Question 9

Reed Anderson, CFA, assumed the title of Chief Executive Officer for Chemco Industries, a manufacturer of petroleum-based products utilized in the production of plastics. The former CEO of Chemco resigned under pressure from disgruntled shareholders amid allegations of impropriety. Accusations include misrepresentation of potential shareholder earnings, possible conflict of interest with a board member, and granting excessive compensation to certain favored members of upper management. The former CEO also served as Chairman of the company’s board, and had handpicked members of the Board. The Board included mostly members of upper management and only one truly independent member. In addition, one board member has business ties to Chemco through her employer, a bank which has loans outstanding to Chemco. Another problem was that the compensation committee was previously composed of the CEO and two other Chemco officers.

Initial steps have been taken by a group of shareholders to file a class action suit for gross mismanagement against the both the Board and Chemco’s upper management. Anderson has experience in stepping into a leadership position in “troubled” companies and successfully putting measures in place to get the company back on track. The challenge with Chemco is expected to be extremely difficult because Chemco has experienced decreased earnings over the past two years with an accompanying drop in share price. Anderson anticipates serving as Chemco’s CEO for approximately two years, in order to ensure that proper governance procedures are put in place and are fully implemented. After two years, the board should be in the position to search for a permanent replacement for Anderson.

Anderson’s first order of business is to evaluate Chemco’s statement of corporate governance policy, which was written over ten years ago when Chemco first became a publicly traded company. It was printed in that year’s annual report, but has not been updated or re-released to the public since that time. In his judgment, it is entirely inadequate and must be completely re-written in order to give assurance to shareholders that management is working in the shareholders’ best interests. Anderson’s goal is to have both Chemco’s board and management team adhere to corporate governance best practices. Anderson believes that any efforts to restore profitability will be in vain without first restoring investor confidence in the company. Only after shareholders trust that management is working in the shareholders’ best interests can the share price of Chemco be expected to trade back up to an appropriate level.

Anderson wants to prevent any future conflicts of interest with board members. He first calls for and receives the resignation of the board member with the existing conflict. He then asks three members of management plus the independent board member to formally outline a policy for selecting future board members, and to develop measures to assess their performance. This must be in place before a search can be made for new, independent board members. Another concern of Anderson’s is the existing structure of the compensation committee and their current operating procedures. He believes there is merit to the accusations that excessive compensation had been granted in the past. Certain members of Chemco’s upper management received increasing levels of compensation even as profitability and the share price declined. Part of the problem lies in the fact that the compensation committee was formerly composed of three managers and one independent board member. Anderson has mandated that the formal policy must specify the make-up of the compensation committee going forward. He also has stated that the CEO’s performance must be regularly evaluated, and that any changes in compensation will be based upon the prior year’s performance. Anderson’s goal is establish a strong governance policy that will prevent future violations of best practices and to reduce risk to the company’s investors.

Part 1)

Anderson’s goal in incorporating corporate governance best practices is most likely to:

A)   provide appropriate incentives for managers to maximize wealth for investors and other stakeholders.

B)   precisely define the parameters and expectations of the principal-agency relationship.

C)   promote and encourage communication between directors and shareholders.

D)   utilize company assets in a manner consistent with the best interest of shareholders.

Part 2)

Being a corporation, Chemco is subject to unique conflicts of interests problems that other types of business forms will not experience. However, corporations do have several advantages over sole proprietorships and partnerships. Which of the following is least likely to be considered to be an advantage of a corporate structure?

A)   Ownership stakes are easily transferable, allowing a corporation to have an unlimited life.

B)   It is easier for corporations to raise large amounts of capital.

C)   Liability is shared among the owners of a corporation.

D)   There is no need for owners of a corporation to be industry experts.

Part 3)

In order to prevent future conflicts interest between directors and shareholders, Anderson has called for the formalization of Chemco’s policies in accordance with best practices. There are many factors that could potentially cause directors to align more closely with managers than shareholders. Which of the following scenarios would least likely lead to a conflict of interest?

A)   Four of Chemco’s seven board members also serve as managers of the company.

B)   Management provides the financial information to the members at all board meetings.

C)   Chemco board members are permitted to serve on two other company’s boards of directors.

D)   The nominating committee is a mix of independent directors and management.

Part 4)

Which of the following actions on the part of a compensation committee is most likely to result in the management working in accordance with the best practices of corporate governance?

A)   Using the salaries of employees at other companies as a reference point for establishing compensation for managers.

B)   Re-pricing of stock options previously granted to managers after a stock price decline.

C)   Composing the make-up of the compensation committee entirely of independent board members.

D)   Establishing base salary as a small percentage of compensation, with bonuses and stock options tied to performance goals making up the majority of manager’s income.

Part 5)

Analysts and shareholders assessing Chemco’s new policies are least likely to approve of which of the following practices?

A)   Chemco’s board will assess its own effectiveness twice a year.

B)   Elections of Chemco’s directors will be held on an annual basis.

C)   Chemco’s board will use independent outside counsel when legal counsel is required.

D)   Chemco’s internal audit staff will report directly to the board.

Part 6)

Since one of Chemco’s existing board members is also a senior vice president at a bank that currently has loans outstanding to Chemco, which of the following statements is most accurate? The board member:

A)   can continue to serve as an independent director if she has no further dealings with Chemco’s account through her position at the bank.

B)   can continue to serve on Chemco’s board, but cannot be classified as an independent director.

C)   cannot continue to serve on Chemco’s board so long as her bank has loans to Chemco outstanding.

D)   can continue to serve on Chemco’s board so long as Chemco seeks loans from other banks in the future.

[此贴子已经被作者于2008-5-26 18:11:30编辑过]

Part 1)

Anderson’s goal in incorporating corporate governance best practices is most likely to:

A)   provide appropriate incentives for managers to maximize wealth for investors and other stakeholders.

B)   precisely define the parameters and expectations of the principal-agency relationship.

C)   promote and encourage communication between directors and shareholders.

D)   utilize company assets in a manner consistent with the best interest of shareholders.

The correct answer was D) utilize company assets in a manner consistent with the best interest of shareholders.

The two main objectives of corporate governance are to eliminate or reduce conflicts of interest and to use the company’s assets for the benefit of investors and other stakeholders.

This question tested from Session 9, Reading 34, LOS d

Part 2)

Being a corporation, Chemco is subject to unique conflicts of interests problems that other types of business forms will not experience. However, corporations do have several advantages over sole proprietorships and partnerships. Which of the following is least likely to be considered to be an advantage of a corporate structure?

A)   Ownership stakes are easily transferable, allowing a corporation to have an unlimited life.

B)   It is easier for corporations to raise large amounts of capital.

C)   Liability is shared among the owners of a corporation.

D)   There is no need for owners of a corporation to be industry experts.

The correct answer was C) Liability is shared among the owners of a corporation.

Corporate shareholders have limited liability. There is a legal distinction between a corporation and its shareholders—that of limited liability—so the most a shareholder can lose is the amount invested.

This question tested from Session 9, Reading 34, LOS d

Part 3)

In order to prevent future conflicts interest between directors and shareholders, Anderson has called for the formalization of Chemco’s policies in accordance with best practices. There are many factors that could potentially cause directors to align more closely with managers than shareholders. Which of the following scenarios would least likely lead to a conflict of interest?

A)   Four of Chemco’s seven board members also serve as managers of the company.

B)   Management provides the financial information to the members at all board meetings.

C)   Chemco board members are permitted to serve on two other company’s boards of directors.

D)   The nominating committee is a mix of independent directors and management.

The correct answer was C) Chemco board members are permitted to serve on two other company’s boards of directors.

Directors should bring experience and skills to the company, and serving on other boards is acceptable as long as the number is not excessive. The nominating committee should be composed of strictly independent directors. A minimum of 50% of the board members should be independent directors. The board should seek to confirm the completeness and correctness of financial information. Relying strictly on management for financial information creates the potential for a conflict of interest.

This question tested from Session 9, Reading 34, LOS d

Part 4)

Which of the following actions on the part of a compensation committee is most likely to result in the management working in accordance with the best practices of corporate governance?

A)   Using the salaries of employees at other companies as a reference point for establishing compensation for managers.

B)   Re-pricing of stock options previously granted to managers after a stock price decline.

C)   Composing the make-up of the compensation committee entirely of independent board members.

D)   Establishing base salary as a small percentage of compensation, with bonuses and stock options tied to performance goals making up the majority of manager’s income.

The correct answer was D) Establishing base salary as a small percentage of compensation, with bonuses and stock options tied to performance goals making up the majority of manager’s income.

By aligning the interests of shareholders and management, the committee is more likely to obtain the result that management uses the firm’s assets to the benefit of the owners. By making salary a small part of the total compensation package, they are giving managers the incentive to work in the best interests of the firm’s shareholders.

This question tested from Session 9, Reading 34, LOS d

Part 5)

Analysts and shareholders assessing Chemco’s new policies are least likely to approve of which of the following practices?

A)   Chemco’s board will assess its own effectiveness twice a year.

B)   Elections of Chemco’s directors will be held on an annual basis.

C)   Chemco’s board will use independent outside counsel when legal counsel is required.

D)   Chemco’s internal audit staff will report directly to the board.

The correct answer was D) Chemco’s internal audit staff will report directly to the board.

A firm’s internal audit staff should report directly to the audit committee. The audit committee should be composed only of independent directors that are experienced in financial and accounting matters.

This question tested from Session 9, Reading 34, LOS d

Part 6)
Since one of Chemco’s existing board members is also a senior vice president at a bank that currently has loans outstanding to Chemco, which of the following statements is most accurate? The board member:

A)   can continue to serve as an independent director if she has no further dealings with Chemco’s account through her position at the bank.

B)   can continue to serve on Chemco’s board, but cannot be classified as an independent director.

C)   cannot continue to serve on Chemco’s board so long as her bank has loans to Chemco outstanding.

D)   can continue to serve on Chemco’s board so long as Chemco seeks loans from other banks in the future.

Your answer: B was correct!

Global best practices state that at least three-quarters of a board be composed of independent members. The board member can serve on Chemco’s board, but because of her bank’s relationship with Chemco, she would not be considered independent from Chemco’s management.

This question tested from Session 9, Reading 34, LOS d

[此贴子已经被作者于2008-5-26 18:10:54编辑过]

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Question 9

Reed Anderson, CFA, assumed the title of Chief Executive Officer for Chemco Industries, a manufacturer of petroleum-based products utilized in the production of plastics. The former CEO of Chemco resigned under pressure from disgruntled shareholders amid allegations of impropriety. Accusations include misrepresentation of potential shareholder earnings, possible conflict of interest with a board member, and granting excessive compensation to certain favored members of upper management. The former CEO also served as Chairman of the company’s board, and had handpicked members of the Board. The Board included mostly members of upper management and only one truly independent member. In addition, one board member has business ties to Chemco through her employer, a bank which has loans outstanding to Chemco. Another problem was that the compensation committee was previously composed of the CEO and two other Chemco officers.

Initial steps have been taken by a group of shareholders to file a class action suit for gross mismanagement against the both the Board and Chemco’s upper management. Anderson has experience in stepping into a leadership position in “troubled” companies and successfully putting measures in place to get the company back on track. The challenge with Chemco is expected to be extremely difficult because Chemco has experienced decreased earnings over the past two years with an accompanying drop in share price. Anderson anticipates serving as Chemco’s CEO for approximately two years, in order to ensure that proper governance procedures are put in place and are fully implemented. After two years, the board should be in the position to search for a permanent replacement for Anderson.

Anderson’s first order of business is to evaluate Chemco’s statement of corporate governance policy, which was written over ten years ago when Chemco first became a publicly traded company. It was printed in that year’s annual report, but has not been updated or re-released to the public since that time. In his judgment, it is entirely inadequate and must be completely re-written in order to give assurance to shareholders that management is working in the shareholders’ best interests. Anderson’s goal is to have both Chemco’s board and management team adhere to corporate governance best practices. Anderson believes that any efforts to restore profitability will be in vain without first restoring investor confidence in the company. Only after shareholders trust that management is working in the shareholders’ best interests can the share price of Chemco be expected to trade back up to an appropriate level.

Anderson wants to prevent any future conflicts of interest with board members. He first calls for and receives the resignation of the board member with the existing conflict. He then asks three members of management plus the independent board member to formally outline a policy for selecting future board members, and to develop measures to assess their performance. This must be in place before a search can be made for new, independent board members. Another concern of Anderson’s is the existing structure of the compensation committee and their current operating procedures. He believes there is merit to the accusations that excessive compensation had been granted in the past. Certain members of Chemco’s upper management received increasing levels of compensation even as profitability and the share price declined. Part of the problem lies in the fact that the compensation committee was formerly composed of three managers and one independent board member. Anderson has mandated that the formal policy must specify the make-up of the compensation committee going forward. He also has stated that the CEO’s performance must be regularly evaluated, and that any changes in compensation will be based upon the prior year’s performance. Anderson’s goal is establish a strong governance policy that will prevent future violations of best practices and to reduce risk to the company’s investors.

Part 1)

Anderson’s goal in incorporating corporate governance best practices is most likely to:

A)   provide appropriate incentives for managers to maximize wealth for investors and other stakeholders.

B)   precisely define the parameters and expectations of the principal-agency relationship.

C)   promote and encourage communication between directors and shareholders.

D)   utilize company assets in a manner consistent with the best interest of shareholders.

Part 2)

Being a corporation, Chemco is subject to unique conflicts of interests problems that other types of business forms will not experience. However, corporations do have several advantages over sole proprietorships and partnerships. Which of the following is least likely to be considered to be an advantage of a corporate structure?

A)   Ownership stakes are easily transferable, allowing a corporation to have an unlimited life.

B)   It is easier for corporations to raise large amounts of capital.

C)   Liability is shared among the owners of a corporation.

D)   There is no need for owners of a corporation to be industry experts.

Part 3)

In order to prevent future conflicts interest between directors and shareholders, Anderson has called for the formalization of Chemco’s policies in accordance with best practices. There are many factors that could potentially cause directors to align more closely with managers than shareholders. Which of the following scenarios would least likely lead to a conflict of interest?

A)   Four of Chemco’s seven board members also serve as managers of the company.

B)   Management provides the financial information to the members at all board meetings.

C)   Chemco board members are permitted to serve on two other company’s boards of directors.

D)   The nominating committee is a mix of independent directors and management.

Part 4)

Which of the following actions on the part of a compensation committee is most likely to result in the management working in accordance with the best practices of corporate governance?

A)   Using the salaries of employees at other companies as a reference point for establishing compensation for managers.

B)   Re-pricing of stock options previously granted to managers after a stock price decline.

C)   Composing the make-up of the compensation committee entirely of independent board members.

D)   Establishing base salary as a small percentage of compensation, with bonuses and stock options tied to performance goals making up the majority of manager’s income.

Part 5)

Analysts and shareholders assessing Chemco’s new policies are least likely to approve of which of the following practices?

A)   Chemco’s board will assess its own effectiveness twice a year.

B)   Elections of Chemco’s directors will be held on an annual basis.

C)   Chemco’s board will use independent outside counsel when legal counsel is required.

D)   Chemco’s internal audit staff will report directly to the board.

Part 6)

Since one of Chemco’s existing board members is also a senior vice president at a bank that currently has loans outstanding to Chemco, which of the following statements is most accurate? The board member:

A)   can continue to serve as an independent director if she has no further dealings with Chemco’s account through her position at the bank.

B)   can continue to serve on Chemco’s board, but cannot be classified as an independent director.

C)   cannot continue to serve on Chemco’s board so long as her bank has loans to Chemco outstanding.

thanks