MGST 451 FINAL EXAM 291 QUESTIONS WITH
VERIFIED ANSWERS
when managers put their own self-interest ahead of the interest of the
shareholders - CORRECT ANSWER agency problem
a system of controls, regulations, and incentives designed to prevent fraud. It is a
story of conflicts of interest and attempts to minimize them - CORRECT ANSWER
corporate governance
nearly 80% of institutional investors responded that they would pay a premium
for a well governed company - CORRECT ANSWER McKinsey and Company survey
2002
Morocco, 41% - CORRECT ANSWER highest premiums for a well governed
company
Canada, 11% - CORRECT ANSWER lowest premiums for a well governed company
to act in the best interest of the corporation - CORRECT ANSWER Board of
Director's duty
effective governance should increase the value of equity holders by better aligning
incentives between management and shareholders - CORRECT ANSWER
shareholder perspective
,effective governance should support policies that produce stable and safe
employment, provide an acceptable standard of living to workers, mitigate risk for
debt holders, and improve the community and environment - CORRECT ANSWER
stakeholder perspective
shareholders, creditors, employees, society - CORRECT ANSWER stakeholders
auditors, analysts, investment bankers, financial institutions, credit agencies,
attorneys, government, provincial securities regulators, Canada Revenue Agency -
CORRECT ANSWER monitors outside the company
the knowledge that certain actions are inherently wrong even if they are
undetected and left unpunished - CORRECT ANSWER moral salience
fiduciary, loyalty and fair dealing, care, supervision, candor - CORRECT ANSWER 5
duties of the board
- hire and evaluate management
- approve major operating proposals
- approve major financial decisions
- offer expert advice to management
- make sure the firm's activities and financial condition are accurately reported -
CORRECT ANSWER board functions
- inside (current and former employees, or family members)
,- grey (not directly connected but have existing or potential business relationships,
such as bankers, lawyers or consultants)
- outside (independent) - CORRECT ANSWER types of directors
the company has more than one class of common stock differentiated by the
number of votes assigned to each class (Canadian Tire, Bombadier, Cara, Shopify) -
CORRECT ANSWER dual-class shares voting
requires a director to receive a majority of votes to be elected (85% of S&P500
companies had majority voting) - CORRECT ANSWER majority voting system
allows a shareholder to concentrate votes on a single board candidate rather than
requiring one vote for each candidate (<5% of S&P500) - CORRECT ANSWER
cumulative voting system
- allows raising of capital without threat to loss or dilution of control
- facilitates intergenerational control from founders to heirs
- if they pay preferential dividends to restricted voting shares, they can argue that
the structure appeals to investors with differing interests
- useful in Canada in industries that have Canadian ownership requirements -
CORRECT ANSWER advantages of dual class shares
- controlling superior (little equity with voting control)
- minority superior (superior voting shares but not enough for control)
, - minority restricted (usually hold the most of the equity but voting rights are
insufficient to affect company direction) - CORRECT ANSWER Common
shareholder groups
pay less dividends, share value is discounted about 14% less - CORRECT ANSWER
dual class companies tend to
prevent superior class from obtaining a premium on change of control
transactions, but that doesn't mean they can't charge a premium by relinquishing
their superior rights to unify the class - CORRECT ANSWER coattails provisions
between 5-15% - CORRECT ANSWER premium from coattail provisions
monitoring duties have been compromised by connections or perceived loyalties
to management. Many independent directors nominated by CEO - CORRECT
ANSWER captured board
a board in which an executive on one firm sits on the board of another firm, and
an executive on the second firm sits on the board of the first - CORRECT ANSWER
interlocked board
limit terms, stagger the boards - CORRECT ANSWER methods to avoid interlocked
or captured boards
audit, compensation, governance/nomination - CORRECT ANSWER important BOD
committees
VERIFIED ANSWERS
when managers put their own self-interest ahead of the interest of the
shareholders - CORRECT ANSWER agency problem
a system of controls, regulations, and incentives designed to prevent fraud. It is a
story of conflicts of interest and attempts to minimize them - CORRECT ANSWER
corporate governance
nearly 80% of institutional investors responded that they would pay a premium
for a well governed company - CORRECT ANSWER McKinsey and Company survey
2002
Morocco, 41% - CORRECT ANSWER highest premiums for a well governed
company
Canada, 11% - CORRECT ANSWER lowest premiums for a well governed company
to act in the best interest of the corporation - CORRECT ANSWER Board of
Director's duty
effective governance should increase the value of equity holders by better aligning
incentives between management and shareholders - CORRECT ANSWER
shareholder perspective
,effective governance should support policies that produce stable and safe
employment, provide an acceptable standard of living to workers, mitigate risk for
debt holders, and improve the community and environment - CORRECT ANSWER
stakeholder perspective
shareholders, creditors, employees, society - CORRECT ANSWER stakeholders
auditors, analysts, investment bankers, financial institutions, credit agencies,
attorneys, government, provincial securities regulators, Canada Revenue Agency -
CORRECT ANSWER monitors outside the company
the knowledge that certain actions are inherently wrong even if they are
undetected and left unpunished - CORRECT ANSWER moral salience
fiduciary, loyalty and fair dealing, care, supervision, candor - CORRECT ANSWER 5
duties of the board
- hire and evaluate management
- approve major operating proposals
- approve major financial decisions
- offer expert advice to management
- make sure the firm's activities and financial condition are accurately reported -
CORRECT ANSWER board functions
- inside (current and former employees, or family members)
,- grey (not directly connected but have existing or potential business relationships,
such as bankers, lawyers or consultants)
- outside (independent) - CORRECT ANSWER types of directors
the company has more than one class of common stock differentiated by the
number of votes assigned to each class (Canadian Tire, Bombadier, Cara, Shopify) -
CORRECT ANSWER dual-class shares voting
requires a director to receive a majority of votes to be elected (85% of S&P500
companies had majority voting) - CORRECT ANSWER majority voting system
allows a shareholder to concentrate votes on a single board candidate rather than
requiring one vote for each candidate (<5% of S&P500) - CORRECT ANSWER
cumulative voting system
- allows raising of capital without threat to loss or dilution of control
- facilitates intergenerational control from founders to heirs
- if they pay preferential dividends to restricted voting shares, they can argue that
the structure appeals to investors with differing interests
- useful in Canada in industries that have Canadian ownership requirements -
CORRECT ANSWER advantages of dual class shares
- controlling superior (little equity with voting control)
- minority superior (superior voting shares but not enough for control)
, - minority restricted (usually hold the most of the equity but voting rights are
insufficient to affect company direction) - CORRECT ANSWER Common
shareholder groups
pay less dividends, share value is discounted about 14% less - CORRECT ANSWER
dual class companies tend to
prevent superior class from obtaining a premium on change of control
transactions, but that doesn't mean they can't charge a premium by relinquishing
their superior rights to unify the class - CORRECT ANSWER coattails provisions
between 5-15% - CORRECT ANSWER premium from coattail provisions
monitoring duties have been compromised by connections or perceived loyalties
to management. Many independent directors nominated by CEO - CORRECT
ANSWER captured board
a board in which an executive on one firm sits on the board of another firm, and
an executive on the second firm sits on the board of the first - CORRECT ANSWER
interlocked board
limit terms, stagger the boards - CORRECT ANSWER methods to avoid interlocked
or captured boards
audit, compensation, governance/nomination - CORRECT ANSWER important BOD
committees
