Deck 13: Corporate Governance in the Twenty-First Century

Question 1

Given a lack of traditional indicators of quality, analysts will turn to secondary information sources as the indicators of the underlying quality of risky firms.

Answer 1

True

Question 2

In most situations, the interests of principals and agents naturally overlap completely.

Answer 2

False

Question 3

When managers are owners of the firm, the risk that they will deviate from the organization's stated purpose increases.

Answer 3

False

Question 4

All companies have a corporate governance system.

Question 5

The separation of ownership from managerial control of a firm is known as the agency problem.

Question 6

Poor governance structure frequently provides warning signs prior to organizational scandals.

Question 7

When a company raises capital through an IPO, it generally exchanges only a small portion of the firm's stock for financial capital.

Question 8

A new stock exchange designed to be a separate market for small and midsize companies that follows strict governance prescriptions was launched in Italy.

Question 9

The interests of principals and agents generally overlap completely.

Question 10

Shareholders have very little direct control over what happens with a firm.

Question 11

Some things that would be in shareholders' best interests may be detrimental to the best interests of executives, and vice versa.

Question 12

Sometimes corporate governance characteristics are stronger predictors of firm valuation than such things as sales or profits.

Question 13

Market valuations of traditional firms are always linked to the firms' corporate governance characteristics.

Question 14

Two countries with a strong orientation toward shareholders' rights are the United States and the United Kingdom of Great Britain.

Question 15

Effective governance will always prevent executive fraud.

Question 16

A key strategy for shareholders is to align the interests of executives with their own, or closely monitor and control what executives do.

Question 17

Research suggests that even good governance has a minimal impact on firm performance.

Question 18

The market will frequently place higher valuations on risky firms with poor governance characteristics.

Question 19

Corporate governance has little impact on a firm's ability to create a competitive advantage.

Question 20

The company that is credited with making the word's first handheld scientific calculator is Texas Instruments.

Question 21

The Public Company Accounting Oversight Board sets standards and rules for audit reports.

Question 22

Some codes of conduct require managers to either comply with the standards or explain why they have not complied.

Question 23

The United Kingdom Commission was formed to clarify the respective responsibilities and obligations of relevant entities connected to a firm.

Question 24

A private firm is one in which the owner(s) has not listed shares of the firm on a public exchange.

Question 25

When the interests of principals and agents are in alignment, the agency problem is small.

Question 26

Most institutional investors are active and aggressive investors.

Question 27

The presence of a powerful owner removes all forms of agency problems.

Question 28

The Cadbury Code of Best Practice was a report issued with suggestions for corporate governance reform among United Kingdom companies.

Question 29

The Cadbury Code is a model of governance developed specifically for the candy-making industry.

Question 30

Managers of public pension funds seem to prefer to invest in firms that attempt to acquire innovations through acquisitions.

Question 31

Blockholders are considered powerful because they control 10 percent or more of a firm's shares.

Question 32

The burden placed on firms by their nation's codes of best practice varies across the globe.

Question 33

Codes of governance are ideal governance standards that all firms should follow.

Question 34

The Cadbury Commission was established to help raise corporate governance standards and increase the level of confidence in financial reporting and auditing.

Question 35

Even when ownership is dispersed, some shareholders still are in a position to influence corporate policies.

Question 36

There is little overlap in different world codes of governance.

Question 37

In the U.S., not all accounting firms that audit public companies have to register with the Public Company Accounting Oversight Board.

Question 38

Managers must understand who owns the company and what their interests are.

Question 39

The Cadbury Code resulted in the creation of the Public Company Accounting Oversight Board.

Question 40

The definition of public firm versus private firm is consistent across all parts of the world.

Question 41

Outsiders are more likely to deploy strategies that lead their firms to underperform their competitors.

Question 42

Board interlock occurs when a director sits on multiple boards.

Question 43

Simply adding more board members is an excellent way to improve CEO and board member interaction.

Question 44

CEO-board interactions are maximized when the selection of outside board members matches the competitive environment facing the firm.

Question 45

The general responsibility of the board of directors is to ensure that executives are acting in their own best interests.

Question 46

Executives of the firm who also serve on the board are often referred to as "insiders."

Question 47

When the roles of CEO and board chair are split, it is critical that the board chair take on some operational roles.

Question 48

Increasing the number of insiders on the board can increase the board's effectiveness.

Question 49

In the majority of U.S. public firms, the CEO also serves as the chair of the board of directors.

Question 50

Directors may be more effective as monitors if they are linked to certain firms given the environmental turbulence facing the focal firms.

Question 51

Firms in which CEOs collaborate with board members on an informal basis perform worse than those where the relationships remain more formalized.

Question 52

Research suggests that social ties between CEOs and board members lessen the risks for shareholders.

Question 53

The chief monitoring device available to shareholders is the federal government.

Question 54

Outsiders bring a fresh strategic perspective.

Question 55

When a CEO is fired for performance reasons, it is more likely that the board will recruit an insider as a replacement.

Question 56

Outsiders are typically more independent but may lack critical knowledge.

Question 57

Most institutional investors prefer a large majority of insiders on the board.

Question 58

Effective boards have well-prepared CEO succession plans in place.

Question 59

Social ties between CEOs and board members increase board involvement.

Question 60

One of the key roles of the board of directors is to replace management when necessary.

Question 61

Executives with large proportions of their pay packages derived from stock options tend to be extremely risk averse.

Question 62

There is a perception that annual bonuses are the best forms of governance.

Question 63

Implementing a stock ownership plan can be accomplished in a relatively short period of time.

Question 64

When bonuses are tied to accounting indicators of performance, executives may be motivated to alter year-end income deferrals.

Question 65

CEO compensation is dependent on the compensation of other managers and salaried workers.

Question 66

Incentives may exacerbate conflicts of interest.

Question 67

If companies use the retention form of stock ownership, they are concerned with keeping track of the total stock option granted.

Question 68

Firms establish stock ownership policies in an attempt to ensure that executives act in the best interests of the shareholders.

Question 69

Bonus plans allocate a year-end cash award based on an executive's performance on multiple dimensions.

Question 70

Firms that have large gaps in pay across top managerial staff suffer negative effects.

Question 71

The key to using incentives is to use the metrics identified with the balanced scorecard and link pay to these outcomes.

Question 72

Executive compensation may be structured to overcome all possible conflicts of interest.

Question 73

Incentive alignment may be used to solve the principal problem.

Question 74

The most direct way to align incentives is the use of the annual bonus plan.

Question 75

Incentives tied to current stock prices increase the likelihood that executives will make necessary capital investments.

Question 76

More firms are beginning to require that their board members also own stock.

Question 77

Common board ties can influence the choice of CEO.

Question 78

With stock ownership, executives are risking their own human capital.

Question 79

Firms run by executives with high levels of stock ownership are much less likely to pursue acquisitions and divestitures.

Question 80

When executives own stock in their own firms, they face the problem of being able to balance their risk exposure.