Corporate Governance quiz

The primary motivation of activist shareholders is to increase shareholder value. If they feel management or the board has failed to act in the best interests of shareholders, they may attempt to force changes by gaining control of the board.

(environmentally sustainable business practices) is incorrect. This is more likely to be a goal of ESG investors with an investment mandate focused on environmental factors.

(consideration of human rights in employee relations)is incorrect. This is more likely to be a goal of ESG investors with an investing mandate focused on social factors.

While leverage increases risk for all stakeholders, shareholders generally benefit through higher potential returns. Senior management typically benefits through equity-based compensation. For non-management employees, equity-based compensation is likely to be small to non-existent .

Corporate governance is the arrangement of checks, balances, and incentives a company needs to minimize and manage the conflicting interests between insiders and external shareholders.

A specific concern among investors of energy companies is the existence of “stranded assets,” which are carbon-intensive assets at risk of no longer being economically viable because of changes in regulation or investor sentiment .

Negative screening refers to the practice of excluding certain sectors, companies, or practices that do not meet specific ESG criteria based on the investor’s values, ethics, or preferences .

Positive screening does not exclude any sectors but seeks to invest in the companies with the best practices. Negative screening typically excludes some sectors. Thematic investing refers to making an investment in a company or project in order to advance specific social or environmental goals.

Often, policies on related-party transactions require that such transactions or matters be voted on by the board (or shareholders), excluding the director holding the interest .

Stakeholder theory focuses on the conflicts of interest among owners and several groups that have an interest in a company’s activities, including creditors .

A common law system offers better protection of shareholder interests than does a civil law system .

Green finance is an example of impact investing, which seeks to achieve targeted social or environmental objectives by direct investment in projects or companies. Values-based investing is used to express the moral or ethical beliefs of the investor. Negative screening refers to the practice of excluding certain sectors or companies that deviate from acceptable standards.

(Negative screening) is incorrect. Negative screening refers to the practice of excluding certain sectors or companies that deviate from acceptable standards.

(Values-based investing) is incorrect. Values-based investing is used to express the moral or ethical beliefs of the investor.

Unlike civil law systems, common law systems provide judges with the ability to create law by setting precedents that are followed in subsequent cases. Shareholders are viewed as better protected under common law because judges may rule against management actions in situations that are not specifically addressed by statutes.

(When CEO duality is common ) is incorrect. Under CEO duality, the CEO also serves as chairperson of the board. All else equal, this decreases the protection of shareholder interests in favor of those of management.

( When stakeholder theory prevails ) is incorrect. Stakeholder theory incorporates the interests of non-shareholders such as customers, suppliers, and employees. This inevitably dilutes the focus on shareholders.

Effective corporate governance requires a system of appropriate controls and procedures to protect financial markets and investors.

(All stakeholders should have the right to participate in the governance of the firm) is incorrect. Only shareholders have the right (not all stakeholders) to participate in the governance of the firm.

(An audit committee that benefits from the direct guidance of management) is incorrect. The audit and compensation committees are best structured with exclusively independent directors, and no management involvement.

Responsible investing is the broadest (umbrella) term used to describe investment strategies that incorporate environmental, social, and governance (ESG) factors into their approaches .

Information asymmetry can exist between a company’s shareholders and its managers because the company’s managers may be much more knowledgeable about the company’s functioning and strategic direction. This makes it more difficult for shareholders to monitor the firm’s managers and determine whether they are acting in shareholders’ interests.

The election of directors is considered an ordinary resolution and, therefore, requires only a simple majority of votes to be passed .

The risks of poor corporate governance have long been understood by analysts and shareholders. In contrast, the practice of considering environmental and social factors has been slower to take hold .

Shareholder and manager interests can diverge with respect to risk tolerance. In some cases, shareholders with diversified investment portfolios can have a fairly high risk tolerances because specific company risk can be diversified away. Managers are typically more risk averse in their corporate decision making to better protect their employment status .

The objective of a value-based ESG approach is to mitigate risks and identify opportunities by analyzing ESG considerations in addition to traditional finance metrics. Avoidance of companies that conflict with moral or ethical values reflects a value-based approach.

(Reduction in risks associated with increased litigation costs) and (Increase in risk-adjusted returns through ESG factor ranking ) are incorrect. The objective of a value-based ESG approach is to mitigate risks and identify opportunities by analyzing ESG considerations in addition to traditional finance metrics.

Social factors considered in ESG implementation generally pertain to the management of the human capital of a business, including data privacy and security.

Ordinary resolutions, such as those to appoint an auditor or elect a board member, require a simple majority. Acquisitions, mergers, takeovers, and amendments to the company bylaws often require a supermajority of more than 50% for passage .