CORPORATE GOVERNANCE
EXAM QUESTIONS WITH CORRECT
ANSWERS 100% 2024
Agency Problem - CORRECT ANSWERS-When self-interested executives use their
power for personal gain at the expense of shareholders.
Corporate Governance - CORRECT ANSWERS-Monitoring System put in place to
mitigate the agency problem.
Corporate Governance Participants - CORRECT ANSWERS-all those involved in
management, monitoring, or operations of the firm
Limitations of Empirical Tests - CORRECT ANSWERS-- Average results that cannot be
applied to a specific firm or situation
- correlation doesn't equal causation
- samples may be a selective group, which makes the test inapplicable to different types
of firms
Efficient Capital Markets - CORRECT ANSWERS-- Market determines the price of g/s
- when ECMs exist, the price accurately reflects the information held by all parties
- When ECMs don't exist, the inaccurate price can lead to poor decision-making
Market Standard - CORRECT ANSWERS-Created in ECMs and lead to a monitoring
system. Any failure to meet this standard leads to a decrease in stock price.
BOD primary functions - CORRECT ANSWERS-1. Advise on corporate strategy
2. Ensure integrity of FS
Board Independence - CORRECT ANSWERS-degree to which a director is free from
the company's influence and removed from conflicts of interest within the firm that could
interfere with monitoring ability and prevent them from acting in the firm's interest
Majority independence required by NYSE
Ensures they can oppose management
Staggered/Classified Board - CORRECT ANSWERS-divided into two-three year terms,
with a subset of directors being up for re-election each year. Prevents hostile takeovers.
Unpopular with shareholders because it insulates BOD from their influence. Has
become less common.
, Manager/Director Misstatement liability - CORRECT ANSWERS-Can be held liable if
misstatement was intended or behaved recklessly to point that behavior approaches
intentionality. Also depends on the severity of the event, i.e. IPO is a very important
information event
Pros/Cons of CEOs on the BOD - CORRECT ANSWERS-Pros:
- Leadership Skills
- Good stock market reaction
- industry expertise
- business expertise
Cons:
- bossy
- poor collaborators
- busy with their own company
- overly compensated
- may use their own company as a benchmark (not always appropriate industry)
- firm is not their major source of revenue --> may not align interests with firm
Pros/Cons of outgoing CEOs on the BOD - CORRECT ANSWERS-Pros:
- Company and industry specific knowledge
- Ease transition process
- advise incoming CEO
Cons:
- Make new CEO feel inferior
- Scare off new talent
- Negatively affects firm value (unless CEO=founder)
Purpose/issues of director stock ownership - CORRECT ANSWERS-- align interests
with shareholders
- minimum amount required to hold = multiple of annual cash retainer
- appears in 78% of firms on average
- Paying directors similar to managers can affect oversight and monitoring ability
- May become risk averse or reject decrease in ST value even if decision could increase
LT value
- Incentivizes directors to make decisions based on personal financial portfolio
- not calibrated for wealth of individual directors
- less likely to oppose low level accounting manipulation
Outside Directors - CORRECT ANSWERS-- non-executive/non-employee
- Not major source of income --> removed from company's influence and not invested in
company's performance
- no reporting lines to CEO
- Can draw on diverse background
Social Independence - CORRECT ANSWERS-Pros:
- Connections or networks between board members
EXAM QUESTIONS WITH CORRECT
ANSWERS 100% 2024
Agency Problem - CORRECT ANSWERS-When self-interested executives use their
power for personal gain at the expense of shareholders.
Corporate Governance - CORRECT ANSWERS-Monitoring System put in place to
mitigate the agency problem.
Corporate Governance Participants - CORRECT ANSWERS-all those involved in
management, monitoring, or operations of the firm
Limitations of Empirical Tests - CORRECT ANSWERS-- Average results that cannot be
applied to a specific firm or situation
- correlation doesn't equal causation
- samples may be a selective group, which makes the test inapplicable to different types
of firms
Efficient Capital Markets - CORRECT ANSWERS-- Market determines the price of g/s
- when ECMs exist, the price accurately reflects the information held by all parties
- When ECMs don't exist, the inaccurate price can lead to poor decision-making
Market Standard - CORRECT ANSWERS-Created in ECMs and lead to a monitoring
system. Any failure to meet this standard leads to a decrease in stock price.
BOD primary functions - CORRECT ANSWERS-1. Advise on corporate strategy
2. Ensure integrity of FS
Board Independence - CORRECT ANSWERS-degree to which a director is free from
the company's influence and removed from conflicts of interest within the firm that could
interfere with monitoring ability and prevent them from acting in the firm's interest
Majority independence required by NYSE
Ensures they can oppose management
Staggered/Classified Board - CORRECT ANSWERS-divided into two-three year terms,
with a subset of directors being up for re-election each year. Prevents hostile takeovers.
Unpopular with shareholders because it insulates BOD from their influence. Has
become less common.
, Manager/Director Misstatement liability - CORRECT ANSWERS-Can be held liable if
misstatement was intended or behaved recklessly to point that behavior approaches
intentionality. Also depends on the severity of the event, i.e. IPO is a very important
information event
Pros/Cons of CEOs on the BOD - CORRECT ANSWERS-Pros:
- Leadership Skills
- Good stock market reaction
- industry expertise
- business expertise
Cons:
- bossy
- poor collaborators
- busy with their own company
- overly compensated
- may use their own company as a benchmark (not always appropriate industry)
- firm is not their major source of revenue --> may not align interests with firm
Pros/Cons of outgoing CEOs on the BOD - CORRECT ANSWERS-Pros:
- Company and industry specific knowledge
- Ease transition process
- advise incoming CEO
Cons:
- Make new CEO feel inferior
- Scare off new talent
- Negatively affects firm value (unless CEO=founder)
Purpose/issues of director stock ownership - CORRECT ANSWERS-- align interests
with shareholders
- minimum amount required to hold = multiple of annual cash retainer
- appears in 78% of firms on average
- Paying directors similar to managers can affect oversight and monitoring ability
- May become risk averse or reject decrease in ST value even if decision could increase
LT value
- Incentivizes directors to make decisions based on personal financial portfolio
- not calibrated for wealth of individual directors
- less likely to oppose low level accounting manipulation
Outside Directors - CORRECT ANSWERS-- non-executive/non-employee
- Not major source of income --> removed from company's influence and not invested in
company's performance
- no reporting lines to CEO
- Can draw on diverse background
Social Independence - CORRECT ANSWERS-Pros:
- Connections or networks between board members
