Corporate Boards in Action Quizzes

"Seven Myths of Corporate Governance,"

#1 The chairperson should always be independent. •2005 71% of S&P 500 chairpersons were independent. •2014 53% of S&P 500 chairpersons were independent. •Move to independent chairperson was perceived to have negatively impacted performance. •#2 Staggered boards are always detrimental to shareholders. •Staggered means three-year terms that retire 1/3 of board members at a time. •Staggered term strategy intends to protect the interests of shareholders •Sometimes can impede mergers and long-term plans. •#3 Directors who meet NYSE independence standards are independent. •Conventional independence is required for compliance •Social independence may be just as important. •#4 Interlocked directorships reduce governance quality •Interlocked means "My executive serves and your board". •Common belief is that it reduces independence. •#5 CEOs make the best directors •Management/executive skills do not translate directly to governance skills. •#6 Directors face significant liability risk •Directors are insured. •1980-2005 only 12 cases ended with directors paying damages out of their own pocket. •#7 The failure of a company is always the board's fault •The board does hold responsibility for some failures such as undetected fraud or poor strategic direction. •However things that cannot be blamed on the board are....•Competitive pressure•Shifts in market focus•Poor operational performance

Corporate governance is best described as...

A collection of control mechanisms.

Typical Board committees would NOT include... -A procurement committee. -An audit committee. -A compensation committee. -A Nominating Committee

A procurement committee.

The role of the chairperson does NOT include... -Acting independently to create board policies. -Setting board meeting agendas. -Scheduling board meetings. -Coordinating activities of board committees.

Acting independently to create board policies.

The cost incurred by failures of corporate governance are called...

Agency costs.

Activist shareholders are primarily concerned about... -All of these answer choices. -Returns on investment that meet or exceed indexes. -Returns on investment that meet or exceed indexes and corporate outcomes -Social justice.

All of these answer choices.

Opponents of shareholder activism suggests the cost are... -All of these answer choices. -Disruption of operational activities. -Distracts the focus of the Board and the Executive. -Threatens the pursuit of long term shareholder value.

All of these answer choices.

Proponents of shareholder activism suggest the benefits are.... -All of these answer choices. -Reducing agency costs. -Limiting management entrenchment. -Combating complacency of the Executive.

All of these answer choices.

Evidence of self-interested behavior by executives that potentially harmed investors include....

Bankruptcies, Financial restatements, Class Action Lawsuits

The Cadbury Committee was commissioned by...

Both the London Stock Exchange and the accountancy profession.

Corporate governance protects the interests of...

Both the shareholders and stakeholders.

A corporate governance framework should include the inclusion of all EXCEPT which of the following? -Detailed tactical plans for increasing the profitability of the organization. -Strategic guidance for the organization. -Effective monitoring of the organization. -Accountability to shareholders.

Detailed tactical plans for increasing the profitability of the organization.

Which of the following is NOT a way in which shareholders express their desire for change or dissatisfaction with the corporation. - Directly making changes to the operational policies of the corporation. - Seeking to have Board member(s) removed. - Voting for or against proxy proposals. - Choosing to sell their shares

Directly making changes to the operational policies of the corporation.

Organizations protect the members of the Boards of Directors with....

Director and Officer Liability Insurance

The legal definition of the fiduciary duties of the Board of Directors includes... -Duty of care. -Duty of loyalty. -Duty of efficiency. -Both duty of care and duty of loyalty.

Duty of care.

The "Code of best practices" issued by the Cadbury Committee did NOT include which of the following? -Establishing an executive advisory committee. -Separating chairperson and executive roles. -Selecting independent directors on their boards. -Convening an independent audit committee.

Establishing an executive advisory committee.

Corporate governance is primarily needed because...

Executives acting in their own interest can harm the interest of shareholders and stakeholders.

True/False Shareholders influence the corporation primarily through the Executive.

False

True/False: The Sarbanes-Oxley Act of 2002 restricts the Executive from being the Chairperson of the Board.

False

True/False: The fiduciary duty of the Board of Directors is to ensure that the organization acts in the interest of the Executive.

False

The term "independent director" refers to one who...

Is deemed to have no conflicts of interest with those for whom the Board is intended to protect.

The findings of the Cadbury Committee were adopted by ...

Largely adopted by both the London and New York Stock Exchanges.

Good governance seeks to create alignment between.....

Management and shareholders.

In a proxy contest, shareholders....

Propose a new slate of Board members.

Active shareholders are primarily concerned about...

Returns on investment that meet or exceed indexes and corporate outcomes.

Passive shareholders are primarily concerned about ....

Returns on investment that meet or exceed indexes.

The role and duties of the Board of Directors are...

Separate and distinct from those of the Executive

In its oversight capacity, the duty of the Board of Directors is to ensure that the organization acts in the best interest of...

Shareholders

In its advisory capacity, the Board of Directors consults with the Executive on...

Strategic direction for the future of the organization.

Corporate governance is needed to address...

The agency problem.

Moral salience is...

The knowledge that certain things are inherently wrong.

True/False Shareholders have only indirect influence on the corporation.

True

True/False: Investors perceive well-governed companies as better investments.

True

True/False: Structural conflicts of interest can arise when the roles of the Executive and the Chairperson of the Board are held by the same person.

True

True/False: There is no universally agreed upon standard for good governance.

True

Blockholders can be individual or institutional shareholders.

True.

Through a proxy proposal, shareholders can vote to influence the actions of the corporation.

True.

Agency Cost

When executives make investment, financing, and operating decisions that better themselves at the expense of other party related to the firm

Corporate governance

the collection of control mechanism that an organization adopts to prevent or dissuade potentially self-interested managers from engaging in activities detrimental to the welfare of shareholders and stakeholders

Agency problem

the idea that when separation exists between the ownership of a company and its management, self-interested executives have the opportunity to take action that benefit themselves, with shareholders and stakeholders bearing the cost of these actions

Moral Salience

the knowledge that certain actions are inherently wrong even if they are undetected and left unpunished

The Citibank Story

•60% of loans purchased did not meet risk standards of corporation. •Risk loans sold and incorporated into securities. •"Whistleblower" reported the problem multiple times to management and the Board. •Eventual 60%-80% failure of those loans ultimately harmed investors.

Whistleblower

•Exposing a problem that could negatively impact shareholders/stakeholders. •Exposing such a problem could negatively impact the individual's job security.