A) monitoring directors.
B) independent directors.
C) gray directors.
D) inside directors.
F) B) and D)
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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) .
F) A) 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) B) and C)
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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) C) and D)
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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) A) and C)
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A) smaller boards are associated with greater firm value and performance, since small groups make better decisions than larger groups.
B) smaller boards are associated with lower firm value and performance, since small groups are more likely to be compromised by connections to management.
C) larger boards are associated with greater firm value and performance, since larger boards tend to have directors with a more diverse range of backgrounds and talents.
D) larger boards are associated with lower firm value and performance, since larger groups are more likely to be compromised by connections to management.
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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A) gray directors.
B) independent directors.
C) advising directors.
D) inside directors.
F) A) and C)
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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 to 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) the auditor must personally attest to the accuracy of the financial statements presented to shareholders and to sign a statement to that effect.
F) A) and C)
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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) A) and C)
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A) a majority of the directors are independent directors.
B) a majority of the directors are outside directors.
C) its monitoring duties have been compromised by connections or perceived loyalties to management.
D) when the CEO also serves as chairman of the board of directors.
F) A) and C)
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Corporate governance is the sy...View Answer
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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.
F) B) and D)
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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) A) and C)
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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.
F) A) and D)
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A) the system of laws and regulations that control corporations.
B) the system of controls, regulations, and incentives designed to prevent fraud and minimize conflicts of interest.
C) the system that determines who controls and runs a corporation.
D) the system that minimizes agency costs between bondholders and stockholders.
F) A) and B)
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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) None of the above
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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) All of the above
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A) prohibits insiders with a fiduciary duty to their shareholders from trading on material non-public information in that stock.
B) prohibits anyone with nonpublic information about a pending or ongoing tender offer from trading on that information.
C) overhauls incentive and independence in the auditing process.
D) requires corporations to consider all stakeholders in corporate governance decisions.
F) A) and C)
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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.
F) C) and D)
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