Deck 25: Corporate Governance

Question 1

Corporate governance is the system of controls designed to minimize conflicts between bondholders and shareholders.

Answer 1

False

Question 2

What is the difference among inside,grey,and outside directors?

Answer 2

Inside directors are employees,former employees,or family members of employees.Grey directors are people who are not as directly connected to the firm as insiders are,but who have existing or potential business relationships with the firm.For example,bankers,lawyers,and consultants who are already retained by the firm,or who would be interested in being retained,may sit on a board.Thus their judgment could be compromised by their desire to keep the CEO happy.Finally,all other directors are considered outside (or independent)directors and are the most likely to make decisions solely in the interests of the shareholders.

Question 3

How do securities analysts provide outside monitoring of a corporation?

Answer 3

Since analysts collect extensive information and become experts in the firm,they are in a position to uncover irregularities.They are also able to ask questions of CEOs and CFOs during earnings releases.

Question 4

According to the findings of researchers in the field,which of the following is most likely to be an effective board of directors?

A)a small board with a large proportion of directors who are not employed by the company or other companies with which it does business
B)a small board with a large proportion of directors who are employed by the company or another company that has a business relationship with the company
C)a large board on which most directors have served a long time
D)a large board on which most directors are employees
E)a small board with a small proportion of outside directors

Question 5

Directors who are employees,former employees,or family members of employees are called:

A)managing directors.
B)independent directors.
C)inside directors.
D)grey directors.
E)unelected directors.

Question 6

What is corporate governance?

Question 7

Why is monitoring the firm's managers more closely an imperfect solution to the conflict of interest problem?

Question 8

Directors who are NOT as directly connected to the firm but who have existing or potential business relationships with the firm are called:

A)grey directors.
B)independent directors.
C)advising directors.
D)inside directors.
E)unelected directors.

Question 9

Tammy is a member of the Board of Directors of Moon Corporation.Her husband is the manager of a large division.What type of director is Tammy?

A)inside director
B)outside director
C)grey director
D)resident director
E)unelected director

Question 10

Which monitors of a firm,other than the board of directors,become experts in the firm and are in a position to detect irregularities first?

A)securities analysts
B)lenders
C)employees
D)regulators
E)shareholders

Question 11

Which monitors of a firm,other than the board of directors,are most likely to detect outright fraud?

A)securities analysts
B)lenders
C)employees
D)regulators
E)shareholders

Question 12

What is the drawback of having more independent directors on the board?

Question 13

Which of the following is an example of an agency problem?

A)managers not working as diligently if they are not the sole owner of the business
B)the board of directors firing an incompetent manager
C)the manager owning a great deal of stock in the company
D)a corporate raider attempting to purchase the company
E)managers using cash to increase dividends

Question 14

When the ownership of a corporation is widely held,no one shareholder has the incentive to bear the cost of monitoring the firm's managers.

Question 15

What is a captured board?

Question 16

The least costly solution to the conflict of interest problem is simply to monitor the firm's managers closely.

Question 17

In the absence of monitoring,conflict of interest between managers and owners can be mitigated by closely aligning their interests through the managers' compensation policy.

Question 18

What is the cost of aligning managers' interests with those of shareholders?

Question 19

Directors who are NOT employees,former employees,or family members of employees and who do not have existing or potential business relationships with the firm are called:

A)monitoring directors.
B)independent directors.
C)grey directors.
D)inside directors.
E)unelected directors.

Question 20

When a board's monitoring duties have been compromised by connections or perceived loyalties to management,it is said to be:

A)a dysfunctional board.
B)an institutional board.
C)a failed board.
D)a divided board.
E)a captured board.

Question 21

What is backdating?

Question 22

What is the role of takeovers in corporate governance?

Question 23

The optimal level of sensitivity of a manager's compensation to the firm's performance depends on the manager's level of risk aversion.

Question 24

Insider trading happens when an employee of the firm trades,buys,or sells the firm's stock based on public information.

Question 25

Examples of cross-holdings include: I.Japanese keiretsu

A)I,II,and IV
B)I,II,and III
C)I and IV
D)I,II,III,and IV
E)II and III

Question 26

What are the main provisions of the DODD Frank Act?

Question 27

One of the most critical inputs to the monitoring process is accurate information.

Question 28

The most extreme form of direct action that shareholders can take is:

A)a resolution.
B)to privately approach the board.
C)a "no" vote.
D)a proxy contest.
E)a "say-on-pay" vote.

Question 29

Why is insider trading problematic?

A)If insiders trade on their information,they cause unnecessary share price fluctuations that drive away outside investors.
B)If insiders trade on their information,the firm is automatically fined and there will be a net loss in firm value.
C)If insiders trade on their information,outside investors will benefit from the increase in the share price and thus there is a free rider problem.
D)If insiders trade on their information,it increases the conflicts between shareholders and managers.
E)If insiders trade on their information,their profits come at the expense of outside investors,making outside investors less willing to invest in corporations.

Question 30

What is a proxy contest?

Question 31

The relationship between managerial ownership and firm value is unlikely to be the same for every firm,or even for different executives of the same firm.

Question 32

How does shareholder voice serve to discipline poorly performing managers?

Question 33

Describe the main requirements of the Sarbanes-Oxley Act of 2002.

Question 34

Use the table for the question(s)below.
The following are the week-ending stock prices that occurred during the quarter:

Billy,the CEO of Movin On Up Company,was granted stock options with an exercise price of $55.00 per share.Refer to the week-ending stock prices that occurred during the quarter.If Movin On Up engaged in the practice of backdating,which of the following is the most likely exercise price for Billy's options?

A)$65.52
B)$67.50
C)$65.00
D)$56.82
E)$57.23

Question 35

Which of the following countries has employees appoint some board members?

A)Canada
B)the United States
C)Turkey
D)Germany
E)Australia

Question 36

________ is a person making a trade based on privileged information.

A)Rogue trading
B)Illegal trading
C)Standard trading
D)Insider trading
E)Exchange trading

Question 37

Academic studies have shown that greater managerial ownership is associated with greater value-reducing actions by managers.

Question 38

Use the table for the question(s)below.
The following are the week-ending stock prices that occurred during the quarter:

Billy,the CEO of Movin On Up Company,was granted stock options with an exercise price of $62.04 per share.Refer to the week-ending stock prices that occurred during the quarter.What is the most likely date on which the stock options were awarded?

A)13-Sep-15
B)11-Oct-15
C)13-Dec-15
D)25-Oct-15
E)7-Sep-15

Question 39

What are some of the negative effects of increasing the sensitivity of managerial pay to firm performance?

Question 40

Activist investors can only achieve their goals by putting their issues to a shareholder vote.

Question 41

Explain what it means for a firm to have dual class shares.

Question 42

The conflict of interest that arises when a shareholder who has a controlling interest in multiple firms moves profits away from companies in which he has relatively less cash flow rights toward firms in which he has relatively more cash flow rights is called:

A)expropriation.
B)earnings management.
C)tunnelling.
D)profit mining.
E)cash extraction.

Question 43

The Smith family has a 62% stake in A company and A company has a 34% stake in B company.Finally,B company has a 29% stake in C company.What percentage ownership does the Smith family have in C company?

A)21%
B)18%
C)10%
D)29%
E)6%

Question 44

Describe the "stakeholder" model of corporate governance.

Question 45

The Smith family has a 55% stake in A company and A company has a 64% stake in B company.Finally,B company has a 51% stake in C company.What percentage ownership does the Smith family have in C company?

A)33%
B)28%
C)55%
D)51%
E)18%

Question 46

One way for families to gain control over firms,even when they do not own more than half the shares,is to issue:

A)dual class shares.
B)more debt.
C)more equity.
D)restricted shares.
E)commercial paper.

Question 47

Which of the following best describes a pyramid structure?

A)an investor owns less than 50% of a company,and this company owns less than 50% of another company
B)an investor owns more than 50% of a company,and this company owns less than 50% of another company
C)an investor owns more than 50% of a company,and this company owns more than 50% of another company
D)an investor owns less than 50% of a company,and this company owns more than 50% of another company
E)an investor owns less than 50% of a company,and this company owns 100% of another company

Question 48

How does a pyramid structure work?

Question 49

Having a founder and top executive also be a major shareholder:

A)always results in agency conflicts that are bad for minority shareholders.
B)can sometimes,as in the case of Google,have benefits that outweigh the costs.
C)is illegal in Canada and most other industrialized countries.
D)is never beneficial to employees.
E)inevitably leads to insider trading.

Question 50

The Smith family has a 45% stake in A company and A company has a 75% stake in B company.Finally,B company has a 35% stake in C company.What percentage ownership does the Smith family have in C company?

A)21%
B)12%
C)34%
D)26%
E)16%

Question 51

What is tunnelling?

Question 52

In many countries outside the United States,the central conflict is not between managers and shareholders,but instead between ________ and ________.

A)managers,regulators
B)the board of directors,shareholders
C)controlling shareholders,minority shareholders
D)insiders,outsiders
E)managers,the board of directors

Question 53

The costs and benefits of a corporate governance structure:

A)are the same in all countries.
B)are the same for all companies within a country.
C)depend on cultural norms.
D)are not important in maximizing shareholder wealth.
E)are easily quantified.