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Exam 10: Corporate Governance

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Question 31

Multiple Choice

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The ownership of major blocks of stock by institutional investors have resulted in all of the following EXCEPT

A) making CEOs more accountable for their performance.
B) increasing the concentration of ownership of large U.S. firms.
C) focusing attention on ineffective boards of directors.
D) tying the compensation of CEOs to measurable financial criteria.

E) B) and D)
F) A) and D)

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Question 32

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The ultimate in shareholder concentration would be one person holding all shares of a company's stock.

A) True
B) False

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Question 33

Multiple Choice

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An agency relationship exists when one party delegates

The board of directors of Acme Brands is discussing the design of a very generous stock option plan for its top executives. During the debate, one of the directors raises the point that CalPERS owns a significant portion of Acme Brand stock. Which of the following statements is likely to be TRUE?

Case Scenario 1: Abramson's Jewelers. Abramson's Jewelers has established a strong niche market in the upscale jewelry store segment. Abramson's was founded in 1871, and its current single-store location is owned and operated by John Wickersham, who bought the firm from its namesake founders in 1985. Over the last 15 years, Mr. Wickersham has narrowed the company's product offering considerably to focus only on high-end watches like Rolex and Piaget, custom jewelry, and estate jewelry. Mr. Wickersham stresses that this is an appropriate focus for his business since each of the products lends itself to relationship selling, and price rarely comes into the discussion. Despite the narrower offering, Abramson's floor space has doubled, and clients are intensely loyal to the good taste, design skills, and personal service level provided by Mr. Wickersham. After evaluating several expansion options, Mr. Wickersham has decided to open another store in a neighboring city. While it is likely that some of his existing customers may begin doing business at the other location, thus lowering sales volume at the original store, Mr. Wickersham sees this as a desirable increase in the level of service and convenience he can provide his existing clientele. At the same time, he believes that he will be able to grow the overall business faster with two locations. He has identified another reputable gemologist, Jill Diamond, to run the other store and is now considering how to compensate her. -(Refer to Case Scenario 1) What are the advantages and disadvantages of paying the new manager primarily on new store sales growth?

Boards of directors are now becoming more involved in

Ownership concentration is determined by both

In the U.S., the fundamental goal of business is to

Case Scenario 2: Raptec. Raptec operates in three principal business segments: Direct Attached Storage ("DAS"), Storage Networking Solutions ("SNS") and Software. These hardware and software products are found in high-performance networks, servers, workstations and desktops from the world's leading OEMs, and are sold through distribution channels to Internet service providers, enterprises, medium and small businesses and consumers. Since the time it went public, Raptec has experienced rapid growth and consistently profitable operations. In early 2002, Raptec announced its plan to spin-off the software segment, subsequently incorporated as Axio, Inc., in the form of a fully independent and separate company. Software was Raptec's most profitable and fastest growing segment. By mid-2002 Raptec had completed the initial public offering of approximately 15% of Axio's stock, and then distributed the remaining Axio stock to Raptec's stockholders in a tax-free distribution. Axio's family of products includes category leaders in CD/DVD burning, digital photography, and digital video. Axio's new management team is comprised of: Lex Luthor, CEO, and previously the President of New Business Development for Universal Studios Recreation Group; Karal Kool, COO, and previously General Manager of Raptec's OEM Solutions Group; and R. Elliot Maxter, CFO, and previously corporate controller for Raptec. The interim four-member board of directors is currently comprised of Raptec senior officers, but the terms of the public offering require them to step down in two months. Thus, Axio will need to construct a new board, which in turn will be responsible for overseeing Axio's management and their compensation. -(Refer to Case Scenario 2) How should the board design the executive compensation scheme for Luthor, Kool, and Maxter?

What is corporate governance and how is it used to monitor and control managers' decisions?

In the U.S., a firm's key stakeholder(s) is(are) the

Discuss the effect of the separation of ownership and control in the modern corporation.

The performance of individual board members is being evaluated more formally and with greater intensity than in years past.

The board of directors of CamCell, Inc., wishes to design a CEO compensation plan that will align the personal interests of the CEO with the interests of the shareholders in long-term firm performance. The board wishes the CEO to take more short-term risks in order to achieve potentially higher long-term returns. Consequently, the board has decided on an incentive plan that involves payout based on the firm's performance five years in the future. CamCell is presently searching for a new CEO. Which of the following statements is true?

Shareholders can rely on the market for corporate control to effectively discipline poor-performing executives if internal governance mechanisms fail.

The Sarbanes-Oxley Act requires all of the following EXCEPT

Product diversification provides two benefits to managers that do not accrue to shareholders: ____ and ____.

The most effective defense against a hostile takeover is the poison pill strategy.

Generous severance packages make executives less resistant to the market for corporate control.

The primary role of the board of directors is to monitor and control top-level executives to protect owners' interests.