Questions and Answers
What is a corporation primarily defined as?
What role do shareholders play in a corporation?
What is the primary responsibility of the Board of Directors?
Which of the following roles is primarily responsible for ensuring regulatory compliance and managing board activities?
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What is one responsibility of the CEO and executives in a corporation?
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Who are considered stakeholders in a corporation?
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What is one of the functions of auditors within a corporation?
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What distinguishes a corporation from its owners or shareholders?
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What is the primary activity that directors provide to a firm?
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What occurs if the transaction cost of using the market is higher?
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According to political theory, how is corporate power typically allocated?
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What does P. Drucker say is the primary responsibility of a business?
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What is a potential consequence of the absence of ethics in business?
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Which of the following statements reflects one of the myths about ethics in business?
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Why is ethics considered important in the context of business?
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How is business fundamentally defined?
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What is the primary focus of agency theory in corporate governance?
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Which of the following describes the key feature of agency theory?
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According to agency theory, what behavior may agents exhibit that differs from the expectations of the principals?
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What is a steward in the context of corporate governance?
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Stakeholder theory emphasizes which of the following aspects in organizational management?
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What role do directors play according to the Resource Dependency Theory?
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Which aspect is NOT emphasized in the agency theory regarding agent behavior?
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How does the steward's satisfaction relate to organizational performance?
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Study Notes
Corporate Governance
- Decision-making processes in large businesses are governed by corporate governance principles.
- Agency theory describes the relationship between principals (shareholders) and agents (company directors).
- Principals hire agents to manage business operations, with an expectation that agents will act in the best interests of the principals.
- Agents may act in self-interest or engage in opportunistic behavior, leading to a misalignment with principals' expectations.
- A key feature of agency theory is the separation of ownership and control, emphasizing accountability for tasks and responsibilities.
- Rewards and punishments can realign agents' priorities to benefit principals, with stewards maximizing shareholder wealth through firm performance.
- Stewards (executives/managers) are motivated by organizational success, promoting autonomy to maximize shareholder returns.
Stakeholder Theory
- Management is accountable to a diverse range of stakeholders, including suppliers, employees, and business partners.
- Managers must consider intrinsic interests of all stakeholders without one set of interests dominating the others.
Resource Dependency Theory
- This theory highlights the role of board directors in securing essential resources for the organization.
- Directors’ external linkages provide critical resources, enhancing organizational performance and survival.
Corporation Definition
- A corporation is a legal entity distinct from its owners, created to conduct business with rights and responsibilities similar to individuals.
- Formed through incorporation, it can own assets, incur liabilities, enter into contracts, and engage in legal actions.
Shareholders
- Shareholders invest capital and hold voting rights to influence major corporate decisions, including electing board members and approving mergers.
Board of Directors
- Responsible for overseeing management, setting corporate strategy, monitoring executive performance, and ensuring regulatory compliance.
CEO and Executives
- Address conflicts of interest, make significant decisions, and implement board strategies while managing resources and meeting organizational goals.
Stakeholders
- Groups or individuals affected by the company’s actions, classified into types:
- Employees expect fair wages and job security.
- Customers seek quality products at reasonable prices.
- Suppliers desire fair contracts and timely payments.
- Communities are concerned about environmental and social impacts.
Corporate Secretary
- Ensures compliance with legal requirements and manages board activities, including organizing meetings and maintaining records.
Auditors
- Ensure financial integrity:
- Internal auditors assess risk management and governance processes.
- External auditors verify the accuracy of financial statements against accounting standards.
Directors' Role
- Directors contribute resources like information and links to suppliers and public policy makers, categorized as insiders, business experts, support specialists, and community influencers.
Transaction Cost Theory
- Companies incur transaction costs when creating value from contracts; higher market transaction costs may lead firms to handle transactions internally.
Political Theory
- Stresses the necessity of securing shareholder voting support rather than directly purchasing voting power, focusing on corporate power allocation influenced by government favor.
Social Responsibility and Ethics
- Business involves lawful production and exchange of goods/services for profit but can lead to unethical practices.
- Emphasizes the need for ethics in business to avoid chaos and subjective moral standards.
- Ethical principles aid business leaders in tackling moral issues even without clear laws.
- Myths about business ethics include misconceptions about the personal nature of ethics and the false belief that ethics and business cannot coexist.
Importance of Ethics in Business
- Absence of ethics can lead to subjective and relativistic moral standards, necessitating a philosophical approach to ethical dilemmas.
- Business is a fundamental aspect of human society, necessitating ethical considerations in its operations.
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Description
This quiz explores the fundamentals of corporate governance, focusing on decision-making processes within large businesses. It includes the analysis of agency theory and the relationship between principals and agents such as shareholders and directors. Test your understanding of these critical concepts in corporate governance.
