1.Which of the following best describes the importance of a corporate governance system? A strong corporate governance system:

A)   is essential for companies to operate efficiently, while the lack of an effective corporate governance system can threaten the very existence of a firm.

B)   gives the firm the ability to attract and fairly compensate qualified managers to ensure that assets of the company are used efficiently and productively.

C)   prevents costly regulation which can have an adverse affect on a firm’s profits and its operations.

D)   maximizes shareholder value.

2.Corporate governance is defined as:

A)   a system designed to reduce the risk of loss resulting from failures in a company’s systems, procedures, or from external events.

B)   the system in a corporate structure that insures fairness and equitable treatment in all dealings between managers, directors, and shareholders.

C)   a system designed to insure that a corporation’s business is conducted in an ethical, fair, and professional manner.

D)   the system of principles, policies, procedures, and clearly defined responsibilities and accountabilities used by stakeholders to overcome conflicts of interest inherent in the corporate form.

3.Chen Michiba is an Executive Vice President with the Sakai Corporation. Michiba is concerned that Sakai does not have an effective corporate governance system in place and drafts a memo to the company’s senior management team detailing a potential structure for an improved system. Michiba starts his memo by listing the two key objectives of corporate governance:

Michiba is:

A)   incorrect with respect to both Objectives.

B)   correct with respect to Objective 1, but incorrect with respect to Objective 2.

C)   incorrect with respect to Objective 1, but correct with respect to Objective 2.

D)   correct with respect to both Objectives.

4.Which of the following statements regarding effective corporate governance systems is least accurate?

A)   A weak corporate governance system could threaten the very existence of a corporation.

B)   A comprehensive list of corporate governance best practices can be applied effectively to any corporation worldwide to strengthen the company’s corporate governance structure.

C)   A corporate governance system must be continuously monitored because of changes in management and the board of directors.

D)   The primary responsibilities of a corporate board of directors are to institute corporate values and establish long-term strategic objectives that are in the best interests of shareholders.

1.Which of the following best describes the importance of a corporate governance system? A strong corporate governance system:

A)   is essential for companies to operate efficiently, while the lack of an effective corporate governance system can threaten the very existence of a firm.

B)   gives the firm the ability to attract and fairly compensate qualified managers to ensure that assets of the company are used efficiently and productively.

C)   prevents costly regulation which can have an adverse affect on a firm’s profits and its operations.

D)   maximizes shareholder value.

The correct answer was A)

A strong corporate governance system is essential for companies and financial markets to operate efficiently, while the lack of strong corporate governance system represents a major operational risk that can threaten the very existence of a firm. A strong corporate governance system cannot in itself maximize shareholder value, but studies have shown that the lack of effective system certainly reduces shareholder value.

2.Corporate governance is defined as:

A)   a system designed to reduce the risk of loss resulting from failures in a company’s systems, procedures, or from external events.

B)   the system in a corporate structure that insures fairness and equitable treatment in all dealings between managers, directors, and shareholders.

C)   a system designed to insure that a corporation’s business is conducted in an ethical, fair, and professional manner.

D)   the system of principles, policies, procedures, and clearly defined responsibilities and accountabilities used by stakeholders to overcome conflicts of interest inherent in the corporate form.

The correct answer was D)

McEnally and Kim define corporate governance as “the system of principles, polices, procedures, and clearly defined responsibilities and accountabilities used by stakeholders to overcome conflicts of interest in the corporate form.”

3.Chen Michiba is an Executive Vice President with the Sakai Corporation. Michiba is concerned that Sakai does not have an effective corporate governance system in place and drafts a memo to the company’s senior management team detailing a potential structure for an improved system. Michiba starts his memo by listing the two key objectives of corporate governance:

Michiba is:

A)   incorrect with respect to both Objectives.

B)   correct with respect to Objective 1, but incorrect with respect to Objective 2.

C)   incorrect with respect to Objective 1, but correct with respect to Objective 2.

D)   correct with respect to both Objectives.

The correct answer was A)

Although Michiba lists two admirable goals and actions that should be performed by a firm’s board of directors, neither item is one of the two key objectives of a corporate governance system. The two key objectives of a corporate governance system: (1) Eliminate or reduce conflicts of interest (particularly those between managers and shareholders), and (2) Ensure that the assets of a company are used efficiently and productively and in the best interests of its investors and other stakeholders.

4.Which of the following statements regarding effective corporate governance systems is least accurate?

A)   A weak corporate governance system could threaten the very existence of a corporation.

B)   A comprehensive list of corporate governance best practices can be applied effectively to any corporation worldwide to strengthen the company’s corporate governance structure.

C)   A corporate governance system must be continuously monitored because of changes in management and the board of directors.

D)   The primary responsibilities of a corporate board of directors are to institute corporate values and establish long-term strategic objectives that are in the best interests of shareholders.

The correct answer was B)

Corporate governance systems will differ according to the legal environment, culture, and industry in which a firm operates, so a list of best practices cannot simply be applied to all firms worldwide with any expectation that the corporate governance structure will be strengthened. There are, however, a number of common characteristics that all sound corporate governance structures share.