect a firm's performance besides top-level managerial decisions and behaviour.Unpredictable economic, social or legal changes make it difficult to discern the effects of strategic decisions.
B)The strategic decisions made by top-level managers are typically complex and non-routine, so direct supervision of executives is inappropriate for judging the quality of their decisions.
C)An executive's decision often affects a firm's financial outcomes over an extended period, making it difficult to assess the effect of current decisions on the corporation's performance.
D)The market for quality top executives is strong and sometimes firms have to go out of their way to retain talented top executives.

Question 33

Corporate governance involves oversight in areas where ________ may have conflicts of interest.

A)managers, customers and suppliers
B)board members, employees and managers
C)owners, managers and board members
D)managers, employees and customers

Question 34

________ are the three internal governance mechanisms.

A)Board of director diversity, executive compensation and market for corporate control
B)Executive compensation, ownership concentration and managerial monitoring
C)Human resource policies, ownership structure and the board of directors
D)The board of directors, executive compensation and ownership concentration

Question 35

Ownership concentration is associated with:

A)greater experience in a wider range of industries
B)the opportunity for higher managerial compensation through firm growth
C)lower levels of firm product diversification
D)higher levels of firm product diversification

Question 36

Usually, large-block shareholders are considered to be those shareholders with at least ________ of the firm's stock.

A)3 per cent
B)5 per cent
C)7 per cent
D)10 per cent

Question 37

Corporate governance involves:

A)electing directors, supervising CEO and director pay, and overseeing organisational structure and strategic direction
B)supervising CEO and director pay and managing relationships with customers, suppliers and the government
C)electing directors and supervising organisational compensation structure and human resource policies
D)supervising organisational compensation structure, organisational information and accounting systems as well as managing relationships with the government

Question 38

Which one of the following is not a change increasingly implemented in order to increase accountability and improve performance of boards of directors?

A)Increased diversity of the backgrounds of board members
B)The establishment and consistent use of formal processes to evaluate the board's performance
C)Modification of the compensation of executives, especially reducing or eliminating stock options as a part of the package
D)The creation of a lead director role that has strong powers with regard to the board agenda and oversight of non-management board member activities

Question 39

The interests of multinational corporations' stockholders may be best served when there is:

A)a common compensation plan for all corporate executives
B)only a long-term compensation plan in place for executives
C)both financial and strategic incentives for corporate executive compensation
D)an array of unique compensation plans for corporate executives

Question 40

Institutional owners are:

A)shareholders in the large institutional firms listed on the New York Stock Exchange
B)shareholders in industrial firms
C)large-block shareholders such as mutual funds and pension funds
D)all commercial shareholders

Question 41

List the managerial defence tactics, and briefly explain each of them.

Question 42

When does product diversification become an agency problem?

Question 43

Discuss the effect of the separation of ownership and control in the modern corporation.

Question 44

Define corporate governance.Why is corporate governance needed in modern organisations?

Question 45

________ refers to preferred stock in a merged firm offered to shareholders at a highly attractive rate of exchange.

A)Greenmail
B)A standstill agreement
C)A poison pill
D)A golden parachute

Question 46

Define the three internal corporate governance mechanisms and how they may be used to control and monitor managerial decisions.

Question 47

The market for corporate control serves as a means of governance when:

A)the value of the firm is too significant
B)internal controls have failed
C)the corporation has greatly exceeded performance expectations
D)the top management team's interests and the owners' interests are aligned

Question 48

Ethically responsible companies design governance mechanisms that:

A)maximise shareholder wealth
B)serve all stakeholders' interests
C)enhance job creation
D)provide direct benefits to society

Question 49

Discuss the difficulties in establishing performance-based compensation plans.

Question 50

How can the effectiveness of the board of directors be enhanced? List at least three measures that can be taken.

Question 51

Stock option repricing often involves:

A)ineffective governance but not market sentiments
B)ineffective governance but not policies
C)market sentiments but not ineffective governance
D)politics but not ineffective governance

Question 52

When the market for corporate control is instituted, the target firm's management is typically:

A)replaced
B)promoted to new positions in the firm
C)allowed to stay in the same positions
D)unaffected in any significant manner

Question 53

Research suggests that over time, firm size has accounted for more than ________ of the variance in total CEO pay, while firm performance has accounted for less than ________ of the variance.

A)50 per cent; 5 per cent
B)46 per cent; 7 per cent
C)42 per cent; 10 per cent
D)40 per cent; 12 per cent

Question 54

What is an agency relationship? What is the potential problem with an agency relationship?

Question 55

Describe the market for corporate control and its implications for organisations.