Corporate Finance【 Reading 31】Sample color, following, 2012

tango_gs

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

A) maximizes shareholder value.

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

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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.

tango_gs

Corporate governance is defined as:

A) 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.

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.

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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.”

tango_gs

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:

Objective 1:	Establish clear lines of responsibility and a system of accountability and performance measurement in all phases of a company’s operations.
Objective 2:	Ensure that all legal and regulatory requirements are met and complied with fully and in a timely fashion.

Michiba is:

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

B) incorrect with respect to both Objectives.

C) correct with respect to both Objectives.

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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.

tango_gs

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

A) 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.

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.

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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.

tango_gs

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

A) 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.

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.

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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.

tango_gs

Most corporate governance systems focus on the elimination or reduction of any potential conflicts that may arise between management and:

A) directors.

B) shareholders.

C) employees.

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There is potential for many conflicts of interest to arise in a corporation, but most corporate governance systems focus on those between management and shareholders.

tango_gs

In general, a corporate governance system will NOT strive to manage a potential conflict of interest that may arise between management and which of the following groups?

A) Creditors.

B) Auditors.

C) Employees.

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Corporate governance policies attempt to eliminate the opportunity for management to place their own interest ahead of other stakeholders, such as shareholders, creditors, directors, employees, and customers.

tango_gs

In a presentation to a group of students in an Executive MBA class, Professor Steven Dawes tells the class that corporate governance systems will tend to differ based on the legal environment, culture an industry in which a firm operates, however, all corporate governance systems share certain common attributes. Dawes continues on to make two statements:

Statement 1:	All corporate governance systems will define the rights of shareholders and other important stakeholders.
Statement 2:	All corporate governance systems should be implemented by individuals with no potential conflicts of interest with company management or shareholders.

Which of Dawes’ statements are consistent with the core attributes of an effective corporate governance system?

A) Statement 1 is inconsistent, but Statement 2 is consistent.

B) Statement 1 is consistent, Statement 2 is inconsistent.

C) Both Statement 1 and Statement 2 are consistent.

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All effective corporate governance systems share the following attributes:

• Define the rights of shareholders and other important stakeholders.
• Clearly identify manager and director governance responsibilities to stakeholders.
• Provide clear and measurable accountability for managers and directors in assuming their responsibilities.
• Provide for fair and equitable treatment in all dealings between managers, directors, and shareholders.
• Have complete transparency and accuracy in disclosures regarding operations, performance, risk, and financial position.

Dawes’ first statement is consistent with these attributes; however, his second statement is not

tango_gs

Mitchell Cash is a corporate governance consultant for Yost and Karl Consulting. In a presentation to a prospective new client, Cash states that an effective corporate governance system will:

Provide for fair and equitable treatment in all dealings between managers, directors, and shareholders.
Have complete transparency and accuracy in all disclosures regarding operations, performance, risk, and financial systems.
Which of the following is a core attribute of effective corporate governance systems that Cash left out of his presentation?


A) Legal and regulatory requirements are complied with fully and in a timely fashion.

B) Chief officers of a corporation are legally authorized to enter into contracts on behalf of the business.  

C) Clearly defined manager and director governance responsibilities to stakeholders.





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All effective corporate governance systems share the following attributes:

Define the rights of shareholders and other important stakeholders.
Clearly identify manager and director governance responsibilities to stakeholders.
Provide clear and measurable accountability for managers and directors in assuming their responsibilities.
Provide for fair and equitable treatment in all dealings between managers, directors, and shareholders.
Have complete transparency and accuracy in disclosures regarding operations, performance, risk, and financial position.

tango_gs

All of the following are attributes of an effective corporate governance system EXCEPT:

A) executive compensation is not excessive in comparison with other industry firms.

B) have complete transparency and accuracy in disclosures regarding operations, performance, risk, and financial position.

C) provide for fair and equitable treatment in all dealings between managers, directors, and shareholders.

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Although executive compensation that is not excessive may be an outcome of a strong corporate governance system, it is not considered a core attribute.