Ch004-Corporate-Governance-Around-the-World

Eun/Resnick4e39Eun&Resnick4eCHAPTER4CorporateGovernanceAroundtheWorldGovernanceofthePublicCorporation:KeyIssuesTheAgencyProblemRemediesfortheAgencyProblemBoardofDirectorsInternationalFinanceinPractice:WhenBoardsAreAllintheFamilyIncentiveContractsConcentratedOwnershipAccountingTransparencyDebtOverseasStockListingsMarketforCorporateControlLawandCorporateGovernanceConsequencesofLawOwnershipandControlPatternPrivateBenefitsofControlCapitalMarketsandValuationCorporateGovernanceReformObjectivesofReformPoliticalDynamicsTheCadburyCodeofBestPracticeSummaryMINICASE:Parmalat:Europe’sEnron1Corporategovernancecanbedefinedas:a)theeconomic,legal,andinstitutionalframeworkinwhichcorporatecontrolandcashflowrightsaredistributedamongshareholders,managersandotherstakeholdersofthecompanyb)thegeneralframeworkinwhichcompanymanagementisselectedandmonitoredc)therulesandregulationsadoptedbyboardsofdirectorsspecifyinghowtomanagecompaniesd)thegovernment-imposedrulesandregulationsaffectingcorporatemanagementAnswer:a)2Whenmanagerialself-dealingsareexcessiveandleftuncheckeda)Theycanhaveseriousnegativeeffectsonsharevaluesb)Theycanimpedetheproperfunctionsofcapitalmarketsc)TheycanimpedesuchmeasuresasGDPgrowthd)AlloftheaboveAnswer:d)3Corporategovernancestructurea)Variesagreatdealacrosscountriesb)Hasbecomehomogenizedfollowingtheintegrationofcapitalmarketsc)Hasbecomehomogenizedduetocross-listingofsharesofmanypubliccorporationsd)NoneoftheaboveAnswer:a)Eun/Resnick4e40GovernanceofthePublicCorporation:KeyIssues4Thecentralissueofcorporategovernanceisa)howtoprotectcreditorsfrommanagersandcontrollingshareholdersb)howtoprotectoutsideinvestorsfromthecontrollinginsidersc)howtoalleviatetheconflictsofinterestbetweenmanagersandshareholdersd)howtoalleviatetheconflictsofinterestbetweenshareholdersandbondholdersAnswer:b)5Thekeyweaknessofthepubliccorporationisa)toomanyshareholders,whichmakesitdifficulttomakecorporatedecisionb)relativelyhighcorporateincometaxratesc)conflictsofinterestbetweenmanagersandshareholdersd)conflictsofinterestsbetweenshareholdersandbondholdersAnswer:c)6Whencompanyownershipisdiffuse,a)A“freerider”problemdiscouragesshareholderactivismb)Thelargenumberofshareholdersensuresstrongmonitoringofmanagerialbehaviorbecausewithalargeenoughgroup,there’salmostalwayssomeonewhowilltoincurthecostsofmonitoringmanagement.c)Fewshareholdershaveastrongenoughincentivetoincurthecostsofmonitoringmanagement.d)a)andc)arecorrectAnswer:d)7Inwhatcountrydothethreelargestshareholderscontrol,onaverage,about60percentofthesharesofapubliccompany?a)UnitedStatesb)Canadac)GreatBritaind)ItalyAnswer:d)8Thepubliccorporationa)Isjointlyownedbya(potentially)largenumberofshareholdersb)Offersshareholderslimitedliabilityc)Separatestheownershipandcontrolofafirmsassetsd)AlloftheaboveAnswer:d)9Thekeystrengthsofthepubliccorporationis/area)Theircapacitytoallowefficientrisksharingamongmanyinvestorsb)Theircapacitytoraiselargeamountsoffundsatrelativelylowcostc)Theircapacitytoconsolidatedecision-makingd)AlloftheaboveAnswer:d)Eun/Resnick4e4110Intheory,a)Managersarehiredbytheshareholdersattheannualstockholdersmeeting.Ifthemanagersturninabadyear,newonesgethired.b)Shareholdershirethemanagerstooverseetheboardofdirectors.c)Managersarehiredbytheboardofdirectors;theboardisaccountabletotheshareholders.d)NoneoftheaboveAnswer:c)11Inmanycountrieswithconcentratedownershipa)Theconflictsofinterestbetweenshareholdersandmanagersareworsethanincountrieswithdiffuseownershipoffirms.b)Theconflictsofinterestaregreaterbetweenlargecontrollingshareholdersandsmalloutsideshareholdersthanbetweenmanagersandshareholders.c)Theconflictsofinterestaregreaterbetweenmanagersandshareholdersthanbetweenlargecontrollingshareholdersandsmalloutsideshareholdersd)CorporateformsofbusinessorganizationwithconcentratedownershiparerareAnswer:b)12Intherealityofcorporategovernanceattheturnofthiscentury,a)Boardsofdirectorsareoftendominatedbymanagement-friendlyinsiders.b)Atypicalboardofdirectorsoftenhasrelativelyfewoutsidedirectorswhocanindependentlyandobjectivelymonitorthemanagement.c)Managersofonefirmoftensitontheboardsofotherfirms,whosemanagersareontheboardofthefirstfirm.Duetotheinterlockingnatureoftheseboards,therecanexistacultureof“I’lloverlookyourproblemsifyouoverlookmine.”d)Alloftheabovehavebeentruetoagreaterorlesserextentintherecentpast.Answer:d)TheAgencyProblem13Acompletecontractbetweenshareholdersandmanagersa)Wouldspecifyexactlywhatthemanagerwilldoundereachofallpossiblefuturecontingenciesb)Wouldbeanexpensivecontracttowriteandaveryexpensivecontracttomonitor.c)Wouldeliminateanyconflictsofinterest(andmanagerialdiscretion)d)AlloftheaboveAnswer:d)14Mostshareholdersare“weak”inthattheygiveupcontroltothemanagersofthefirm.a)Thismayberationalwhenshareholdersmaybeneitherqualifiednorinterestedinmakingbusinessdecisions.b)Thismayberationalsincemanyshareholdersfinditeasiertoselltheirsharesinanunderperformingfirmthantomonitorthemanagementc)Thismayberationaltotheextentthatmanagersareanswerabletotheboardofdirectorsd)Alloftheaboveareexplanationsforthesepara