29 Questions
What is the primary function of shareholders and creditors in a company?
To provide the capital and financial resources to finance the company's activities
Which of the following is NOT a typical stakeholder group in a company?
The media
What is the common characteristic that defines a stakeholder?
Having a vested interest in the company
Who is responsible for overseeing the daily operations of a company?
The managers
What is the primary function of the board of directors in a company?
To make strategic decisions for the company
Which stakeholder group is responsible for ensuring a company's compliance with government regulations?
The government and regulators
What do customers typically expect from a company's products or services?
Appropriate benefits given the price paid and meet applicable standards of safety
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
What is the primary interest of short-term creditors?
Being paid in a timely manner
Which stakeholders are most concerned with ensuring the well-being of their nations' economies?
Government regulators
What is a key concern for most companies?
Customer satisfaction
What would most likely benefit from a significant increase in the market value of a company?
Shareholders
Who provides the human capital for a company's day-to-day operations?
The employees
According to the shareholder theory, whose interests are prioritized?
Only shareholders
What is the role of the board of directors in a company?
To serve as the steward of the company
What do suppliers provide to a company?
Raw inputs and outsourced services
What is the primary objective of the stakeholder theory?
To consider the interests of all stakeholders
What role do government and regulators play in a company?
They dictate the rules and regulations governing the company
What is the characteristic of a dispersed ownership structure?
No single shareholder has the ability to individually exercise control over the corporation
What is the purpose of dual-share classes in a corporation?
To give more voting power to company insiders and family
What is the strategy used by managers to extract private benefits?
Withholding relevant information from the board
What is the characteristic of a concentrated ownership structure?
An individual or group has the ability to exercise control over the corporation
What is the purpose of straight voting in a corporation?
To give one vote for each share
What is the primary concern for a debtholder when a company increases its leverage?
Increased risk of default
Why might increasing dividend payments to shareholders conflict with debtholders' interests?
It may impair the company's ability to pay interest and principal
What is the reason for the debt/equity conflict in a company?
Shareholders prefer higher leverage while debtholders prefer lower leverage
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
What is the likely outcome of a company's decision to increase its leverage?
Increased default risk for debtholders
Why might a company include covenants in its debt agreements?
To limit dividend payments to shareholders
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
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!
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