CFA Corporate Governance: Stakeholder Groups and ESG Considerations

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Questions and Answers

What is the primary function of shareholders and creditors in a company?

To manage the company's relationships with suppliers and customers

To ensure the company's compliance with government regulations

To provide the capital and financial resources to finance the company's activities (correct)

To oversee the daily operations of the company

Which of the following is NOT a typical stakeholder group in a company?

The media (correct)

The government and regulators

The employees

The board of directors

What is the common characteristic that defines a stakeholder?

Having a vested interest in the company (correct)

Being employed by the company

Being a government official

Having a direct financial interest in the company

Who is responsible for overseeing the daily operations of a company?

The managers Signup and view all the answers

What is the primary function of the board of directors in a company?

To make strategic decisions for the company Signup and view all the answers

Which stakeholder group is responsible for ensuring a company's compliance with government regulations?

The government and regulators Signup and view all the answers

What do customers typically expect from a company's products or services?

Appropriate benefits given the price paid and meet applicable standards of safety Signup and view all the answers

Why do suppliers have a long-term interest in a company's stability?

Because they have invested in the relationship through product design and training Signup and view all the answers

What is the primary interest of short-term creditors?

Being paid in a timely manner Signup and view all the answers

Which stakeholders are most concerned with ensuring the well-being of their nations' economies?

Government regulators Signup and view all the answers

What is a key concern for most companies?

Customer satisfaction Signup and view all the answers

What would most likely benefit from a significant increase in the market value of a company?

Shareholders Signup and view all the answers

Who provides the human capital for a company's day-to-day operations?

The employees Signup and view all the answers

According to the shareholder theory, whose interests are prioritized?

Only shareholders Signup and view all the answers

What is the role of the board of directors in a company?

To serve as the steward of the company Signup and view all the answers

What do suppliers provide to a company?

Raw inputs and outsourced services Signup and view all the answers

What is the primary objective of the stakeholder theory?

To consider the interests of all stakeholders Signup and view all the answers

What role do government and regulators play in a company?

They dictate the rules and regulations governing the company Signup and view all the answers

What is the characteristic of a dispersed ownership structure?

No single shareholder has the ability to individually exercise control over the corporation Signup and view all the answers

What is the purpose of dual-share classes in a corporation?

To give more voting power to company insiders and family Signup and view all the answers

What is the strategy used by managers to extract private benefits?

Withholding relevant information from the board Signup and view all the answers

What is the characteristic of a concentrated ownership structure?

An individual or group has the ability to exercise control over the corporation Signup and view all the answers

What is the purpose of straight voting in a corporation?

To give one vote for each share Signup and view all the answers

What is the primary concern for a debtholder when a company increases its leverage?

Increased risk of default Signup and view all the answers

Why might increasing dividend payments to shareholders conflict with debtholders' interests?

It may impair the company's ability to pay interest and principal Signup and view all the answers

What is the reason for the debt/equity conflict in a company?

Shareholders prefer higher leverage while debtholders prefer lower leverage Signup and view all the answers

What could be a reason for a company to reject a high-risk high-reward project?

The company's debtholders are concerned about increased leverage Signup and view all the answers

What is the likely outcome of a company's decision to increase its leverage?

Increased default risk for debtholders Signup and view all the answers

Why might a company include covenants in its debt agreements?

To limit dividend payments to shareholders Signup and view all the answers

Study Notes

Stakeholder Groups

A stakeholder is any individual or group that has a vested interest in a company.
Stakeholders in a business include:
- Shareholders and creditors (provide capital and financial resources)
- Board of directors (steward of the company)
- Managers (execute strategy and day-to-day operations)
- Employees (provide human capital)
- Customers (demand for products and services)
- Suppliers (raw inputs and outsourced functions)
- Government and regulators (dictate rules and regulations)

Stakeholder Purpose/Function

Shareholders: provide financial resources, expect return on investment
Customers: expect products/services to satisfy needs, provide benefits, and meet safety standards
Suppliers: provide inputs and services, expect long-term stability
Government and regulators: protect public interest and ensure well-being of economy

Shareholder vs Stakeholder Theory

Shareholder Theory: prioritize shareholder value, consider other stakeholders only as they affect shareholder value
Stakeholder Theory: consider interests of all stakeholders, making ESG an explicit objective

Shareholder Rights and Relationships

Shareholders have rights, e.g., controlling and minority relationships
Shareholder relationships can be:
- Dispersed (many shareholders, none with control)
- Concentrated (individual/group with control)
- Hybrid (combination of dispersed and concentrated)

Manager and Board Relationships

Managers may extract private benefits by withholding information from the board
Dual-share classes can give company insiders more control

Shareholder vs Creditor Interests

Shareholders: prefer high leverage for higher return potential
Creditors: prefer lower leverage to reduce risk and ensure debt repayment

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Description

Test your knowledge of corporate governance and ESG considerations with this quiz, featuring 15 multiple-choice questions on stakeholder groups, assessment, and other key topics from the CFA Institute curriculum. Review the concepts and get ready for your exam!