BM CORE 2 – 3258 – TTh 4:30 PM-6:00 PM

Group 8 Members:
PELONIO, JAMAICA G.
POBADORA, MA. JHEZARIE
RABAYA, MITZI ROSE
SALADAGA, RICAMAE P.

ACTIVITY 3 – Cheat Sheet

Chapter 10: Corporate Governance

FAQ ACTIVITY I
Test I. Enumeration (21 items)
1. What are the three internal governance mechanisms that are used in modern
corporation?

- Ownership concentration
- The board of directors
- Executive compensation

2. In recent years, corporate governance mechanisms have received greater

scrutiny due to the passing of:

- The Sarbanes-Oxley Act (SOX) of 2002

- The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank of 2010)

3. Generally, board members are classified into one of three groups:

- Insiders
- Related outsiders
- Outsiders
4. The demand for improved performance and greater accountability is simulating
many boards to make changes, such as:

- Increasing diversity of the backgrounds of board members

- Strengthening internal management and accounting control systems
- Establishing and consistently using formal processes to evaluate board
members’ performance
- Modifying the compensation of directors, especially reducing or eliminating
stock options as part of their package
- Creating a “lead director” role that has strong powers with regard to the board
agenda and oversight of non-management board activities

5. Globalization in trade, investments, and equity markets is simulating an increase

in the intensity of efforts to:

- Improve corporate governance

- Potentially reduce the variation in regions’ and nations’ governance systems

6. Attitudes toward corporate governance in Japan are affected by the concept of:

- Obligation
- Family
- Consensus

7. Effective governance mechanisms ensure that the interests of all stakeholders

are served. Thus, strategic competitiveness results when firms are governed in
ways that permit at least minimal satisfaction of:

- Capital market stakeholders (e.g., shareholders)

- Product market stakeholders (e.g., customers and suppliers)
- Organizational stakeholders (e.g., managerial and non-managerial
employees)
Test II. True or false (15 items)

1. The most effective boards of directors set boundaries for their firms’ business
ethics and values.

- True

2. The stock markets of China, which were once strong due to significant insider
trading, are still young and developing.

- False, were once weak

3. Japan’s corporate governance practices have been stagnant in recent years.

- False, have been changing

4. Independent, nonexecutive board members are increasingly important in

Japanese firms.

- True

5. Bank in China have an important role as a corporate governance mechanism in

large public firms.

- False, Japan

6. A keiretsu (a group of firms tied together by cross-shareholdings is more than an

economic concept – it, too, is a consensus.

- False, it, too, is a family

7. Corporate governance practices used in Germany have been changing in recent

years and are gravitating toward U.S. governance mechanisms.

- True

8. German firms with more than 2,000 employees are required to have a three-
tiered board structure that places the responsibility for monitoring and controlling
 managerial (or supervisory) decisions and actions in the hands of separate
group.

- False, two-tiered

9. Concentration of ownership is an important means of corporate governance in

Germany.

- True

10. Corporate governance is an increasingly important issue in economies around

the world, including emerging economies.

- True

11. Different nations have different governance systems in place.

- True

12. In general, managers’ use of defense tactics is considered self-serving in nature.

- True

13. Firms targeted for a hostile takeover may only use one defense tactics to fend
off the takeover attempt.

- False, multiple defense tactics

14. As a governance mechanism, investors sometimes use the market for corporate
control to take an ownership position in firms that are an imperfect governance
mechanism.

- True

15. An effective market for corporate control ensures that ineffective and/or
opportunistic top-level managers are disciplined.

- True
Test III. Identification (15 items)

1. Is the set of mechanisms used to manage the relationships among stakeholders

and to determine and control the strategic direction and performance of
organizations.

- Corporate governance

2. Is an external governance mechanism influencing managers’ decisions and the

outcomes resulting from them.

- Market for corporate control

3. Allows shareholders to purchase stock, which entitles them to income (residual

returns) from the firm’s operations after paying expenses.

- Separation of ownership and managerial control

4. Exists when one party delegates decision-making responsibility to a second party

for compensation.

- Agency relationship

5. Is the seeking of self-interest with guile (i.e., cunning or deceit).

- Managerial opportunism

6. Is a potential agency problem that could result in principals incurring costs to

control their agents’ behavior.

- Product diversification
7. The cash remaining after the firm has invested in all projects that have positive
net present value within its current businesses – is the source of another
potential agency problem.

- Free cash flow

8. Are the sum of incentives costs, monitoring costs, enforcement costs, and
individual financial losses incurred by principals because governance mechanism
cannot guarantee total compliance by the agent.

- Agency costs

9. Is defined by the number of large-block shareholders and the total percentage of

the firm’s shares they own.

- Ownership concentration

10. Typically own at least 5 percent of a company’s issued shares.

- Large-block shareholders

11. Are financial institutions, such as mutual funds and pension funds, that control
large-block shareholder positions.

- Institutional owners

12. Is a 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 of directors

13. Elect the members of a firm’s board of directors.

- Shareholders
 14. Individual not involved with the firm’s day-to-day operations, but who have a
relationship with the company.

- Related outsiders
15. Is a 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.

- Executive compensation

Test IV. Essay (5 questions)

We provide answers not in paragraph form as a reference for students.
1. As an internal governance mechanism, why is executive compensation –
especially long-term incentive compensation complicated?

 Because strategic decisions top-level managers make are complex and

nonroutine, direct supervision (even by the firm’s board of directors) is likely
to be an ineffective as a means of judging the quality of their decisions.
 It is difficult to assess the effects of top-level managers’ decision on a regular
basis (e.g., annually) because they are stronger on the firm’s long-term
performance that its short-term performance.
 It is difficult to separate the effects of unpredictable changes in segments
(economic, demographic, political/legal, etc.) on a firm’s performance from the
effects of top-level managerial decisions and behavior.

2. What are the potential drawbacks of executive compensation as governance

mechanism?

 Incentive compensation is subject to managerial manipulation.

 Annual bonuses may provide incentives to pursue short-run objectives at the
expense of the firm’s long-term interests.
  Long-term, performance based incentives increase executive exposure to
risks associated with uncontrollable events, such as market fluctuations and
industry decline.
 Long-term incentives tie a manager’s overall wealth to the firm in an inflexible
way, and such incentives may not be valued as highly by a manger as by
outside investors who have the opportunity to diversify their wealth in a
number of other financial investments.
- Thus, firms may have to overcompensate for managers using long-
term incentives.

3. Why are German executives have not been dedicated to maximizing shareholder
wealth to the degree that is the case for top-level managers in the United Stated
and United Kingdom?

 Because of the role of local government (through the board structure) and the
power of banks in Germany’s corporate governance structure, private
shareholders rarely have major ownership positions in German firms.
 Large institutional investors, such as pension funds (outside of banks and
insurance companies), are relatively insignificant owners of corporate stock.

4. Why are the most effective boards of directors set boundaries for their firms’
business ethics and values?

 As agents of firm’s owners, the board – acting as an internal governance

mechanism – holds top-level managers fully accountable for developing and
supporting an organizational culture in which only ethical behaviors are
permitted.

5. Why problems occurred when there is a separation between ownership and

managerial control?
  The principal and the agent may have different interests and goals.
 The agent may take decisions that result in pursuing goals that conflict with
those of the principal.

FAQ ACTIVITY II

Matching Type. Match the corresponding word in column A to its definitions or

examples in column B. Write the letter beside the number.

Column A

_D_1. Corporate governance

_A_2. Product market stakeholders

_F_3. Board of Directors Column B

_B_4. Organizational stakeholders a. customers and suppliers

_J_5. Hostile takeovers b. employees

_C_6. China c. There has been a gradual decline in

the equity held in state-owned
_E_7. Keiretsu
enterprises, while the number and
_G_8. Consensus percentage of private firm has grown.

_I_9. Insiders d. Is the set of mechanisms used to

_H_10. Outsiders manage the relationships among

stakeholders and to determine and
control the strategic direction and
performance of organizations.

e. A group of firms tied together by

cross-shareholdings.

f. Is a 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.

g. Is valued even when it results in a

slow and cumbersome decision-making
process. h. individuals who are independent of
the firm in terms of day-today operations
and other relationships

i. CEO and other top-level managers

j. Is an acquisition of a target company

by an acquiring firm that is
accomplished not by coming to an
agreement with the target company’s
shareholders or fighting to replace
management in order to get the
acquisition approved.