Deck 4: Corporate Governance: Foundational Issues.

Question 1

Shareholders' control is manifested primarily in the right to select the CEO of the company.

Answer 1

False

Question 2

Because of its theoretical role of authority over the CEO, it has always been the board's responsibility to get tough with the senior manager when needed.

Answer 2

True

Question 3

Research has shown that golden parachutes have had no effect on senior managers' resistance to takeover attempts.

Answer 3

True

Question 4

There is some early evidence that the Sarbanes-Oxley Act has made little difference in the attention financial executives pay to shareholder reports.

Question 5

The Say on Pay movement evolved from concerns over low executive compensation.

Question 6

The major condition of modern corporations that contributes to the corporate governance problem is the separation of ownership from control.

Question 7

Most shareholder resolutions concern some aspect of executive compensation.

Question 8

Wages have grown faster than CEO salaries over the past decade.

Question 9

Managers have successfully lobbied Congress to make shareholder lawsuits very difficult to file.

Question 10

Business, by virtue of its place in society, has an inherent right to exist.

Question 11

Some analysts believe that business's social legitimacy is fragile.

Question 12

Practically speaking the corporate CEO often does the work the nominating committee should do.

Question 13

The purpose of corporate governance is a direct outgrowth of the question of legitimacy.

Question 14

Audit committees arguably have the most responsibility of all board committees.

Question 15

During the past forty years, corporate boards have become more diverse.

Question 16

Although initially, companies did not object to the compliance costs of Sarbanes-Oxley, after 10 years experience with the law, they now object strenuously

Question 17

The issue at the heart of the Sarbanes-Oxley Act is protection for whistle-blowers.

Question 18

The corporate system as a whole rarely addresses the idea of social legitimacy.

Question 19

Much of the blame for corporate scandals like Enron and WorldCom can be placed on the audit committees of the boards of directors.

Question 20

Penalties under the Sarbanes-Oxley Act can include fines and prison terms.

Question 21

Directors who have no ties to the firm other than membership on the board are called

A) dependent directors.
B) free agent directors.
C) inside directors.
D) outside directors.

Question 22

The macro level of legitimacy refers to the achievement and maintenance of legitimacy by

A) government.
B) private/public partnerships.
C) business as a whole.
D) individual businesses.

Question 23

The micro level of legitimacy refers to achieving and maintaining legitimacy by conforming to societal expectations for

A) the business system as a whole.
B) public policy partnerships.
C) non-government organizations.
D) individual businesses.

Question 24

Boards have recently improved in all of the following ways except

A) more directors are independent.
B) reducing executive pay.
C) more directors own stock in the company.
D) more boards are likely to demand change.

Question 25

Executive Excess reports that in 2014 the ratio of CEO pay to average workers' pay was:

A) 531 to 1.
B) 216 to 1.
C) 1,063 to 1.
D) 18 to 1.

Question 26

Directors who have some sort of ties to the firm are termed

A) dependent directors.
B) independent directors.
C) inside directors.
D) outside directors.

Question 27

In the grand scheme of things, the interests of the investing public are more important than those of the management team.

Question 28

The dynamic process by which business seeks to perpetuate its acceptance is called

A) advertising.
B) marketing.
C) legitimation.
D) embedding.

Question 29

When the interests of management and owners are not aligned, there will likely be a(n)

A) agency problem.
B) free agency dilemma.
C) shareholder rebellion.
D) shareholder resolution.

Question 30

The state-issued document that grants the corporation's right to exist and stipulating the basic terms of its existence is a(n)

A) certificate of legitimacy.
B) occupancy permit.
C) charter.
D) article of incorporation.

Question 31

Congruence between the organization's activities and society's expectations is called

A) alignment.
B) legitimacy.
C) social norms.
D) acceptability.

Question 32

Shareholders are

A) owners of the corporation.
B) creditors of the corporation.
C) anyone who is affected by the corporation.
D) also employees of the corporation.

Question 33

The people hired by the board to run the company and operate it on a daily basis is

A) the employee council.
B) management.
C) administration.
D) headquarters.

Question 34

Employees are the people hired by the company to

A) oversee management.
B) work with the board to keep management in line.
C) do the actual work of operating the company.
D) set the course for the company to follow.

Question 35

Compensation recovery mechanisms that enable a company to recoup compensation funds is called ____.

A) proxy process.
B) risk arbitrage.
C) golden parachutes.
D) clawback provisions.

Question 36

Which of the following is not a method of obtaining the micro level of legitimacy?

A) A company adapts its operations to conform to prevailing standards.
B) A company may seek to avoid detection that it is operating contrary to social norms.
C) A company may attempt to changes the public's values and norms.
D) A company may identify itself with other organization, people, or values.

Question 37

The Say on Pay movement:

A) First began with regulations including a requirement to put a remuneration report to a shareholder vote
B) Began in the United States
C) Evolved from concerns over low executive compensation
D) Is supported by the SEC

Question 38

The method by which shareholders elect boards of directors is known as

A) distributive voting.
B) cumulative voting.
C) the proxy process.
D) direct balloting.

Question 39

The method by which a firm is being governed, directed, administered, or controlled is

A) corporate governance.
B) management.
C) management by objectives.
D) management by decree.

Question 40

The group that is elected by shareholders to govern and oversee management is the

A) investment council.
B) board of directors.
C) board of trustees.
D) governing council.

Question 41

The primary purpose of the Sarbanes-Oxley Act is to

A) provide rules regulating the relationship between CEOs and boards.
B) limit the power of corporate boards.
C) restrict the flow of corporate money into politics.
D) provide better protection for investors in public companies by improving the financial reporting of those companies.

Question 42

Companies that elected to provide meaningful information to shareholders and securities professionals without also informing small investors were practicing

A) insider trading.
B) programmed trading.
C) selective disclosure.
D) stair-stepping.

Question 43

A shareholder rights plan aimed at discouraging or preventing a hostile takeover is known as

A) a poison pill.
B) golden handcuffs.
C) a golden parachute.
D) insider trading.

Question 44

A new trend in board recruiting focuses more on

A) networking skills.
B) experience than title.
C) business school professors.
D) foreign investors.

Question 45

Which of the following is not on the ranking of red flags that signal board problems?

A) Company has to restate earnings
B) Poor employee morale
C) Poor customer satisfaction track record
D) Stock price increases

Question 46

A major criticism of CEOs and boards during the 1980s, when corporate takeovers were regular occurrences, was

A) not trying to get the best price they could for shareholders.
B) focusing on "making deals" instead of running the business.
C) trying to run up the price of their company's stock in preparation for the sale.
D) being obsessed with self-preservation instead of making optimal decisions on behalf of shareholders.

Question 47

The board committee that is responsible for responding to social issues is the

A) ethics committee.
B) public policy committee.
C) community interface committee.
D) rapid response committee.

Question 48

Boards are now being tougher on CEOs for all of the following reasons except

A) increasing diversity on boards.
B) competitive economic conditions.
C) rising vigilance of outside directors.
D) increasing power of large institutional investors.

Question 49

Shareholder activism

A) was started by the counter culture during the 1960s.
B) has been around for more than sixty years.
C) is lead by the Roman Catholic church.
D) relies on large institutional investors to introduce most of the shareholder resolutions.

Question 50

The Securities and Exchange Commission's Regulation FD is designed to

A) streamline the trading process.
B) change stock trading prices to the decimal system.
C) allow small investors to benefit from insider trading.
D) limit the common practice of selective disclosure.

Question 51

The board's compensation committee has responsibility for

A) setting directors' pay scales.
B) making sure that all employees are paid a fair wage.
C) evaluating executive performance and recommending terms and conditions of employment.
D) determining what bonuses should be paid and to whom.

Question 52

A contract in which a corporation agrees to make payments to key officers in the event of a change in the control of the corporation is called

A) a golden parachute.
B) golden handcuffs.
C) greenmail.
D) the silver rule.

Question 53

The board committee that has the primary responsibility of ensuring that competent, objective directors are selected is the

A) qualifications committee.
B) personnel standards committee.
C) compensation committee.
D) nominating committee.

Question 54

The board committee responsible for assessing the adequacy of internal control systems and the integrity of financial statements is the

A) finance committee.
B) monetary policy committee.
C) arbitrage committee.
D) audit committee.

Question 55

Personal liability for a corporate board member means that

A) directors have a legal obligation to pay all debts of the corporation.
B) directors have a legal obligation to pay all debts of the corporation if the company cannot.
C) directors may be sued for breach of fiduciary duty.
D) directors have a personal responsibility to the shareholders.

Question 56

The principal responsibilities of the audit committee are to

A) interview auditing firms to do the company audit.
B) negotiate with the Internal Revenue Service in the event of a tax audit.
C) ensure that published financial statements are not misleading.
D) hire the Chief Financial Officer (CFO) and monitor that person's work.

Question 57

Which of the following is a step to board repair?

A) Seeking outside help in identifying potential risks
B) Increasing executive compensation
C) Using dependent compensation consultants
D) Reducing involvement in corporate strategy

Question 58

The practice of obtaining critical information from within a company and then using that information for one's own financial gain is

A) arbitrage.
B) programmed trading.
C) insider trading.
D) hedging.

Question 59

Sarbanes-Oxley attempts to ensure auditor independence is by

A) limiting the nonauditing services an auditor can provide.
B) requiring auditing firms to rotate the auditors who work with a specific client.
C) making it unlawful for accounting firms to provide auditing services where conflicts of interest exist.
D) all of these.

Question 60

Which of the following is not an argument against the use of golden parachutes?

A) The covered executives are already being well paid for their work.
B) The covered executives are given an incentive to run the company poorly.
C) The covered executives are being rewarded for failure.
D) The covered executives are giving themselves the golden parachutes.

Question 61

Utilize the knowledge you have gained to respond to the following essay questions. Your answers should state your position and use logical arguments and content from this and other chapters in the textbook to support it.
Church groups are key members in the shareholder activist movement. One way that they gain access to corporate executives is by purchasing a small amount of stock and holding it a certain length of time (state laws usually dictate how much they need to buy and how long they need to hold it), which then allows them to introduce shareholder resolutions at stockholder meetings. Should small investors be able to wield influence like this, which arguably goes beyond their financial stake in the firm?

Question 62

Provide a short answer to each of these questions. Be sure to fully explain your answer.
Describe how the separation of ownership and control came about.

Question 63

Provide a short answer to each of these questions. Be sure to fully explain your answer.
Why is insider trading illegal and considered unethical? Isn't that exactly what financial markets are supposed to do--reward those who make good decisions?

Question 64

Utilize the knowledge you have gained to respond to the following essay questions. Your answers should state your position and use logical arguments and content from this and other chapters in the textbook to support it.
Discuss the role of shareholder democracy in corporate governance.

Question 65

Provide a short answer to each of these questions. Be sure to fully explain your answer.
Why are church groups particularly visible in the shareholder activist movement?

Question 66

The fact that company information should be made at regular and frequent intervals and should contain information that might affect the investment decisions of shareholders is contained in the concept of

A) full disclosure.
B) transparency.
C) open door reporting.
D) both full disclosure and transparency.

Question 67

Utilize the knowledge you have gained to respond to the following essay questions. Your answers should state your position and use logical arguments and content from this and other chapters in the textbook to support it.
Should directors be held personally liable in cases of corporate misconduct?

Question 68

Provide a short answer to each of these questions. Be sure to fully explain your answer.
Why is the generous nature of CEO retirement packages particularly frustrating to the public?

Question 69

Provide a short answer to each of these questions. Be sure to fully explain your answer.
List the reasons that good candidates for corporate board positions are hard to find.

Question 70

Provide a short answer to each of these questions. Be sure to fully explain your answer.
What is the difference between an owner and an investor?

Question 71

Utilize the knowledge you have gained to respond to the following essay questions. Your answers should state your position and use logical arguments and content from this and other chapters in the textbook to support it.
Forecast how society would change if business did lose its macro level of legitimacy.

Question 72

Provide a short answer to each of these questions. Be sure to fully explain your answer.
What are the two main issues associated with CEO pay?

Question 73

Provide a short answer to each of these questions. Be sure to fully explain your answer.
Why are inside directors seen as problematic in corporate governance?

Question 74

One of the main ways in which shareholder activists communicate their concerns to management is through

A) the Internet.
B) blogging.
C) advertisements in mass media outlets.
D) shareholder resolutions.

Question 75

Provide a short answer to each of these questions. Be sure to fully explain your answer.
What is the primary problem inherent in management control of the firm?

Question 76

Utilize the knowledge you have gained to respond to the following essay questions. Your answers should state your position and use logical arguments and content from this and other chapters in the textbook to support it.
Explain Harry Markopolos' opinion regarding the SEC.

Question 77

Provide a short answer to each of these questions. Be sure to fully explain your answer.
Summarize the responsibilities that corporations should have toward their shareholders.

Question 78

Utilize the knowledge you have gained to respond to the following essay questions. Your answers should state your position and use logical arguments and content from this and other chapters in the textbook to support it.
The textbook mentions that business as a whole rarely, if ever, addresses the issue of legitimacy at the macro level. Imagine that the Chamber of Commerce approaches you to design a campaign to assure its legitimacy with the public. What kinds of issues would you address?