CFA Level 1: Corporate Governance Manual for Investors

CFA Level 1 - Corporate Finance Session 11 - Reading 50 The Corporate Governance of Listed Companies: A Manual for Investors (Notes, Practice Questions, Sample Questions) 1. The most likely outcome of adopting a golden parachute, poison pill, or greenmail is a: A) reduced possibility for a successful takeover bid and a negative impact on the stock price. B) negative impact on the stock price and a greater possibility for a successful takeover bid. C) reduced possibility for a successful takeover bid and a positive impact on the stock price. Explanation: Adopting a golden parachute, poison pill, or greenmail are all take-over defenses used to frustrate an acquisition attempt. The barriers created by such defenses are likely to decrease the value of the stock 2. Which of the following is least likely to be considered a “best practice” regarding corporate governance? A) Board members are limited to a six-year term. B) Use of a third party to tabulate votes and retain voting records. C) A code of ethics that is audited and improved periodically. Explanation: Anything beyond 2- or 3-year term limits on board membership has the potential to restrict the ability for shareholders to change the composition of the board if its members are not acting in the shareholders’ best interest 3. Which of the following firms is most likely to have a board of directors that considers the best interest of all shareholders? A) Firms that assign a single vote to each share, and firms with different classes of common equity with supermajority rights given to one class. B) Neither firms with different classes of common equity with supermajority rights given to one class, nor firms that assign a single vote to each share. C) Firms that assign a single vote to each share, but not firms with different classes of common equity with supermajority rights given to one class. Explanation: Firms that assign one vote to each share are more likely to have a board that considers the best interest of all shareholders. Firms with dual classes of common equity where supermajority rights are given to one class are likely to have boards that focus on the interests of the supermajority shareholders 4. When examining a firm’s ownership structure, it is imperative to examine any super-voting rights by certain classes of shareholders. Which of the following statements concerning these voting rights is most accurate? A) Super-voting rights by certain classes of shareholders impair the firm’s ability to raise capital for the future. B) If a company has a significant minority shareowner group, such as a founding family, cumulative voting to elect board members can be a positive factor for shareholders. C) Firms with a single class of common equity could encourage prospective acquirers to only deal directly with shareholders with the supermajority rights Explanation: Firms with dual classes of common equity could encourage prospective acquirers to only deal directly with shareholders with the supermajority rights. If the firm has a significant minority ownership group, such as a founding family, use of cumulative voting to elect board members can favor specific interests at the expense of the interests of other shareholders 5. Which of the following statements regarding company takeover defenses is CORRECT? A) Newly created anti-takeover provisions may or may not require stakeholder authorization/approval. B) The firm’s annual report contains pertinent details concerning takeover defenses. C) A firm’s proxy is the most likely place to find information about present takeover defenses Explanation: These provisions may or may not require such approval. In either case, the firm may have to, at a minimum, provide information to its shareholders about any amendments to existing takeover defenses. A firm’s articles of organization are the most likely places to locate information about present takeover defenses 6. All of the following negatively affect shareholders’ proxy voting rights, EXCEPT: A) allowing proxy voting by means other than a paper ballot. B) preventing investors who wish to vote their shares from trading during a period prior to the annual meeting. C) requiring attendance at the annual meeting Explanation: Allowing proxy voting by means other than a paper ballot has a positive impact on shareholders’ proxy voting rights. Both of the remaining choices negatively affect shareholders’ proxy voting rights 7. One of the issues shareholders should consider is the issue of confidential voting of proxies. Which of the following statements would be considered most accurate in regard to proxy voting and confidential votes? A) Shareholders are more likely to vote conscientiously if allowed to do so confidentially. B) It is an SEC requirement that the proxy voting process be confidential. C) Confidentiality of voting does not ensure that all votes are counted equally Explanation: Shareholders will be more likely to vote and vote conscientiously if they are sure that board members and/or management will not find out how they voted. There is no SEC requirement of confidentiality regarding proxy voting. Confidentiality of voting does insure that all votes are counted equally 8. Which of the following would NOT be a good source for information about a company’s proxy voting rules? A) Firm’s annual report. B) Company’s articles of organization and by-laws. C) Firm’s corporate governance statement. Explanation: The annual report would typically not contain this detailed information 9. Shareholder-sponsored resolutions are something investors can consider in order to be “heard”. These resolutions do have implications for investors. Which of the following statements regarding shareholder-sponsored resolutions is least accurate? A) The ability shareholders have to propose needed changes in a firm can serve to erode shareholder value. B) The right to propose initiatives for consideration at the firm’s annual meeting is one way for shareholders to send a message that they are dissatisfied with the way the board is handling one or more firm matters. C) The right to propose initiatives for consideration at the firm’s annual meeting is one way for shareholders to send a message that they are dissatisfied with the way management is handling one or more firm matters Explanation: The ability to bring issues in front of the board and/or management can serve to prevent erosion of shareholder value 10. Which of the following actions would most likely have a positive influence on shareholder value? A) Executive board members regularly attend the board meetings. B) Adopting a poison pill. C) Only one class of common equity has been issued Explanation: Firms with dual classes of equity can have a negative effect on shareholder value as the shareholder may have inferior voting rights. Takeover measures such as poison pills, golden parachutes, and greenmail typically have a negative effect on shareholder value. Annual elections are preferred for board members as it increases accountability. Executive board members regularly attending the meetings can potentially prevent free discussion among the independent members