Deck 29: Corporate Governance

Question 1

Which of the following statements is false?

A) The substantial use of stock and option grants in the 1990s greatly increased managers' pay-for-performance sensitivity.
B) The optimal level of sensitivity of managers' compensation to the performance of their firms depends on the managers' level of risk aversion, which is hard to measure.
C) While decreasing managers' risk exposure, increasing the sensitivity of managerial pay and wealth to firm performance does have some negative effects.
D) In the absence of monitoring, the other way the conflict of interest between managers and owners can be mitigated is by closely aligning their interests through the managers' compensation policy.

Answer 1

While decreasing managers' risk exposure, increasing the sensitivity of managerial pay and wealth to firm performance does have some negative effects.

Question 2

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) Gray Directors.
D) Inside Directors.

Answer 2

Independent Directors.

Question 3

By tying stock option compensation to performance,the shareholders effectively give the manager ________ in the firm.

A) an ownership stake
B) an investment opportunity
C) a leadership opportunity
D) controlling power

Answer 3

an ownership stake

Question 4

When the different stakeholders in a firm all have their own interests and the interests diverge,we may have ________.

A) a governance issue
B) an effective issue
C) agent issues
D) an efficiency issue

Question 5

What is the difference between inside,gray,and outside directors?

Question 6

In Canada,________,Section 122.1.a,defines the board's duty to act in the best interests of ________.

A) the Canada Business Corporations Act (CBCA); the corporation
B) the Canada Business Corporations Act (CBCA); the stakeholders
C) the Companies Creditors Arrangement Act (CCAA); the corporation
D) the Companies Creditors Arrangement Act (CCAA); the stakeholders

Question 7

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

A) Managing Directors.
B) Independent Directors.
C) Inside Directors.
D) Gray Directors.

Question 8

What is corporate governance?

Question 9

________ is perhaps the most important reason for the success of the corporate organizational form.

A) The separation of ownership and planning
B) The separation of ownership and organizing
C) The separation of ownership and leadership
D) The separation of ownership and control

Question 10

Canadian rules require firms to report option grants within ________ of the end of the month the options were ________ ; this rule is similar to the prior rules in the U.S.and allows more time for backdating should the share price increase during the time since the option grant.

A) ten days; exercised
B) ten days; granted
C) fifteen days; granted
D) fifteen days; exercised

Question 11

Which of the following statements is false?

A) A board is said to be classified when its monitoring duties have been compromised by connections or perceived loyalties to management.
B) Even the most active independent directors spend only one or two days per month on firm business, and many independent directors sit on multiple boards, further dividing their attention.
C) On a board composed of insider, gray, and independent directors, the role of the independent director is really that of a watchdog.
D) Because independent directors' personal wealth is likely to be less sensitive to performance than that of insider and gray directors, they have less incentive to closely monitor the firm.

Question 12

Which of the following statements is false?

A) Increasing the pay-for-performance sensitivity comes with the added benefit of reducing managers' risk.
B) Stock and option grants give managers a direct incentive to increase the stock price to make their stock or options as valuable as possible.
C) By tying compensation to performance, the shareholders effectively give the manager an ownership stake in the firm.
D) During the 1990s, most companies adopted compensation policies that more directly gave managers an ownership stake by including grants of stock or stock options to executives.

Question 13

Which of the following statements is false?

A) Researchers have hypothesized that boards with a majority of outside directors are better monitors of managerial effort and actions.
B) Studies have found that firms with independent boards make fewer value-creating acquisitions but are more likely to act in shareholders' interests if targeted in an acquisition.
C) One early study showed that a board was more likely to fire the firm's CEO for poor performance if the board had a majority of outside directors.
D) Although the firm's stock price increases on the announcement of its addition of an independent board member, the increased firm value appears to come from the potential for the board to make better decisions on acquisitions and CEO turnover rather than from improvements in the firm's operating performance.

Question 14

Canadian courts have sometimes interpreted "the corporation" to include ________ in addition to ________ (for example,bondholders).

A) stakeholders; investors
B) shareholders; creditors
C) shareholders; investors
D) stakeholders; shareholders

Question 15

Which of the following statements is false?

A) In addition to the evidence that board independence matters for major activities such as firing CEOs and making corporate acquisitions, researchers have found a strong connection between board structure and firm performance.
B) Theoretical and empirical research support the notion that the longer a CEO has served, especially when that person is also chairman of the board, the more likely the board is to become captured.
C) Most firms that have just gone public either as young companies or as older firms returning to public status after a leveraged buyout (LBO) choose to start with smaller boards.
D) Boards tend to grow over time as members are added for various reasons. For example, boards are often expanded by one or two seats after an acquisition to accommodate the target CEO and perhaps one other target director.

Question 16

Which of the following statements is false?

A) The conflict of interest between managers and investors derives from the separation of ownership and control in a corporation.
B) Any discussion of corporate controls-the system of controls, regulations, and incentives designed to prevent fraud-is a story of conflicts of interest and attempts to maximize them.
C) Once control and ownership are separated a conflict of interest arises between the owners and the people in control of a corporation.
D) The separation of ownership and control is perhaps the most important reason for the success of the corporate organizational form. Because any investor can hold an ownership stake in a corporation, investors are able to diversify and thus, with no costs, reduce their risk exposures.

Question 17

Which of the following statements is false?

A) The incentives come from owning stock in the company and from compensation that is sensitive to performance.
B) The role of the corporate governance system is to mitigate the conflict of interest that results from the combination of ownership and control without unduly burdening managers with the risk of the firm.
C) Punishment comes when a board fires a manager for poor performance or fraud, or when, upon failure of the board to act, shareholders or raiders launch control contests to replace the board and management.
D) The corporate governance system attempts to align interests by providing incentives for taking the right action and punishments for taking the wrong action.

Question 18

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

A) Gray Directors.
B) Independent Directors.
C) Advising Directors.
D) Inside Directors.

Question 19

Which of the following statements is false?

A) The shareholders as a group elect a board of directors to monitor managers. The directors themselves, however, have the same conflict of interest - monitoring is costly and in many cases directors do not get significantly greater benefits than other shareholders from monitoring the managers closely.
B) In principle, the board of directors hires the executive team, sets its compensation, approves major investments and acquisitions, and dismisses executives if necessary.
C) In Canada, the board of directors has a clear fiduciary duty to protect the interests of both the owners of the firm (the shareholders) and the interests of other stakeholders in the firm (such as the employees).
D) When the ownership of a corporation is widely held, no one shareholder has an incentive to bear the cost of monitoring, because he or she bears the full cost of monitoring but the benefit is divided among all shareholders.

Question 20

Which of the following statements is false?

A) When the CEO is also chairperson of the board, the nominating letter offering a seat to a new director comes from her. This process merely serves to reinforce the sense that the outside directors owe their positions to the CEO and work for the CEO rather than for the shareholders.
B) Over time, most of the independent directors will have been nominated by the CEO. Even though they have no business ties to the firm, they are still likely to be friends or at least acquaintances of the CEO.
C) Researchers have found the surprisingly robust result that larger boards are associated with greater firm value and performance.
D) The CEO can be expected to stack the board with directors who are less likely to challenge her.

Question 21

Which of the following statements is false?

A) An active takeover market is part of the system through which the threat of dismissal is maintained.
B) When internal governance systems such as ownership, compensation, board oversight, and shareholder activism fail, the one remaining way to remove poorly performing managers is by mounting a hostile takeover.
C) Likely because hostile takeovers and internal governance systems are substitute mechanisms, researchers have found that boards are less likely to fire managers for poor performance during active takeover markets than they are during lulls in takeover activity.
D) The effectiveness of the corporate governance structure of a firm depends on how well protected its managers are from removal in a hostile takeover.

Question 22

While the Sarbanes-Oxley Act (SOX)contains many provisions,the overall intent of the legislation was to improve the accuracy of information given to both boards and to shareholders.SOX attempted to achieve this goal in all of the following ways EXCEPT

A) overhauling incentives and independence in the auditing process.
B) mandating the separation of the positions of CEO and Chairman of the Board.
C) stiffening penalties for providing false information.
D) forcing companies to validate their internal financial control processes.

Question 23

Which of the following statements is false?

A) Recently, shareholders have started organizing "no" votes. That is, when they are dissatisfied with a board, they simply refuse to vote to approve the slate of nominees for the board.
B) One early study of proxy contests found that the announcement of a contest increased firm stock price by 8% on average, even if the challenge was eventually unsuccessful and the incumbents won reelection.
C) Shareholders' only real role in governance is in electing the directors of the company.
D) Perhaps the most extreme form of direct action that disgruntled shareholders can take is to hold a proxy contest and introduce a rival slate of directors for election to the board.

Question 24

The Dodd-Frank 2010 provides new regulations to strengthen corporate governance. Which of the following is NOT a regulation under this Act?

A) At least once every three years, firms must provide shareholders the right to vote on the compensation of the firm's highest paid executives. The results of this vote are binding on the firm's board of directors.
B) All US Exchanges must require that listed firms have compensation committees made up exclusively of independent board members.
C) Large continuous shareholders may nominate candidates for the board of directors and the candidates must be included in the firm's proxy statement.
D) Firms must establish policies to claw back performance pay in the event that an accounting restatement indicates that such payments were not justified.

Question 25

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

Question 26

Which of the following statements is false?

A) 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.
B) Even with the risk benefits of separating ownership and control, there are still examples of corporations in which the top managers have substantial ownership interests.
C) Academic studies do not support the notion that greater managerial ownership is associated with fewer value-reducing actions by managers.
D) While increasing managerial ownership may reduce perquisite consumption, it also makes managers harder to fire-thus reducing the incentive effect of the threat of dismissal.

Question 27

The Canada Corporations Act of 1970 introduced the first federal provisions regarding insider trading,and this was carried over into ________ which continues in force today.

A) the Generally Accepted Accounting Principles
B) the Corporation Law of Canada
C) the Canada Business Corporations Act
D) the International Financial Reporting Standards

Question 28

Academic studies have supported the notion that ________ managerial ownership is associated with ________ value-reducing actions by managers.

A) greater; fewer
B) greater; more
C) less; fewer
D) less; more

Question 29

Which of the following statements is false?

A) Backdating refers to the practice of choosing the grant date of a stock option retroactively, so that the date of the grant would coincide with a date when the stock price was at its low for the quarter or for the year.
B) Unless it is reported in a timely manner to the Canadian Revenue Agency and to shareholders, and reflected in the firm's financial statements, backdating is illegal.
C) The use of backdating suggests that some executive stock option compensation may not truly have been earned as the result of good future performance of the firm.
D) By backdating the option the executive receives a stock option that is already out-of-the-money, with a strike price equal to the higher price on the supposed grant date.

Question 30

Which of the following statements is false?

A) If managers have large ownership stakes, then shareholders are more likely to use compensation policies or a stronger board to create the desired incentives.
B) If all else fails, the shareholders' last line of defense against expropriation by self-interested managers is direct action.
C) A shareholder resolution could direct the board to take a specific action, such as discontinuing investment in a particular line of business or country, or removing a poison pill.
D) Any shareholder can submit a resolution that is put to a vote at the annual meeting.

Question 31

Which of the following statements is false?

A) The Cadbury Commission stiffened the criminal penalties for providing false information to shareholders.
B) The Exchange Acts of 1933 and 1934, among other things, established the Securities and Exchange Commission (SEC) and prohibited trading on private information gained as an insider of a firm.
C) Many of the problems at Enron, WorldCom, and elsewhere were kept hidden from boards and shareholders until it was too late. In the wake of these scandals, many people felt that the accounting statements of these companies, while often remaining true to the letter of GAAP, did not present an accurate picture of the financial health of a company.
D) While one study found that those firms that separated the position of CEO and chairman performed better, another found no relation between the independence of key board committees and firm performance in the post-Cadbury era.

Question 32

What is the role of takeovers in corporate governance?

Question 33

Which of the following was NOT a finding of the Cadbury Commission?

A) Audit and compensation committees should be made up entirely of independent directors or, at least, have a majority of them.
B) Auditors should be rotated, and there should be fuller disclosure of non-audit work.
C) The CEO should not be chairman of the board, and at the very least there should be a lead independent director with similar agenda-setting powers.
D) The CEO and the CFO should personally attest to the accuracy of the financial statements presented to shareholders.

Question 34

Which of the following statements regarding auditors is false?

A) The Sarbanes-Oxley Act called on the SEC to force companies to have audit committees that are dominated by outside directors and required that at least one outside director have a financial background.
B) Whether information is material has been defined in the courts as referring to whether the information would have been a significant factor in an investor's decision about the value of the security.
C) CEOs and CFOs must return bonuses or profits from the sale of stock or the exercise of options during any period covered by statements that are later restated.
D) The law is especially strict with regard to takeover announcements, prohibiting any insider with nonpublic information about a pending or ongoing tender offer from trading on that information or revealing it to someone who is likely to trade on it.

Question 35

Which of the following statements regarding auditors is false?

A) Most auditors have a longstanding relationship with their audit clients; this extended relationship and the auditors' desire to keep the lucrative auditing fees makes auditors less willing to challenge management.
B) Most accounting firms have developed large and extremely profitable consulting divisions. Obviously, if an audit team refuses to accommodate a request by a client's management, that client will be less likely to choose the accounting firm's consulting division for its next consulting contract.
C) Auditing firms are supposed to ensure that a company's financial statements accurately reflect the financial state of the firm.
D) In the post Sarbanes-Oxley world, accounting firms are no longer allowed to offer both audit and non-audit services to the same firm.

Question 36

In Canada,insider trading laws exist at ________.

A) both the provincial and federal levels
B) both the provincial and municipal levels
C) the provincial level
D) the federal level

Question 37

The Sarbanes-Oxley Act requires all of the following EXCEPT

A) that audit partners rotate every five years to limit the likelihood that auditing relationships become too cozy over long periods of time.
B) strict limits on the amount of non-audit fees (consulting or otherwise) that an accounting firm can earn from the same firm that it audits.
C) that senior management and the boards of public companies be comfortable enough with the process through which funds are allocated and controlled, and outcomes monitored throughout the firm to be willing to attest to their effectiveness and validity.
D) that the auditor must personally attest to the accuracy of the financial statements presented to shareholders and must sign a statement to that effect.

Question 38

Which of the following statements is false?

A) One study found that firms with fewer restrictions on shareholder power performed worse than firms with more restrictions during the 1990s.
B) Some large public pension funds, such as CalPERS (the California Public Employees Retirement System), take an activist role in corporate governance.
C) In 2004 in the Walt Disney Company, major shareholders were dissatisfied with the recent performance of Disney under long-time CEO and Chairman, Michael Eisner. They began an organized campaign to convince the majority of Disney shareholders to withhold their approval of the reelection of Eisner as director and chairman of the board.
D) Given the importance of shareholder action in corporate governance, researchers and large investors alike have become increasingly interested in measuring the balance of power between shareholders and managers in a firm.

Question 39

________ was amended in 2004 to create tougher insider trading laws and penalties.

A) The Corporation Law of Canada
B) The Criminal Code of Canada
C) The Generally Accepted Accounting Principles
D) The Canada Business Corporations Act

Question 40

Which of the following statements is false?

A) The Canadian rules require firms to report option grants within ten days of the grant date, which may help prevent further abuses.
B) Studies have found evidence that the practice of timing the release of information to maximize the value of CEO stock options is widespread.
C) Managers have an incentive to manipulate the release of financial forecasts so that good news comes out before options are granted and bad news is delayed until after the options are granted.
D) The factor contributing most to the climb in CEO total compensation for the 1990s was the sharp increase in the value of stock and options granted each year.

Question 41

In Canada and Europe,many corporations are run by families that own controlling blocks of shares.The central conflict is between what are called ________ and ________.

A) controlling shareholders; minority shareholders
B) controlling stakeholders; minority stakeholders
C) controlling investors; minority investors
D) controlling creditors; minority creditors

Question 42

Which of the following statements is false?

A) The United States is somewhat of an exception, in that it focuses solely on maximizing shareholder welfare.
B) A controlling family has many opportunities to expropriate minority shareholders in a pyramid structure.
C) One way for families to gain control over firms even when they do not own more than half the shares is to issue dual class shares-a scenario in which companies have more than one class of shares and one class has superior voting rights over the other class.
D) Researchers have claimed that the degree of investor protection was largely determined by the legal origin of the country-specifically, whether its legal system was based on British common law (less protection) or French, German, and Scandinavian civil law (more protection).

Question 43

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

Question 44

A variety of pyramid structures are quite common in Canada and ________.

A) other countries including the United States
B) other countries except the United States
C) the United States and not the European countries
D) other Asian countries except Japan

Question 45

Which of the following statements is false?

A) Controlling shareholders pay for their control rights because the firm effectively faces a higher cost of equity for outside capital.
B) Most countries follow what is called the stakeholder model, giving explicit consideration to other stakeholders-in particular, rank-and-file employees.
C) In a pyramid structure, a family first creates a company in which it owns more than 50% of the shares and therefore has a controlling interest.
D) A conflict of interest arises because the family has an incentive to try to move profits (and hence dividends) down the pyramid-that is, toward companies in which it has few cash flow rights and away from firms in which it has more cash flow rights.

Question 46

How does a pyramid structure work?

Question 47

Which of the following statements is false?

A) In many other countries, the central conflict is between what are called "controlling shareholders" and "minority shareholders."
B) Controlling shareholders can make decisions that benefit them disproportionately relative to the minority shareholders, such as employing family members rather than the most talented managers or establishing contracts favourable to other family-controlled firms.
C) As recent events and corporate scandals have shown, investor protection in the United States is generally seen as substandard when compared to the developed economies in the world.
D) Much of the focus in the United States is on the agency conflict between shareholders, who own the majority of a firm but are a dispersed group, and managers, who own little of the firm and must be monitored.

Question 48

Which of the following statements is false?

A) It is important to keep in mind that good governance is value enhancing and so, in principle, is something investors in the firm should strive for.
B) Corporate governance is a system of checks and balances that trades off costs and benefits.
C) Because good governance is based upon a basic set of principles, like those detailed in the Cadbury Commission's findings, one should expect all firms to display similar governance structures.
D) The costs and benefits of a corporate governance system also depend on cultural norms.

Question 49

Describe the "stakeholder" model of corporate governance.