Corporate Governance

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Question 1
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Corporate governance is the set of mechanisms used to manage the relationship among stakeholders and to determine and control the strategic direction and performance of an organization.

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Question 2
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Corporate governance involves oversight in areas where owners, managers, and members of Boards of Directors may have conflicts of interest.

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Question 3
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Corporate governance is a means to establish harmony between parties (the firm's owners and its top-level managers) whose interests may conflict.

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Question 4
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In modern corporations-especially those in the United States and United Kingdom-a primary objective of corporate governance is to ensure that the interests of top-level managers are aligned with the interests of shareholders.

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Question 5
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Recent emphasis on corporate governance stems mainly from the failure of corporate governance mechanisms to adequately monitor and control top-level managers' decisions.

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Question 6
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The three internal corporate governance mechanisms are ownership concentration, Board of Directors, and the market for corporate control.

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Question 7
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Executive compensation is considered an external corporate governance mechanism because it determined in part by market forces.

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Question 8
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In the United States, the primary goal of a firm is to maximize profits to provide a financial gain to shareholders.

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Question 9
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In the United States, the members of the Board of Directors are a firm's key stakeholders and a company's legal owners.

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Question 10
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In the modern U.S. corporation, the ownership and managerial control of the firm are separated.

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Question 11
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In a large number of family owned firms, ownership and managerial control are not separated.

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Question 12
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An agency relationship exists when one or more persons (the principal or principals) hire another person or persons (the agent or agents) as decision-making specialists to perform a service.

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Question 13
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The separation of ownership and control is the most effective means used by firms to prevent managerial opportunism.

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Question 14
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A top-level manager's reputation is a dependable predictor of his/her future behavior.

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Question 15
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As a rule, shareholders prefer more product diversification than do managers because shareholders wish to reduce risk and maximize wealth.

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Question 16
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Both top executives and owners of the firm wish to diversify the firm to reduce risk.

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Question 17
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Agency costs include incentives for executives, monitoring, enforcement costs, and any individual financial losses incurred by principals.

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Question 18
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In general, when governance mechanisms are strong, managers have free rein in their decisions.

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Question 19
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Failures of corporate internal controls and inadequate internal control systems allowed unethical executives at such companies as Enron and WorldCom to act in their own self-interest.

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Question 20
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The Dodd-Frank Wall Street Reform and Consumer Protection Act is the most sweeping set of financial and regulatory reforms in the United States since the Great Depression.

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