Corporate Finance【Reading 42】Sample 2012, experience, necessary, corporate

Kingpin804

During a recent luncheon, Angus Rahamut and Dan Riding became engaged in a discussion of issues related to corporate governance. Neither of these individuals is an expert in the field of corporate governance and either of them may have made an inaccurate statement. Which of the following is most likely to be an inaccurate statement?

A) “Board members must have the experience and qualifications necessary for them to be able to make decisions independently from the firm’s management.”

B) “To be independent, a board member must not have any material relationship with the firm’s executive management or their families.”

C) “In order to avoid conflicts of interest, board members should seek management approval prior to hiring external advisors.”

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Ideally, independent board members can hire external consultants without management’s approval. This enables the board to obtain advice on specialized issues that is not biased by the interests of management.

Kingpin804

Corporate governance defines the appropriate rights, role, and responsibilities of:

A) management only.

B) management and the board of directors.

C) management, the board of directors, and shareholders.

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Corporate governance defines the appropriate rights, roles, and responsibilities of a corporation’s management, the board of directors, and shareholders.

Kingpin804

Which of the following statements regarding corporate governance practices is least accurate?

A) Good corporate governance practices ensure that the firm’s financial and operating activities are reported to shareholders in a verifiable manner.

B) Corporate governance is not as important for firms with largely dispersed minority shareholders.

C) Corporate governance is the system of internal controls/procedures by which firms are managed.

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Good corporate governance practices are extremely important in the case of firms with largely dispersed minority shareholders. Both remaining statements are accurate.

Kingpin804

Corporate governance is the set of internal controls, processes and procedures defining how a firm is managed. Which of the following statements concerning corporate governance is least accurate?

A) Good corporate governance dictates that the firm’s financial, operating and governance activities are reported to stakeholders in a fair, accurate and timely manner.

B) Good corporate governance means that the board can work effectively with management.

C) Corporate governance defines the appropriate rights, roles and responsibilities of management, the board, and stakeholders within a firm.

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The board of directors must be able to act independently from management. Both remaining statements concerning corporate governance are accurate.

Kingpin804

All of the following practices constitute good corporate governance, EXCEPT:

A) there are proper procedures and controls covering management’s day-to-day operations and the firm acts lawfully in dealings with shareholders.

B) the board of directors protects shareholder interests, and the shareholders have a voice in governance.

C) the firm’s financial, operating, and governance activities are reported to shareholders in a fair, accurate, and timely manner, and management acts independent of the board of directors.

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The board of directors must be able to act independent of management, not vice versa. Both of the remaining practices are examples of good corporate governance.

Kingpin804

Which of the following activities would least likely be an example of good corporate governance?

A) Management is allowed to act independently of board of directors.

B) The board has decided to eliminate finders’ fees for its members for any potential acquisitions that are brought to management’s attention.

C) The board of directors has decided to conduct a self-assessment.

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The board of directors should be allowed to act independently of management. Management should not be allowed to act independently from the board.

Kingpin804

Rochelle Dixon is delivering a presentation on best practices for corporate governance. Two of her recommendations are as follows:
Statement 1: To avoid the potential for harming shareholders’ interests by wasting company resources, the Board of Directors should get management’s approval before it hires outside consultants.
Statement 2: The more members a Board of Directors has, the more likely it is to represent shareholders’ interests fairly.
Are Dixon’s statements CORRECT?

Statement 1

Statement 2

A) Incorrect Correct

B) Incorrect Incorrect

C) Correct Correct

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Both statements are incorrect. An independent board should have the ability to seek specialized advice by hiring outside consultants without management approval. The size of the board should be appropriate for the facts and circumstances of the firm; having more members does not imply that the board will be more independent if the additional members are aligned closely with management or are less well qualified.

Kingpin804

A board of directors is most likely to protect the shareholders’ interests when:

A) the board requires that management attend all meetings.

B) one individual can be identified as the leading board member from outside the firm.

C) the board includes representatives from the firm’s key customers and suppliers.

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Especially in cases where the chairman of the board is closely aligned with the firm, independent board members are more able to protect shareholders’ interests when they have a leading or primary independent member. The board should meet regularly outside the presence of management. Board members who represent the firm’s customers and suppliers may have interests that conflict with those of shareholders.

Kingpin804

There are a lot of issues to consider in determining board independence. What would be the best definition of true “independence”? Independence, as it relates to board members, refers to:

A) the degree to which these persons are not biased or otherwise controlled by firm management or other groups which may have some degree of control over management.

B) the degree to which these persons are not biased or otherwise controlled by firm management or the outside audit group.

C) avoidance of material conflicts of interest.

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Avoiding material conflicts of interest is important, but this is not a true definition of independence. Independent board members should be independent from the outside audit group, but this is not part of the actual definition. Benefiting management interests should not be a board priority.

Kingpin804

Which of the following statements related to corporate governance is least accurate?

A) It is desirable for the chairman of the board to be the firm’s current CEO or former CEO.

B) Board members should not have any material relationships with the firm’s advisers, auditors, and their families.

C) It is desirable for board members to have board experience with other boards.

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The willingness of independent board members to express opinions that are not aligned with managements’ may be impaired when the chairman is the firm’s current CEO or a former CEO.