Corporate Governance and Agency Theory Quiz
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According to agency theory, what is the primary goal of corporate governance?

  • To ensure complete independence of the board from management.
  • To align the interests of agents with those of the principals. (correct)
  • To maximize the utility of the agents.
  • To maximize the agency costs.

    • What does the agency relationship involve?

  • An arrangement where the agent always acts in the principals interests.
  • A contract where a principal delegates a task to an agent. (correct)
  • A guarantee of perfect alignment between agent's and principal's interests.
  • A situation where the principal directly controls all the agent's decisions.

    • Which of the following is NOT a component of agency costs?

  • Residual losses
  • Profit maximization costs (correct)
  • Guarantee costs
  • Monitoring costs

    • What is considered the optimal composition of the Board of Directors?

    <p>A mix of internal executives and external and independent actors.</p> Signup and view all the answers

    What is the key challenge regarding the Board of Directors' role in the context of agency theory?

    <p>Balancing control over management with support for effective decision-making.</p> Signup and view all the answers

    In family-owned companies, the second variant of the agency problem often involves which of the following?

    <p>An overlap between shareholders, the board, and management.</p> Signup and view all the answers

    What risk arises if management establishes too much dominance in the governance structure?

    <p>Agency costs may not be minimized by the board.</p> Signup and view all the answers

    According to the content, what is a consequence of the convergence of interest in family owned companies?

    <p>A blurred line between shareholders, the board and management.</p> Signup and view all the answers

    What is a primary concern arising from the overlap of the chairman and CEO positions within a company?

    <p>Excessive concentration of power, limiting board independence.</p> Signup and view all the answers

    Why might a company choose to appoint a lead independent director?

    <p>To mitigate conflicts arising from having a combined chairman and CEO role.</p> Signup and view all the answers

    Which of the following is NOT a typical function of a lead independent director?

    <p>Deciding the remuneration policies for managing directors.</p> Signup and view all the answers

    Which body holds the ultimate decision-making power within a company, regarding areas discussed in board committees?

    <p>The board of directors.</p> Signup and view all the answers

    What is the main purpose of the audit committee?

    <p>To monitor the work of executives and the proper functioning of the board.</p> Signup and view all the answers

    What is a primary focus of the remuneration committee?

    <p>To support the company’s strategy and promote sustainable success through appropriate pay.</p> Signup and view all the answers

    What is the general requirement for the composition of the internal control committee, according to the content provided?

    <p>At least three independent directors.</p> Signup and view all the answers

    According to the information given, what is a specific guideline regarding the chairman's involvement in the remuneration committee?

    <p>The chairman should not chair the committee.</p> Signup and view all the answers

    What is a core assumption of the shareholders' view regarding corporate value?

    <p>Maximizing shareholder value equates to maximizing corporate value.</p> Signup and view all the answers

    In the shareholders' view, what primary purpose do contracts serve within a firm?

    <p>To regulate the rights and responsibilities of all stakeholders.</p> Signup and view all the answers

    What are the two primary components that constitute the concept of 'ownership rights' in the context of a company?

    <p>The right to appropriate returns and the right to control the assets.</p> Signup and view all the answers

    According to the shareholders' perspective, why should residual control rights be allocated to shareholders?

    <p>Because they receive residual income and are more at risk of being exploited by managers.</p> Signup and view all the answers

    What is one key limitation of allocating ownership rights as a governance mechanism?

    <p>It can lead to the controlling stakeholder potentially exploiting other stakeholders’ specific investments.</p> Signup and view all the answers

    What specific types of decisions are directly influenced by the allocation of residual control rights to shareholders?

    <p>Dividend policy, capital increases, corporate by-laws, and election of board members.</p> Signup and view all the answers

    Why is the market for corporate control considered a disciplinary mechanism in the shareholders' view?

    <p>Because it incentivizes top managers to maximize shareholders’ value to avoid takeover.</p> Signup and view all the answers

    What motivates stakeholders who provide critical resources to behave honestly, according to the shareholders' perspective?

    <p>The structure of contracts that attract key resources and the fairness within those contracts.</p> Signup and view all the answers

    What is required for the relevant principles to be considered functional?

    <p>If controls are selected, developed, and deployed with persuasive evidence that they affect them.</p> Signup and view all the answers

    Which line of defense is responsible for management and internal controls?

    <p>First line of defense</p> Signup and view all the answers

    What is the primary role of the second line of defense?

    <p>To support and oversee the first line of defense.</p> Signup and view all the answers

    What is the role of the third line of defense in an organization?

    <p>Providing independent assurance on risk management</p> Signup and view all the answers

    According to Weimer and Pape (1999), what constitutes a governance system?

    <p>A framework of legal, institutional, and cultural factors shaping stakeholder influence on managerial decision-making.</p> Signup and view all the answers

    Which of these countries is NOT typically associated with the Anglo-Saxon model of corporate governance?

    <p>Germany</p> Signup and view all the answers

    What is a key characteristic of the Anglo-Saxon model?

    <p>A market-oriented structure with strong financial market influence.</p> Signup and view all the answers

    Which type of corporate ownership structure is typical of the Anglo-Saxon model?

    <p>Public companies with high presence of institutional investors</p> Signup and view all the answers

    What is a primary factor that companies living through a crisis should consider when revising their strategy?

    <p>The values, interests, and resources of the current owners.</p> Signup and view all the answers

    In a company where family values are emphasized, what is a likely outcome?

    <p>Higher probability of family participation in company governance.</p> Signup and view all the answers

    How can the institutional context affect a company's strategy?

    <p>By favoring some businesses and strategies over others through regulations and political models.</p> Signup and view all the answers

    In the public company model, what is typically the role of ownership?

    <p>Weak and passive with limited influence on strategy.</p> Signup and view all the answers

    What is the defining feature of concentrated ownership?

    <p>Strong and direct influence on strategic choices by the shareholders.</p> Signup and view all the answers

    What is one suggested consequence of having a controlling shareholder?

    <p>Company governance bodies will be designed according to the needs of the owner.</p> Signup and view all the answers

    How do Institutional Investors typically approach risk and strategic choices?

    <p>With a greater propensity to risk and focus on long-term value creation.</p> Signup and view all the answers

    Which of the following is an example of a context condition that influences a business and their strategy?

    <p>Available technology</p> Signup and view all the answers

    What is the main role of the Family Board in a family firm's governance structure?

    <p>To identify the objectives and code of conduct for family members involved in the business.</p> Signup and view all the answers

    Study Notes

    Corporate Governance

    • Corporate governance is a set of rules and procedures for decision-making in a company.
    • Accountability and responsibility distribution are crucial to business management.
    • Corporate governance considers the interests of internal and external actors, including shareholders and stakeholders.
    • Non-financial reporting is produced by listed companies, used by stakeholders to check interest satisfaction.

    Different Definitions of Corporate Governance

    • Corporate Governance (CG) is the activity of management and control by owners and their representatives.
    • Different definitions exist, varying in the interests considered and the number of structures and mechanisms involved in managing and controlling the company.
    • Some definitions focus on shareholder interests, while others consider stakeholder interests.
    • Other definitions consider the Board of Directors as the only body responsible, while others see various structures with the aim of protecting different interests.

    Corporate Governance in Large Listed Companies

    • The problem in large listed companies with fragmented shareholding is the configuration of the Board of Directors.
    • The Board of Directors is responsible for strategic leadership and representing shareholders.
    • A high probability exists that directors' interests are not aligned with shareholders.
    • Misbehavior by managers can lead to opportunistic behavior or legal consequences (such as bankruptcy).
    • The main goal of good governance literature is to address and avoid misbehaviors and ensure the pursuit of shareholders' interests.
    • A Board of directors should create value for the company, set direction, and make the right choices.

    Origins of Public Companies

    • Companies were initially owned and managed by the same person or family.
    • Public companies emerged due to growth needs and professionalized management.
    • Public companies (PCs) are companies where ownership is fragmented (listed).
    • Situations where shareholders vote for directors appointed by previous boards due to not being interested in company governance are seen as "omnipotent boards" , mainly in the 60s and 70s in the US.

    The Agency Theory

    • An agency relationship is a contract where one party delegates another party to fulfill a task.
    • There is a possible conflict of interest between the principal (shareholder) and the agent (management)
    • Agency costs are the costs of monitoring and guaranteeing the principal's interests are met.
    • The Board of Directors is crucial in balancing the relationship between shareholders and managers, and mitigating the agency costs.

    Possible Solutions

    • Making markets more efficient.
    • A better governance structure.
    • Codes for corporate governance (e.g., Cadbury report).
    • Role of the board of directors to control management.
    • Board of directors role is important in decision making and strategy making.

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    Related Documents

    Corporate Governance PDF

    Description

    Test your knowledge on corporate governance principles and agency theory with this comprehensive quiz. Explore relationships, board composition, agency costs, and the challenges faced in family-owned companies. Perfect for students and professionals interested in organizational structure and management.

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