Question

4. Corporate governance: Methods for influencing management's decisions

Corporate governance refers to policies and rules, regulations and laws, and activities that (1) influence both management’s decisions and its company’s operations, and (2) affect the relationships between a business’s stakeholders. These stakeholders include the company’s executives and managers, shareholders, creditors, current and former employees, competitors, and local and global communities.

In simple terms, corporate governance provisions can take two forms: __________ and ________ , with the former generally taking the form of__________ designed to reward management for benefitting the firm’s stakeholders, and the latter resulting in their____________ for making damaging decisions or undertaking unacceptable activities.

These governing forces are both internal and external to the organization, and they can either align management’s interests with those of their shareholders (a positive outcome) or further entrench the firm’s management (a not-so-positive outcome). An entrenched management is one that is________ likely to be removed, all other things remaining equal.

Internal and external corporate governance provisions and activities can take many forms, including restricted voting rights. Which of the following best describes this provision?

a) This anti-takeover provision limits the voting rights of certain classes of shares, such as Class A versus Class B shares.

b) This charter provision automatically cancels the voting rights of any shareholder who agrees to sell their shares to an acquiring firm.

c) This provision automatically cancels the voting rights of any shareholder who owns more than a specified amount of a target company’s stock.

According to financial and management theory, which of the following practices are reasonably expected to align the behaviors of a corporation’s management with those of the firm’s shareholders? Check all that apply.

a) All provisions that result in an entrenched senior management team, since an entrenched management is more stable and can devote more time and energy to running the business.

b) The board of directors should consist of fewer than ten members.

c) The board of directors and senior managers should advocate using an accounting firm that provides both accounting and consulting services to the company.

d) Senior managers should keep a lot of cash on hand, rather than investing it in productive assets, because it allows them to spend money on unnecessary expenditures and perquisites

Answer 1

In simple terms, corporate governance provisions can take two forms: carrots and sticks, with the former generally taking the form of compensation designed to reward management for benefitting the firm’s stakeholders, and the latter resulting in their removal or termination for making damaging decisions or undertaking unacceptable activities.

These governing forces are both internal and external to the organization, and they can either align management’s interests with those of their shareholders (a positive outcome) or further entrench the firm’s management (a not-so-positive outcome). An entrenched management is one that is more likely to be removed, all other things remaining equal.