Exam 10: Corporate Governance

Simon Leagreet, the Chairperson and CEO of L-EVA Industries, Inc., has long been the major power at L-EVA. A majority of the directors are concerned that while Mr. Leagreet has been responsible for the firm's earning above-average returns, he has been displaying a tendency toward personal extravagance at the firm's expense. In order to limit Mr. Leagreet's power, the Board of Directors plans to:

More intense application of governance mechanisms such as mandated by Sarbanes Oxley and Dodd-Frank may cause firms to take on fewer risky projects and thus increase potential shareholder wealth.

Product diversification provides two benefits to managers that do not accrue to shareholders: ____ and ____.

Ambrose Bierce, the CEO of DictionAry, has been paid a lump sum amounting to 3 years' salary because DictionAry has been bought in a hostile takeover by its main competitor. Ambrose received:

When the option strike prices in an executive stock option-based compensation plan have been lowered it is usually a defense to a hostile takeover.

Compared to managers, shareholders prefer:

The governance mechanism most closely connected with deterring unethical behaviors by holding top management accountable for the corporate culture is:

DDD MetalWorks plans to go public in the next 2 years. In order to be listed on the New York Stock Exchange, the firm will need to restructure its present Board of Directors, which is made up of a majority outside independent directors to a Board of Directors that is dominated by insiders and related outsiders.

Generally, a Board member who is a source of information about a firm's day-to-day activities is classified as a(n) ____ director.

The separation between firm ownership and management creates a(n) ____ relationship.

Managers in firms that have been subjects of hostile takeovers usually find that their value to the new firm has been enhanced because of their in-depth insider knowledge.

Agency costs include incentives for executives, monitoring, enforcement costs, and any individual financial losses incurred by principals.

Critics advocate reforms to ensure that independent outside directors represent a significant majority of the total membership of the Board. But outsider-dominated Boards may emphasize the use of financial as opposed to strategic controls. The risk of reliance on financial controls is that they may encourage managers to make decisions to maximize their interests and reduce their employment risk.

Executive compensation is a governance mechanism that seeks to align managers' and owners' interests through all of the following EXCEPT:

Managers in the United States receive ____ compensation than managers in the rest of the world.

All of the following statements are TRUE about the use of defense tactics by the target firm during a hostile takeover EXCEPT:

Corporate governance mechanisms are designed to ensure that top managers make strategic decisions that best serve the interests of the entire group of stakeholders.

One of the changes to enhance the effectiveness of the Board of Directors is the creation of a "lead director" role that has strong powers with regard to the Board agenda and oversight of non-management Board member activities.

In general, when governance mechanisms are strong, managers have free rein in their decisions.

In recent years, the number of individuals who are large-block shareholders have declined and been replaced by institutional owners such as mutual funds and pension funds.