Corporate governance - ANSWERSthe set of mechanisms used to manage the relationships among stakeholders and to determine and control the strategic direction and performance of organizations
how is corporate governance used to monitor and control managers' decisions? - ANSWERSit includes oversigh...
SEVI 3013 Exam 3 Questions & Answers
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Corporate governance - ANSWERSthe set of mechanisms used to manage the
relationships among stakeholders and to determine and control the strategic direction
and performance of organizations
how is corporate governance used to monitor and control managers' decisions? -
ANSWERSit includes oversight in areas where there are conflicts of interest among
major stakeholders, including the election of directors, supervision of CEO pay, and the
organization's overall structure and strategic direction.
Three internal governance mechanisms - ANSWERS1. ownership concentration
2. board of directors
3. executive compensation
The separation of ownership and managerial control - ANSWERSallows shareholders to
purchase stock, which entitles them to income (residual returns) from the firm's
operations after paying expenses
agency relationship - ANSWERSexists when one party delegates decision-making
responsibility to a second party for compensation
Managerial opportunism - ANSWERSthe seeking of self-interest with guile (i.e., cunning
or deceit)
problems that result from the agency relationship - ANSWERS- the potential for a
divergence of interests
- a lack of direct control of the firm by shareholders
Managerial opportunism prevents - ANSWERSthe maximization of shareholder wealth
Product diversification can create two benefits for top-level managers that shareholders
do not enjoy - ANSWERS1. Top-level managers can increase their compensation.
2. Managerial employment risk—the risk of job loss, loss of compensation, and loss of
managerial reputation—can be reduced.
Agency costs - ANSWERSthe sum of incentive costs, monitoring costs, enforcement
costs, and individual financial losses incurred by principals because governance
mechanisms cannot guarantee total compliance by the agent
corporate governance mechanisms have received greater scrutiny due to the passing of
- ANSWERSThe Sarbanes-Oxley Act of 2002
, board of directors - ANSWERSa group of elected individuals whose primary
responsibility is to act in the owners' best interests by formally monitoring and controlling
the firm's top-level managers
board members are classified into one of three groups - ANSWERS1. Insiders
2. Related outsiders
3. Outsiders
Insiders - ANSWERSThe firm's CEO and other top-level managers
Related outsiders - ANSWERS• Individuals not involved with the firm's day-to-day
operations, but who have a relationship with the company
Outsiders - ANSWERSIndividuals who are independent of the firm in terms of day-to-
day operations and other relationships
Executive compensation - ANSWERSa governance mechanism that seeks to align the
interests of managers and owners through salaries, bonuses, and long-term incentives
such as stock awards and options.
hostile takeover - ANSWERSacquisition of a target company by an acquiring firm that is
accomplished not by coming to an agreement with the target company's management
but by going directly to the company's shareholders or fighting to replace management
in order to get the acquisition approved
_________ __________ __________ ensure that the interests of all stakeholders are
served - ANSWERSEffective governance mechanisms
strategic competitiveness results when firms are governed in ways that permit at least
minimal satisfaction of: - ANSWERS- Capital market stakeholders (e.g., shareholders)
- Product market stakeholders (e.g., customers and suppliers)
- Organizational stakeholders (e.g., managerial and non-managerial employees)
Organizational structure - ANSWERSspecifies the firm's formal reporting relationships,
procedures, controls, and authority and decision-making processes
Structural stability - ANSWERSprovides the capacity the firm requires to consistently
and predictably manage its daily work routines
Structural flexibility - ANSWERSmakes it possible for the firm to identify opportunities
and then allocate resources to pursue them as a way of being prepared to succeed in
the future
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