Chapter 10 - Corporate Governance
Corporate governance is the set of mechanisms used to manage the relationship
among
stakeholders and to determine and control the strategic direction and performance of an
organization. – answer T
Corporate involves oversight in areas where owners, managers, and members of
boards of
directors may have conflicts of interest. – answer T
Corporate governance is a means to establish harmony between parties (the firm's
owners and its top-
level managers) whose interests may conflict. – answer T
In modern corporations-especially those in the United States and United Kingdom-a
primary objective
of corporate governance is to ensure that the interests of top-level managers are
aligned with the
interests of shareholders. – answer T
Recent emphasis on corporate governance stems mainly from the failure of corporate
governance mechanisms to adequately monitor and control top-level managers'
decisions. - answerT
The three internal corporate governance mechanisms are ownership concentration,
board of directors,
and the market for corporate control. - answerF
Executive compensation is considered an external corporate governance mechanism
because
it determined in part by market forces. - answerF
In the United States, the primary goal of a firm is to maximize profits to provide a
financial gain
to shareholders. - answerT
In the U.S., the members of the board of directors are a firm's key stakeholders and a
company's legal
owners. - answerF
Executive compensation, ownership concentration, and the matrix organizational
structure are all
,examples of internal governance mechanisms. - answerF
In the modern U.S. corporation, the ownership and managerial control of the firm are
separated. - answerT
In a large number of family-owned firms, ownership and managerial control are not
separated. - answerT
Amelia Smith is the sole owner of the successful restaurant chain, Amelia's Café. Ms.
Smith has
taken a no-interest loan from the company in order to build a luxurious seaside house
for herself in
Carmel, California. This constitutes a classic agency problem. - answerF
An agency relationship exists when one or more persons (the principal or principals)
hire
another person or persons (the agent or agents) as decision-making specialists to
perform a
service. - answerT
The separation of ownership and control is the most effective means used by firms to
prevent
managerial opportunism. - answerF
A top-level manager's reputation is a dependable predictor of his/her future behavior. -
answerF
As a rule, shareholders prefer more product diversification than do managers because
shareholders
wish to reduce risk and maximize wealth. - answerF
Both top executives and owners of the firm wish to diversify the firm to reduce risk. -
answerF
Agency costs include incentives for executives, monitoring, enforcement costs, and any
individual financial losses incurred by principals. - answerT
In general, when governance mechanisms are strong, managers have free rein in their
decisions. - answerF
Failures of corporate internal controls and inadequate internal control systems allowed
unethical
executives at such companies as Enron and WorldCom to act in their own self-interest.
- answerT
, The serious problems experienced in the financial services industry are likely the result
of
poor governance and top-level managers making very bad strategic decisions. -
answerT
While the implementation of the Sarbanes-Oxley Act in 2002 has been controversial to
some, most
believe that the results of it have been generally positive. - answerT
More intense application of governance mechanisms may produce significant changes
in
strategies, for example, firms may take on fewer risky projects and thus increase
potential
shareholder wealth. - answerF
The ultimate in shareholder concentration would be one person holding all shares of a
company's
stock. - answerT
In ZYX Corp., two shareholders own 85 percent of company stock. This represents a
high degree of
ownership concentration. - answerT
Large-block shareholders typically own at least 5% of a corporation's issued shares. -
answerT
In the U.S., institutional investors are mainly the primary lenders to the firm, usually
banks. - answerF
Institutional owners are financial institutions such as stock mutual funds and pension
funds
that control large-block shareholder positions. - answerT
Institutional owners, despite their size, are usually unable to discipline ineffective top
managers and
cannot influence a firm's choice of strategies and overall strategic direction. - answerF
The primary role of the board of directors is to monitor and control top-level executives
to protect
owners' interests. - answerT
Boards have the power to direct the affairs of the organization, punish and reward
managers, and
protect shareholders's rights and interests. - answerT
Corporate governance is the set of mechanisms used to manage the relationship
among
stakeholders and to determine and control the strategic direction and performance of an
organization. – answer T
Corporate involves oversight in areas where owners, managers, and members of
boards of
directors may have conflicts of interest. – answer T
Corporate governance is a means to establish harmony between parties (the firm's
owners and its top-
level managers) whose interests may conflict. – answer T
In modern corporations-especially those in the United States and United Kingdom-a
primary objective
of corporate governance is to ensure that the interests of top-level managers are
aligned with the
interests of shareholders. – answer T
Recent emphasis on corporate governance stems mainly from the failure of corporate
governance mechanisms to adequately monitor and control top-level managers'
decisions. - answerT
The three internal corporate governance mechanisms are ownership concentration,
board of directors,
and the market for corporate control. - answerF
Executive compensation is considered an external corporate governance mechanism
because
it determined in part by market forces. - answerF
In the United States, the primary goal of a firm is to maximize profits to provide a
financial gain
to shareholders. - answerT
In the U.S., the members of the board of directors are a firm's key stakeholders and a
company's legal
owners. - answerF
Executive compensation, ownership concentration, and the matrix organizational
structure are all
,examples of internal governance mechanisms. - answerF
In the modern U.S. corporation, the ownership and managerial control of the firm are
separated. - answerT
In a large number of family-owned firms, ownership and managerial control are not
separated. - answerT
Amelia Smith is the sole owner of the successful restaurant chain, Amelia's Café. Ms.
Smith has
taken a no-interest loan from the company in order to build a luxurious seaside house
for herself in
Carmel, California. This constitutes a classic agency problem. - answerF
An agency relationship exists when one or more persons (the principal or principals)
hire
another person or persons (the agent or agents) as decision-making specialists to
perform a
service. - answerT
The separation of ownership and control is the most effective means used by firms to
prevent
managerial opportunism. - answerF
A top-level manager's reputation is a dependable predictor of his/her future behavior. -
answerF
As a rule, shareholders prefer more product diversification than do managers because
shareholders
wish to reduce risk and maximize wealth. - answerF
Both top executives and owners of the firm wish to diversify the firm to reduce risk. -
answerF
Agency costs include incentives for executives, monitoring, enforcement costs, and any
individual financial losses incurred by principals. - answerT
In general, when governance mechanisms are strong, managers have free rein in their
decisions. - answerF
Failures of corporate internal controls and inadequate internal control systems allowed
unethical
executives at such companies as Enron and WorldCom to act in their own self-interest.
- answerT
, The serious problems experienced in the financial services industry are likely the result
of
poor governance and top-level managers making very bad strategic decisions. -
answerT
While the implementation of the Sarbanes-Oxley Act in 2002 has been controversial to
some, most
believe that the results of it have been generally positive. - answerT
More intense application of governance mechanisms may produce significant changes
in
strategies, for example, firms may take on fewer risky projects and thus increase
potential
shareholder wealth. - answerF
The ultimate in shareholder concentration would be one person holding all shares of a
company's
stock. - answerT
In ZYX Corp., two shareholders own 85 percent of company stock. This represents a
high degree of
ownership concentration. - answerT
Large-block shareholders typically own at least 5% of a corporation's issued shares. -
answerT
In the U.S., institutional investors are mainly the primary lenders to the firm, usually
banks. - answerF
Institutional owners are financial institutions such as stock mutual funds and pension
funds
that control large-block shareholder positions. - answerT
Institutional owners, despite their size, are usually unable to discipline ineffective top
managers and
cannot influence a firm's choice of strategies and overall strategic direction. - answerF
The primary role of the board of directors is to monitor and control top-level executives
to protect
owners' interests. - answerT
Boards have the power to direct the affairs of the organization, punish and reward
managers, and
protect shareholders's rights and interests. - answerT
