Corporate Governance And Ethics 5

Question 1

The 'principal-agent problem' in corporate governance arises when:

Accepted Answer

Managers pursue their own interests at the expense of shareholders

Answer

The principal-agent problem describes the conflict of interest that emerges when agents (managers) have incentives that diverge from those of principals (shareholders).

Question 2

Which of the following is an example of 'empire building' as an ethical concern in corporate governance?

Accepted Answer

A CEO pursuing acquisitions primarily to increase their prestige and compensation rather than shareholder value

Answer

Empire building occurs when executives pursue size-increasing strategies for personal gain (salary, status) rather than for genuine value creation for shareholders.

Question 3

Under SEC Regulation FD (Fair Disclosure), a public company is required to:

Accepted Answer

Simultaneously disclose material information to all investors if disclosed selectively

Answer

Regulation FD requires that if a company discloses material non-public information to certain investors, it must simultaneously (or promptly) disclose that information to all investors.

Question 4

A board that includes directors with diverse backgrounds in finance, law, technology, and industry is MOST likely to benefit from:

Accepted Answer

Broader risk identification and more effective oversight

Answer

Cognitive and experiential diversity on a board improves risk oversight and decision quality by bringing multiple perspectives to complex strategic issues.

Question 5

The 'moral hazard' problem in executive compensation occurs when:

Accepted Answer

Guaranteed bonuses reduce executives' incentive to manage risk prudently

Answer

Moral hazard arises when compensation structures (like guaranteed bonuses) insulate executives from downside risk, encouraging excessive risk-taking at shareholders' expense.

Corporate Governance Practice Test

Corporate Governance Practice Test

Corporate Governance And Ethics 5