Deck 14: Stockholder Rights and Corporate Governance

Question 1

Shareholders must rely exclusively on the board of directors.

Answer 1

False

Question 2

A corporation's stockholders have a right to inspect the company's books for any reason.

Answer 2

False

Question 3

Since the 1960s, there has been phenomenal growth in the numbers of institutional investors in the United States.

Answer 3

True

Question 4

In 2005, the Securities and Exchange Commission approved new rules that for the first time required companies to include the cost of stock options in their earnings.

Question 5

Which of the following statements is not true about stockholders?

A) They are the legal owners of business corporations.
B) They own equal shares of company assets.
C) They are the part owners of the company.
D) Managers pay close attention to their needs and interests.

Question 6

Most boards now staff their compensation committees exclusively with outside directors and permit them to hire their own consultants.

Question 7

The activism of institutional shareholders has often worsened company performance.

Question 8

The three types of stockholders that own shares of stock in U.S. corporations are individuals, institutions, and government.

Question 9

In the mid- to late-1990s the stock market was a:

A) Bull market.
B) Market in which share prices fell overall.
C) Bear market.
D) None of the above.

Question 10

Stockholders have become an increasingly powerful and vocal stakeholder group in corporations.

Question 11

Investors may receive an economic benefit from the ownership of stock by receiving:

A) Interest.
B) Dividends.
C) Capital gains.
D) Both B and C, but not

Question 12

Investors always choose to invest in the stock of companies that pay high dividends.

Question 13

Which of the following is not true about institutional investors?

A) Institutions invest the funds of individuals by purchasing shares of stock in corporations.
B) The proportion of institutional ownership of stock in the U.S. has declined slowly since the 1960s.
C) Through institutions over one-half of the U.S. population has an indirect ownership in corporations.
D) Institutions accounted for 62 percent of the value of all equities owned in the U.S. in 2005.

Question 14

It is the responsibility of the board of directors and its audit committee to engage an independent accounting firm to audit the financial statements prepared by management.

Question 15

Institutional investors have little incentive to hold their shares and organize to change management policy.

Question 16

Institutional investors are sometimes referred to as:

A) Main Street investors.
B) Wall Street investors.
C) Inside investors.
D) Outside investors.

Question 17

Stock options represent the right to buy a company's stock at a set price for a certain period.

Question 18

The Organization for Economic Cooperation and Development (OECD), representing 30 nations, issued a revised set of principles of corporate governance in 2004 to serve as a benchmark for companies and policymakers worldwide.

Question 19

Eighty-four percent of large company boards now have an independent lead director, a sharp decrease in the past decade.

Question 20

In U.S. vs. O'Hagen, the court ruled that someone who traded on the basis of inside information when he or she knew the information was confidential was guilty of misappropriation.

Question 21

The paramount duty of the board of directors of a public corporation is to:

A) Ensure the company is profitable.
B) Select and oversee competent and ethical management to run the company.
C) Audit the firm's financial statements for transparency.
D) Make certain that employees are dealt with in a fair and equitable manner.

Question 22

Which of the following is not an example of fulfilling social objectives through stock ownership?

A) Selling stock of companies that did business in South Africa when it had a policy of racial discrimination.
B) Divesting from Chinese companies that made products by forced labor.
C) Selling stock of companies with a below-market rate of return.
D) Not investing in Burmese companies that had been accused of human rights abuses.

Question 23

Which of the following is not a legal right of stockholders?

A) To vote on members for the board of directors.
B) To vote on major mergers and acquisitions.
C) To vote on changes in the corporate charter and proposals.
D) To vote on who will become chief executive officer (CEO).

Question 24

In 2007, median compensation for directors at the largest U.S. corporations was (rounded to the nearest $10):

A) $172,300.
B) $193,240.
C) $182,300.
D) $205,000.

Question 25

What was a major contributor to the collapse of Enron in 2001?

A) The company's top executives made bad investments.
B) Several failed merger attempts with other firms.
C) Lax oversight by the company's audit committee.
D) The bear market of the early 2000s.

Question 26

Between 2002 and 2004, the proportion of global companies that formally evaluated their board members:

A) Decreased from 90 to 35 percent.
B) Increased from 35 to 90 percent.
C) Remained constant for all industries.
D) None of the above.

Question 27

The activism of institutional investors in other countries has been spearheaded by:

A) U.S.-based pension and mutual funds that in recent years acquired large stakes in foreign countries.
B) Foreign institutions that were granted new rights by their governments.
C) Managers who have become active in proxy battles in the Netherlands, Austria, and Hong Kong.
D) The rising number of individual investors of public service companies.

Question 28

Which of the following is true about corporate boards?

A) Corporate boards average 10 members.
B) About half of the directors are "outside" directors.
C) Only one-third of all companies have at least one woman on their board.
D) Three-quarters of all companies have at least one ethnic minority board member.

Question 29

The main reason that American executives are paid so much is:

A) Pay is set by the compensation committees of the board, largely comprised of other CEOs who have an interest in pushing compensation up.
B) Qualified individuals are scarce, because most current CEOs were born during the "baby bust" years of the Great Depression.
C) High executive compensation in other nations puts upward pressure on the salaries of U.S. executives.
D) Most executives are paid based on their performance, and rising compensation reflects the excellent performance of their firms.

Question 30

Corporate governance involves the exercise of control over a company's:

A) Finance and accounting departments.
B) Entire operations.
C) Manufacturing facilities.
D) Marketing and human resources departments.

Question 31

The social objectives of investing in stocks include eliminating from investment portfolios companies that:

A) Pollute the environment.
B) Discriminate against employees.
C) Make dangerous products like tobacco or weapons.
D) All of the above.

Question 32

How are directors (members of corporate boards) selected?

A) Shareholders elect the directors from a list of candidates.
B) The company's CEO appoints the directors.
C) The nominating committee elects the directors.
D) Shareholders with the greatest proportional ownership in the company become directors.

Question 33

A reason for institutions becoming more assertive in promoting the interests of their member investors is:

A) It is difficult for institutions to sell their holdings.
B) Their members want them to.
C) Institutions have greater flexibility in selling stocks.
D) Institutions have nominated members on the finance committee of the board of directors.

Question 34

The "agency problem" arises when:

A) Owners manage their company on their own behalf.
B) There is no separation of ownership and control in a company.
C) Managers act in their own interest, rather than in the interest of shareholders.
D) Shareholders act in their own interest, rather than in the interest of the board.

Question 35

Which of the following is a key feature of effective boards of directors?

A) Hold regular meetings without the CEO present.
B) Fill all important positions on the board with managers with insider knowledge of the firm.
C) Combine the duties of the board chairman and the chief executive.
D) Ensure that no outside members are included on the board.

Question 36

The directors of a company are a central factor in corporate governance because they:

A) Exercise formal legal authority over company policy.
B) Have the highest stake in the performance of the company.
C) Have a moral responsibility to fulfill the needs of both the company's employees and customers.
D) Inherited the business from their predecessors.

Question 37

Which of the following arguments opposes the idea of high executive pay?

A) High salaries provide an incentive for innovation and risk taking.
B) Not many individuals are capable of running today's large, complex organizations.
C) Top athletes and entertainers make a lot of money, so top executives should, too.
D) High salaries divert resources that could be used to invest in the business.

Question 38

Which of the following is not a function of board committees?

A) The executive committee works closely with top managers on business matters.
B) The audit committee reviews the company's financial reports.
C) The compensation committee administers and approves salaries and benefits.
D) The finance committee works closely with the human resources department to fund employee salaries.

Question 39

Which of the following is not an argument for high executive compensation?

A) High salaries provide an incentive for innovation and risk-taking.
B) High salaries are necessary to attract and retain top talent.
C) Inflated executive pay helps U.S. firms compete with foreign rivals.
D) Well-paid managers are being compensated for outstanding performance.

Question 40

The board committee that administers and approves salaries and benefits of high-level managers in a company is called the:

A) Executive committee.
B) Human resources committee.
C) Nominating committee.
D) Compensation committee.

Question 41

Why have U.S. institutions become more active as investors? How has this trend spread to other countries?

Question 42

What are the key features of effective boards of directors?

Question 43

Do you think U.S. executives are compensated too highly? Why or why not?

Question 44

In response to concerns about the lack of transparency in financial accounting, Congress passed a new law called the:

A) U.S. Corporate Sentencing Guidelines.
B) McCain-Feingold Act.
C) Sarbanes-Oxley Act.
D) Securities and Exchange Act.

Question 45

The Securities and Exchange Commission outlaws:

A) Any manipulative or deceptive device used to trade stocks.
B) Compensating company executives with stock options.
C) Trading in stocks by institutions.
D) Buying stock in a company for which you work.

Question 46

What is insider trading? Explain how the courts have defined this practice.

Question 47

In your opinion, how is the relationship between the modern corporation and shareholders changing? Explain and justify your argument.

Question 48

Reports filed with the SEC provide information on a company's:

A) Sales and earnings.
B) Depreciation by line of business.
C) Details of foreign operations.
D) All of the above.

Question 49

The mission of the Securities and Exchange Commission (SEC) is to:

A) Protect shareholders' rights by making sure that stock markets are run fairly.
B) Protect companies from hostile takeovers.
C) Ensuring that institutional investors do not take control of company management.
D) Ensuring that the federal treasury receives its share of the revenues from stock trading.

Question 50

Describe a current trend in corporate governance, providing a real example.

Question 51

Which of the following is not an instance of "insider trading"?

A) An auditor using nonpublic information about the company to invest in its stock.
B) A marketing executive briefing stock analysts on the company's sales performance.
C) The CEO's cousin buying stock after the CEO mentioned a pending offer to buy the company.
D) A stock broker passing an "inside tip" to a client, but not trading for his or her own account.

Question 52

Identify and provide an example for each of the five major legal rights afforded to stockholders.