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 firms in which it has more cash flow rights.
F) C) and D)
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D
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A) managing directors
B) independent directors
C) inside directors
D) gray directors
F) All of the above
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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.
F) None of the above
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C
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A) New SEC rules require firms to report option grants within two 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.
F) None of the above
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When internal governance systems such as...View Answer
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A) always results in agency conflicts that are bad for minority shareholders
B) can sometimes have benefits that outweigh the costs
C) is illegal in the U.S. and most other industrialized countries
D) is never beneficial to employees
F) A) and D)
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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.
F) None of the above
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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 discontinue investing in a particular line of business or country, or remove a poison pill.
D) Any shareholder can submit a resolution that is put to a vote at the annual meeting.
F) B) and C)
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A) dual class shares
B) pyramid structures
C) the stakeholder model
D) All of the above are ways in which individuals or families can gain control over firms, even when they don't own more than half the shares.
F) C) and D)
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A) I, II, and IV
B) I, II, and III
C) I and IV
D) All of the above are examples of cross-holdings.
F) B) and D)
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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.
F) A) and C)
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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 IRS 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.
F) B) and D)
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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.
F) All of the above
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A) When the CEO is also chairman 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.
F) C) and D)
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C
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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
F) B) and D)
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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.
F) A) and B)
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A) Canada
B) the United States
C) Turkey
D) Germany
F) A) and C)
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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.
F) All of the above
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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.
F) B) and C)
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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 with 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.
F) All of the above
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