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LOS d: Describe the responsibilities of the board of directors, and explain the qualifications and core competencies that an investment analyst should look for in the board of directors.
Q1. Kathryn Rutherford recently joined the Board of Directors for Orvis Asset Management Company (Orvis) and will participate in its annual Board of Directors meeting. Rutherford is an Executive Vice President with Signature Bank, and knows Orvis’ finances well, serving as a commercial lender to Orvis for the last five years. Besides Rutherford, OAMC’s board consists of the following seven members:
- Dane Corser, CFO for Orvis who also serves on the board for Spencer Pharmaceuticals
- Tricia DeLucia, a granddaughter of Orvis’ founder, Michael Orvis
- Wendy Kepling, a former Executive Vice President with Orvis
- Troy Montgomery, the retired CEO of Forner Capital Management, another asset management firm
- Mike Shute, President of Spencer Pharmaceuticals
- Robert Stuart, an attorney with Bricker and Palmer, Orvis’ outside counsel
- Jason Winterfeld, Chairman and CEO of Orvis
Orvis is a publicly traded firm that specializes in managing equity portfolios for both institutional and individual clients. The firm’s investment philosophy is to focus on companies with a history of not changing their dividend payments in order to achieve stable returns. The firm’s marketing approach focuses on tax-exempt pension funds and endowments as well as individuals who depend on dividend payments to meet living expenses. Historically, Orvis has been a successful manager, but recently performance has declined relative to the firm’s benchmark. The primary focus at this board meeting is defining the long-term strategic objectives for the company and making sure the assets of the company, specifically its proprietary investment process, are being used in the best interests of the firm’s shareholders.
Winterfeld states that Item 1 on the Board’s agenda is to discuss the impact of dividends on shareholder value. Kepling begins the discussion by questioning whether Orvis’ investment process should focus on dividends at all. Kepling states, “According to work by Modigliani and Miller, dividends are irrelevant. If an investor holds a non-dividend paying stock, but wants the benefits of a dividend, all they have to do is sell a portion of the stock to get the cash flow they want. Whether the individual receives a cash dividend or sells a portion of their stock, the combination of the investment in the firm and the cash in hand is the same.” Montgomery replies, “I disagree with the theory that dividends are irrelevant. According to work by Gordon and Lintner, dividend payments matter because they are less risky than capital gains. Since investors perceive dividends as being less risky, a firm that starts paying a dividend is likely to see an increase in their P/E ratio.”
Kepling is also aware that Modigliani and Miller have done a great deal of work regarding capital structure theory. She asks Corser if Modigiani and Miller’s theory on capital structure has any implications for the percentage of debt and equity that Orvis has in its capital structure. Corser replies with two statements:
(1) Since Orvis has to pay taxes on its earnings, according to Modigliani and Miller, the optimal capital structure would be 100% debt.
(2) If bankruptcy costs are included in Modigliani and Miller’s capital structure theory, the value of a firm will be maximized when a firm’s cost of debt is minimized.
Which of the following questions about board independence is most accurate?
A) Montgomery qualifies as an independent director, but Stuart does not.
B) Stuart qualifies as an independent director, but Kepling does not.
C) Shute qualifies as an independent director, but DeLucia does not.
Q2. Jason Winterfeld is the Chairman of the Board of Directors at Orvis, as well as the firm’s CEO. Which of the following best describes Winterfeld’s position according to corporate governance best practices? Having the CEO also serve as Chairman of the Board is:
A) in the best interest of shareholders because the CEO has the knowledge and experience to provide information to the board about company strategy and operations.
B) not in the best interest of shareholders because only an independent Chairman insures the proper functioning of the Board.
C) not in the best interest of shareholders because the Chairman/CEO could influence the culture of the board room and diminish the role of independent board members.
Q3. Given that Orvis does not meet the global corporate governance best practice that 75 percent of directors are independent, which of the following would be the best recommendation for a more effective system of corporate governance?
A) Reduce the potential for conflicts of interest between principals and agents of the firm.
B) Determine board member responsibilities and how the board will be held accountable.
C) Create long-term strategic objectives for the company that are consistent with shareholders’ best interests.
Q4. Which of the following statements best reflects Orvis’ investment philosophy and marketing approach? Orvis’ investment philosophy is:
A) not consistent with a stable dividend policy, and the marketing approach depends on the signaling effect.
B) not consistent with a stable dividend policy, and the marketing approach depends on the clientele effect.
C) consistent with a stable dividend policy, and the marketing approach depends on the clientele effect.
Q5. With regard to their statements about dividend theories:
A) Kepling is correct; Montgomery is correct.
B) Kepling is correct; Montgomery is incorrect.
C) Kepling is incorrect; Montgomery is correct.
Q6. With regard to Corser’s statements about Modigliani and Miller’s theory on capital structure, Kepling should:
A) agree with Statement 1, but disagree with Statement 2.
B) agree with both Statements 1 and 2.
C) disagree with Statement 1, but agree with Statement 2.
Q7. Which of the following statements concerning the audit committee of the board of directors is least accurate? The audit committee:
A) should directly oversee the internal audit staff of the company.
B) should not have any dialogue with management in order to ensure that the committee’s actions are independent of management activities.
C) should consist entirely of independent board members.
Q8. Ashley Jones is considering joining the board of directors of Dusseau Investment Management (DIM). Before joining the board, Jones wants to make sure she fully understands what her responsibilities would be as a board member. Kenley Walker, administrative assistant to DIM’s CEO prepares a memo to Jones detailing responsibilities of board members.
Responsibility 1: Establish corporate values and governance structures to ensure that business is conducted in an ethical, fair, and professional manner.
Responsibility 2: Determine which proxy issues that have received a majority of shareholder votes should be addressed or ignored.
Responsibility 3: Hire the company’s chief executive officer (CEO), and determine the CEO’s compensation package.
Which of the responsibilities listed by Walker are CORRECT?
A) Responsibility 1 only.
B) Responsibilities 1 and 3 only.
C) Responsibilities 1, 2, and 3.
Q9. Sunil Reddy is an analyst for Worldwide Financial Services. Reddy thinks that Worldwide’s procedures for analyzing companies for inclusion in client portfolios would be more robust if it included a review of the company’s board of directors. Reddy prepares a list of five items concerning the board of directors that analysts should assess:
Item 1: Frequency of separate sessions for independent directors.
Item 2: Use of independent legal counsel as opposed to company in-house counsel.
Item 3: Composition of the nominating committee.
Item 4: Composition of the compensation committee.
Item 5: Whether the board has staggered or annual elections.
Which of the items on Reddy’s list are attributes of a board of directors that are important for an analyst to assess?
A) All five items.
B) Items 1, 3, and 5 only.
C) Items 2, 3, and 4 only.
Q10. All of the following are responsibilities of the board of directors for a corporation EXCEPT:
A) ensure new board members are adequately trained to perform board functions.
B) make disclosures regarding company operations, risk, and financial position that are accurate and transparent.
C) ensure that management has supplied the board with sufficient information to be fully informed and make appropriate decisions. | 
发表于 2009-3-3 14:48
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