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7) Describe the main requirements of the Sarbanes-Oxley Act of 2002.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
17
26.6 Corporate Governance Around the World
1) Which of the following statements is FALSE?
A) In many other countries, the central conlict is between what are called "controlling
shareholders" and "minority shareholders."
B) Controlling shareholders can make decisions that beneit them disproportionately
relative to the minority shareholders, such as employing family members rather than the
most talented managers or establishing contracts favorable to other family controlled
irms.
C) As recent events and corporate scandals have shown, investor protection in the United
States is generally seen as substandard when compared to the developed economies in the
world.
D) Much of the focus in the United States is on the agency conlict between shareholders,
who own the majority of a irm but are a dispersed group, and managers, who own little of
the irm and must be monitored.
AACSB Objective: Dynamics of the Global Economy
Author: JN
Question Status: Previous Edition
2) Which of the following statements is FALSE?
A) The United States is somewhat of an exception, in that it focuses solely on maximizing
shareholder welfare.
B) A controlling family has many opportunities to expropriate minority shareholders in a
pyramid structure.
C) One way for families to gain control over irms even when they do not own more than
half the shares is to issue dual class shares—a scenario in which companies have more than
one class of shares and one class has superior voting rights over the other class.
D) Researchers have claimed that the degree of investor protection was largely determined
by the legal origin of the country—speciically, whether its legal system was based on
British common law (less protection) or French, German, and Scandinavian civil law (more
protection).
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
18
3) Which of the following statements is FALSE?
A) Controlling shareholders pay for their control rights because the irm efectively faces a
higher cost of equity for outside capital.
B) Most countries follow what is called the stakeholder model, giving explicit consideration
to other stakeholders—in particular, rank-and-ile employees.
C) In a pyramid structure, a family irst creates a company in which it owns more than 50%
of the shares and therefore has a controlling interest.
D) A conlict of interest arises because the family has an incentive to try to move proits
(and hence dividends) down the pyramid—that is, toward companies in which it has few
cash low rights and away irms in which it has more cash low rights.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
4) Examples of cross-holdings include:
I. Japanese keiretsu
II. German Gruppe
III. Australian foundations
IV. Korean chaebol
A) I, II, and IV
B) I, II, and III
C) I and IV
D) All of the above are examples of cross-holdings.
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
5) Which of the following countries has employees appoint some board members?
A) Canada
B) the United States
C) Turkey
D) Germany
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
6) Which of the following are NOT ways in which individuals or families can gain control
over irms, even when they don't own more than half the shares?
A) dual class shares
B) pyramid structures
C) the stakeholder model
D) All of the above are ways in which individuals or families can gain control over irms,
even when they don't own more than half the shares.
19
AACSB Objective: Analytic Skills
Author: JP
Question Status: Previous Edition
7) How does a pyramid structure work?
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
8) Describe the "stakeholder" model of corporate governance.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
20
26.7 The Tradeof of Corporate Governance
1) Which of the following statements is FALSE?
A) It is important to keep in mind that good governance is value enhancing and so, in
principle, is something investors in the irm should strive for.
B) Corporate governance is a system of checks and balances that trades of costs and
beneits.
C) Because good governance is based upon a basic set of principles, like those detailed in
the Cadbury Commission's indings, one should expect all irms to display similar
governance structures.
D) The costs and beneits of a corporate governance system also depend on cultural norms.
AACSB Objective: Relective Thinking Skills
Author: JN
Question Status: Previous Edition
2) The costs and beneits of a corporate governance structure ________.
A) are the same in all countries
B) are the same for all companies within a country
C) depend on cultural norms
D) are not important in maximizing shareholder wealth
AACSB Objective: Relective Thinking Skills
Author: JP
Question Status: Previous Edition
3) Having a founder and top executive also be a major shareholder ________.
A) always results in agency conlicts that are bad for minority shareholders
B) can sometimes have beneits that outweigh the costs
C) is illegal in the U.S. and most other industrialized countries
D) is never beneicial to employees
AACSB Objective: Relective Thinking Skills
Author: JP
Question Status: Previous Edition
21
