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CHAPTER 4 CORPORATE GOVERNANCE AROUND THE WORLD
SUGGESTED ANSWERS TO END-OF-CHAPTERQUESTIONS AND PROBLEMS
Questions
1. The majority of major corporations are franchised as public corporations. Discuss the key
strength and weakness of the ‘public corporation’. When do you think the public corporation
as an organizational form is unsuitable?
Answer: The key strength of the public corporation lies in that it allows for efficient risk sharing
among investors. As a result, the public corporation may raise a large sum of capital at a
2. The public corporation is owned by multitude of shareholders but managed by professional
managers. Managers can take self-interested actions at the expense of shareholders.
Discuss the conditions under which the so-called agency problem arises.
3. Following corporate scandals and failures in the U.S. and abroad, there is a growing
demand for corporate governance reform. What should be the key objectives of
corporate governance reform? What kind of obstacles can there be thwarting reform
efforts?
4. Studies show that the legal protection of shareholder rights varies a great deal across
countries. Discuss the possible reasons why the English common law tradition
provides the strongest and the French civil law tradition the weakest protection of
investors.
5. Explain ‘the wedge’ between the control and cash flow rights and discuss its implications for
corporate governance.
Answer: When there is a separation of ownership and control, managers have control rights with
insignificant cash flow rights, whereas shareholders have cash flow rights but no control rights.
6. Discuss different ways that dominant investors use to establish and maintain the control of
the company with relatively small investments.
7. The Cadbury Code of the Best Practice adopted in the United Kingdom led to a successful
reform of corporate governance in the country. Explain the key requirements of the Code
and discuss how it may have contributed to the success of reform.
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
board structure helped to strengthen the monitoring function of the board and reduce the
agency problem.
8. Many companies grant stocks or stock options to the managers. Discuss the benefits
and possible costs of using this kind of incentive compensation scheme.
manipulate financial statements so that they can maximize their benefits in the short run.
9. It has been shown that foreign companies listed in the U.S. stock exchanges are valued
more than those from the same countries that are not listed in the U.S. Explain the reasons
why U.S.-listed foreign firms are valued more than those which are not. Also explain why not
every foreign firm wants to list stocks in the United States.
Answer: Foreign companies domiciled in countries with weak investor protection can bond
themselves credibly to better investor protection by listing their stocks in U.S. exchanges that
10. Explain “free cash flows.” Why do managers like to retain free cash flows instead of
distributing it to shareholders? Discuss what mechanisms may be used to solve this
problem?
Answer: Free cash flow represents a firm’s internally generated fund in excess of the amount
11. Epic bribe scandal at Petrobras, a major oil company controlled by the Brazilian
government, that broke out in 2015 shocked the economic and political system of Brazil. Put
simply, the company insiders, outside suppliers and contractors, and politicians colluded and
stole billions of dollars from the company via kickbacks, bid riggings, overcharging for
construction projects, etc. The Petrobras scandal led to a sharp drop of the company share
price, laying off thousands of workers, and tilting the national economy toward recession.
The scandal also seriously tarnished the image of Brazil as one of the promising emerging
markets. Document in detail what happened at Petrobras and then investigate how the
company’s governance and the country’s political culture may have contributed to the
scandal.
Answer: According to the 2015 Corruption Perceptions Index compiled by Transparency
International, a global civil organization, Brazil ranks 76th in the world below countries like
MINI CASE: Parmalat: Europe’s Enron
Discussion points.
1. How was it possible for Parmalat managers to “cook the books” and hide it for so long?
2. Investigate and discuss the role that international banks and auditors might have played
in Parmalat’s collapse.
3. Study and discuss Italy’s corporate governance regime and its role in the failure of
Parmalat.
Suggested Answers:
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
also contributed to the implosion of Parmalat.
