Ch. 13 Shareholder Rights and Corporate Governance

By law a Board of Directors must have the following committees:

1. Audit committee 2. Nominating committee 3. Compensation committee

Most states require a minimum of how many BOD's?

3

Owen is a director of Packaging Company. As a director, Owen's rights include a right to A. access the corporation's books, records, facilities, and other property. B. subordinate the corporation's welfare to his personal interest. C. use confidential corporate information for personal advantage. D. self-dealing.

A. access the corporation's books, records, facilities, and other property.

Paul is a director on the board of Quality Tire Corporation. As a director, Paul may not

Answer: engage is self-dealing

The corporation's internal rules of management are the

Answer: the bylaws

An elected group of individuals who have a legal duty to establish corporate objectives, develop broad policies, and select top-level personnel for a company.

Board of directors

The central role in corporate governance

Board of directors

officers and directors of a corporation are immune from liability to the corporation for losses incurred in corporate transactions within their authority so long as the transaction was made in good faith and with reasonable skill and prudence.

Business Judgment Rule

Changes in the nomination process for a company's board of directors that allows shareholders to nominate their own candidates

Proxy access

This rule went into effect in 2018 as a provision to the 2010 Dodd-Frank Act:

Required major U.S. firms to disclose the ratio of their CEO's compensation to the median compensation of all their employees.

• An increase in the direct responsibility of senior corporate managers for the quality of their company's financial reports and disclosures. • An increase in the audit committee's independence from the company and its responsibility regarding the company's auditors. • Limitations on the types and nature of services that auditors can provide to a publicly traded, audit client. • The creation of an independent Board to oversee auditing practices regarding publicly traded companies.

SOX corporate governance guidelines include:

It created the Public Company Accounting Oversight Board (PCAOB) to oversee accounting firms and improve the accuracy of their audits.

The Sarbanes-Oxley Act-2002

the government agency created to protect shareholder interests.

The Securities and Exchange Commission

Organizations that manage pools of money invested by very wealthy individuals and institutions.

private equity firms

A legal instrument giving another person the right to vote the shares of stock of an absentee shareholder; in effect, an absentee ballot for shareholders who do not attend the annual meeting in person.

proxy

3 groups share power in a corporation:

the Board of Directors, Management and Shareholders

One of the most important committees of the board is the

audit committee

The process by which a company is controlled or governed.

Corporate governance

After the 2008 financial crisis Congress reacted by passing this law to reform financial regulation.

Dodd-Frank Act-2010

Occurs when a person gains access to confidential information about a company's financial condition and then uses that information, before it becomes public knowledge, to buy or sell the company's stock; generally illegal.

Insider trading

State incorporation laws require a Board of Directors. True or False?

True

Legal rights of shareholders

- To receive dividends, if declared - To vote on: Members of board of directors Major mergers and acquisitions Charter and bylaw changes Proposals by stockholders - To receive annual reports on the company's financial condition - To bring shareholder suits against the company and officers - To sell their own shares of stock to others

Kay and Leo form Metro Delivery Inc. Responsibility for all policymaking decisions necessary to the management of corporate affairs rests with Metro's A. board of directors. B. officers. C. incorporators. D. shareholders.

A. board of directors.

Don is a shareholder of Energy Renew Inc. When the directors fail to undertake an action to redress a wrong suffered by the firm, Don files a suit on its behalf. Don's suit is A. a preemptive right. B. a shareholder's derivative suit. C. the duty of a majority shareholder. D. unethical and illegal.

B. a shareholder's derivative suit.

Orin is a corporate officer for Pacific Trade Inc. In this capacity, Orin A. authorizes major corporate policy decisions. B. manages corporate day-to-day operations. C. makes executive personnel decisions. D. makes and announces financial decisions.

B. manages corporate day-to-day operations

Guy is a director of Healthcare Corporation. Guy attempts to use his best judgment in guiding corporate management but makes a few honest mistakes. His best defense against liability for these mistakes is A. business success insurance. B. the business judgment rule. C. the duty of loyalty. D. none of the choices.

B. the business judgment rule.

Huan is a shareholder of Insulation Inc. When the directors fail to undertake an action to redress a wrong suffered by the firm, Huan files a suit on its behalf. Any damages recovered by the suit will go to the firm's A. shareholders, excluding Huan. B. treasury. C. directors. shareholders, including Huan

B. treasury.

Erin, a shareholder of Finance Inc., demands the right to inspect corporate books and records to determine whether management has engaged in self-dealing that impacts the company. The firm refuses the request. On Erin's challenge, a court is most likely to hold that her request constitutes A. harassment. B. unreasonable access to trade secrets and other confidential information. C. a proper purpose. D. potential abuse.

C. a proper purpose.

Ned and Olga are shareholders of Pizza Pies Inc. Ned's written authorization to Olga to vote Ned's shares at a shareholders' meeting is A. a fundamental change. B. a cumulative vote. C. a proxy. D. a quorum requirement

C. a proxy.

The compensation (total pay) of corporate executives, including salary, bonus, stock options, and various benefits.

Executive compensation

The legal duty of a representative to manage property in the interest of the owner.

Fiduciary Responsibility

A resolution on an issue of corporate social responsibility placed before shareholders for a vote at a company's annual meeting.

Social responsibility shareholder resolution

A form of compensation. Options represent the right (but not obligation) to buy a company's stock at a set price (called the strike price) for a certain period of time. The option becomes valuable to its holder when, and if, the stock price rises above this amount.

Stock option

of 2002 was passed by Congress in response to widespread corporate fraud and failures.

The Sarbanes-Oxley Act

U.S. regulation requiring public companies to hold an advisory shareholder vote on executive compensation at least once every three years; also required in several other countries.

say-on-pay