Business & Society, 16e (Lawrence)
Chapter 13 Shareholder Rights and Corporate Governance
1) The two main types of investors that own shares of stock in U.S. corporations are individuals
and institutions.
2) Since the 1960s, growth in the numbers of institutional investors in the United States has been
phenomenal.
3) Investors always choose to invest in the stock of companies that pay high dividends.
4) A corporation’s shareholders have a right to inspect the company’s books for any reason.
5) It is the responsibility of the board of directors and its audit committee to engage an independent
accounting firm to audit the financial statements prepared by management.
6) When boards of directors meet without management present, they are more likely to have
completely candid discussions about a company’s affairs.
7) The Organization for Economic Cooperation and Development (OECD), representing 34
nations, issued a revised set of principles of corporate governance to serve as a benchmark for
companies and policymakers worldwide.
8) Stock options represent the right to buy a company’s stock at a set price for a certain period.
9) The ratio of average executive to average worker pay tends to increase during recessions and
fall during periods of economic expansion.
10) Boards of directors in the United States are required to staff their compensation committees
exclusively with outside directors.
11) Shareholders must rely exclusively on the board of directors to protect their interests.
12) Institutional investors have little incentive to hold their shares and organize to change
management policy.
13) The activism of institutional shareholders has been completely limited to the United States.
14) It is illegal in the United States to offer stock trade tips to clients based on public information.
15) Shareholders have become an increasingly powerful and vocal stakeholder group in
corporations.
16) Which of the following statements is not true about shareholders?
A) They are the legal owners of business corporations.
B) They own equal shares of company assets.
C) They are investors in the company.
D) Managers pay close attention to their needs and interests.
17) In 2014, of the following nations, the fastest-growing stock market was in:
A) The United States.
B) Japan.
C) India.
D) Indonesia.
18) Institutional investors are best described by which statement?
A) Institutions invest their funds by purchasing shares of stock in corporations.
B) The proportion of institutional stock ownership in the United States has declined slowly since
the 1960s.
C) Banks and student loans are examples of institutional investors.
D) Institutions accounted for over 90 percent of total U.S. equity value.
19) Institutional investors are sometimes referred to as:
A) Main Street investors.
B) Wall Street investors.
C) Inside investors.
D) Outside investors.
20) Investors may receive an economic benefit from the ownership of stock by receiving:
A) Interest.
B) Dividends.
C) Capital gains.
D) Both dividends and capital gains.
21) In 2008 and early 2009, share values declined sharply as the global economy fell into a severe
recession. This type of stock market is referred to as a:
A) Bull market.
B) Volatile market.
C) Bear market.
D) Capital appreciation.
22) A legal right of shareholders is:
A) To vote on members for the board of directors.
B) To receive interest, if declared.
C) To publish annual financial reports.
D) To vote on who will become chief executive officer (CEO).
23) Corporate governance involves the exercise of control over a company’s:
A) Finance and accounting departments.
B) Entire corporate direction.
C) Manufacturing facilities.
D) Marketing and human resources departments.
24) The directors of a company are a central factor in corporate governance because they:
A) Exercise formal legal authority over company policy.
B) Have the highest stake in the performance of the company.
C) Have a moral responsibility to serve both the company’s employees and customers
D) Inherited the business from their predecessors.
25) Which of the following is true about corporate boards?
A) Corporate boards average between 9 and 11 members.
B) About half of the directors are “outside” directors.
C) Only one-third of all companies have at least one woman on their board.
D) About 13 percent of board members are Latino.
26) In 2017, median compensation for directors at the largest U.S. corporations was around:
A) $150,000.
B) $300,000.
C) $750,000.
D) $1,200,000.
27) The board committee that administers and approves salaries and benefits of high-level
managers in a company is called:
A) Executive.
B) Human resources.
C) Nominating.
D) Compensation.
28) Which of the following is not a function of board committees?
A) The executive committee works closely with top managers on business matters.
B) The audit committee reviews the company’s financial reports.
C) The compensation committee administers and approves salaries and benefits.
D) The finance committee works closely with the human resources department to fund employee
salaries.
29) The audit committee is required by U.S. law to be:
A) Composed entirely of outside directors.
B) Financially literate.
C) Headed by the company’s CEO.
D) Both composed entirely of outside and headed by the company’s CEO.
30) How are directors (members of corporate boards) selected?
A) Shareholders elect the directors from a list of candidates.
B) The company’s CEO appoints the directors.
C) The nominating committee elects the directors.
D) Shareholders with the greatest proportional ownership in the company become directors.
31) Which of the following is a key feature of effective boards of directors?
A) Hold regular meetings without the CEO present.
B) Fill all important positions on the board with managers with insider knowledge of the firm.
C) Combine the duties of the board chairman and the chief executive.
D) Ensure that no outside members are included on the board.
32) Supporters of declassifying board elections argue that this approach:
A) Is less costly.
B) Increases accountability and responsiveness to shareholders.
C) Allows the best people to serve longer.
D) Prevents an excess of diversity on boards.
33) The “agency problem” arises when:
A) Owners manage the company on their own behalf.
B) There is no separation of ownership and control in a company.
C) Managers act in their own interest, rather than in the interest of shareholders.
D) Shareholders act in their own interest, rather than in the interest of the board.
34) One of the main reasons that American executives are paid so much is:
A) Pay is set by the compensation committees of the board, largely comprised of other CEOs who
have an interest in pushing compensation up.
B) Qualified individuals are scarce, because most current CEOs were born during the “baby bust”
years of the Great Depression.
C) High executive compensation in other nations puts upward pressure on the salaries of U.S.
executives.
D) Most executives are paid based on their performance, and rising compensation reflects the
excellent performance of their firms.
35) An argument that opposes the idea of high executive pay is:
A) High salaries provide an incentive for innovation and risk taking.
B) Not many individuals are capable of running today’s large, complex organizations.
C) Top athletes and entertainers make a lot of money, so top executives should, too.
D) High salaries divert resources that could be used to invest in the business.
36) An argument in support of high executive compensation is:
A) Inflated executive pay helps U.S. firms compete with foreign rivals.
B) High executive pay drives away talented middle managers who feel unfairly compensated.
C) High salaries provide an incentive for innovation and risk-taking.
D) There is currently a surplus of qualified executive candidates.
37) A reason for institutions becoming more assertive in promoting the interests of their member
investors is:
A) Expressing dissatisfaction with management performance by selling a large block of stock
would reduce the value of the institution’s holdings.
B) Institutional investors are rarely able to influence management policy.
C) Institutions have greater flexibility in selling stocks than do individual investors.
D) Institutions have nominated members on the finance committee of the board of directors.
38) The activism of institutional investors in other countries has been spearheaded by:
A) U.S.-based pension and mutual funds that in recent years acquired large stakes in foreign
countries.
B) Foreign institutions that were granted new rights by their governments.
C) Managers who became less active in proxy battles on a global level.
D) The rising number of individual investors in public service companies.
39) Social investors seek to eliminate from their investment portfolios companies that:
A) Pollute the environment.
B) Discriminate against employees.
C) Make dangerous products like tobacco or weapons.
D) All of these answers are correct.
40) Which of the following is an example of fulfilling social objectives through stock ownership?
A) Selling stock of companies that refused to do business with nations that produced conflict
minerals.
B) Divesting from Chinese companies that made products using forced labor.
C) Selling stock of companies with a below-market rate of return.
D) Investing in Burmese companies that had been accused of human rights abuses.
41) The mission of the Securities and Exchange Commission (SEC) is to:
A) Protect shareholders’ rights by making sure that stock markets are run fairly.
B) Protect companies from hostile takeovers.
C) Ensure that institutional investors do not take control of company management.
D) Ensure that the federal treasury receives its share of the revenues from stock trading.
42) Reports filed with the SEC provide information on a company’s:
A) Sales and earnings.
B) Depreciation by line of business.
C) Details of foreign operations.
D) All of these answers are correct.
43) Trading stocks in advance of large institutional investment moves is called:
A) Front-running.
B) Divestment.
C) Social screening.
D) Hedge fund betting.
44) The Securities and Exchange Commission outlaws:
A) Any manipulative or deceptive device used to trade stocks.
B) Compensating company executives with stock options.
C) Trading in stocks by institutions.
D) Buying stock in a company for which you work.
45) An example of “insider trading” is:
A) An auditor using public information about the company to invest in its stock.
B) A marketing executive briefing stock analysts on the company’s sales performance.
C) The CEO’s cousin offering to buy the company.
D) A company executive passing nonpublic information about an upcoming acquisition to a
friend, who traded for a profit.
46) The company justified Wynn’s high compensation package, in the discussion case Executive
Misconduct at Wynn Resorts, by saying that:
A) He was the inspiration for the casino owner character in the “Ocean’s” films.
B) His signature was the company logo.
C) He had led the company to total returns of 19 percent per year between 2002 and 2017.
D) His ex-wife was the only one who ever voted against him.
47) Identify and provide an example for each of the five major legal rights afforded to
shareholders.
48) What are the key features of effective boards of directors?
49) Describe a current trend in corporate governance, providing a real example.
50) Do you think U.S. executives are compensated too highly? Why or why not?
51) Why have U.S. institutions become more active as investors? How has this trend spread to
other countries?
52) What is insider trading? Explain how the courts have defined this practice.
53) In your opinion, how is the relationship between modern corporations and their shareholders
changing? Explain and justify your argument.