Chapter 3 - Corporate Governance

Which of the following best describes the stakeholder model of corporate governance?

A company has responsibilities to many stakeholders including investors, employees, suppliers, government agencies, and the community.

How can a company align the interests of owners with managers through its executive compensation actions?

By linking executives' compensation to company performance and achievement of goals

Which of the following does NOT describe how risk plays a role in organizations?

Ensuring that no executive is paid more than 100 times the average employee.

Corporate governance requires little more than compliance with the law,

False

Factors such as increased globalization, enhanced electronic communications, economic agreements and zones, and the reduction of trade barriers are reducing the need for corporate governance.

False

Members of a company's board of directors no longer assume legal responsibility for a business' resources and decisions.

False

Which of the following statements BEST describes the current trends in corporate governance?

Forces are driving businesses toward the stakeholder orientation and more formal governance.

Under the social responsibility philosophy, which of the following best describes what the government's role in corporate governance should be?

Governments need to be actively engaged in affording both protection and accountability for corporate power and decisions

Which of the following internal control mechanisms would be the MOST difficult for a small company to implement?

Having several employees involved with each transaction, decision, or organizational issue.

Which stakeholder is the primary focus of the shareholder model of corporate governance?

Investors

Which of the following is LEAST LIKELY to be a use of internal controls in an organization?

Measuring the effects of advertising on sales

Why was there little reason to focus on corporate governance in the late 1800s and early 1900s?

Most companies were owner-operated and the owner made the strategic decisions about the business, so little governance was needed.

In 2007 and 2008, what happened for only the second time in the U.S. history?

Overall, CEOs took pay cuts for two years in a row.

Who are the principals and agents of a corporation?

Owners and managers, respectively

Which of the following is NOT one of the responsibilities that will affect boards of directors in the future?

Serving on boards will require less of a commitment than in the past.

"Corporations are bound by the law, and by the rules of what you might call ordinary decency. Beyond this however, they have no duty to pursue the collective goals of society." This statement exemplifies which approach?

Shareholder model of corporate governance

Compare the shareholder and stakeholder models of corporate governance. Which one seems to be more prevalent today? How will this effect your role as a business leader in today's marketplace?

Shareholder models just focused on governance to benefit the profits of the business and the returns to investors. Stakeholder models realized that governance must be focused on all stakeholder, just just shareholders. The stakeholder models are becoming more prevalent in today's business world. This means that to become successful in business today, leaders must always have the thought of their stakeholders as well as profit at the beginning of every decision they make.

"Corporate governance" is best defined as:

The formal system of oversight, accountability, and control for organizational decisions and resources.

On what basic guideline is the shareholder model of corporate governance founded?

The maximization of wealth for investors and owners.

What is the primary concern of a board of directors?

To closely monitor the decisions made by managers on behalf of the company.

What is the purpose of the Organization for Economic Co-operation and Development's (OECD) Corporate Governance Principles?

To formulate minimum standards of fairness, accountability, transparency, and responsibility in business practice

Because corporate ownership today is most often separated from corporate management and control, conflicts of interest between owners and operators can arise.

True

Better corporate governance of financial businesses may help to limit the problems experienced in the financial industry in the 2008-09 financial meltdown.

True

The Sarbanes-Oxley Act of 2002 increased accountability by imposing stricter disclosure requirements and holding Boards of Directors accountable for their actions.

True

According to reports published in mainstream business media (like BusinessWeek and other sources) the best boards of directors:

are generally more independent and more active than other boards.

Corporate governance requires a system of ____ similar to the distribution of power between the executive, legislative, and judiciary branches of the U.S. government.

checks and balances

Effective shareholder activism could include all of the following activities EXCEPT:

defacing company property.

As "fiduciaries," members of a company's board of directors are fundamentally expected to:

exercise both a duty of diligence and a duty of loyalty.

An "outside director" on a company's board of directors:

has valuable expertise, but limited vested interest in the firm before assuming the role.

Shareholder resolutions:

may stimulate a company to change its practices.

When the early Quakers refused to invest in, patronize, or partner with any business involved in the slave trade or military concerns, the Quakers were applying _________.

social investment criteria

In recent months, in response to the major collapse of the U.S. financial system in 2008-09, the federal government has become involved in corporate governance to a degree not seen since ______.

the Great Depression.

When fundamental expectations about social responsibility are not met by publicly-traded companies, then:

the confidence that investors have in corporations, fund managers, market analysts, and others will decline.

Perhaps the strongest argument against high levels of compensation for CEOs is

the discrepancy between the highest paid executives and the median (mid-point) employee wages.

Social investing is best defined as:

the integration (blending) of social and ethical criteria into the investment decision-making process.