READING 21 INVESTORS AND OTHER STAKEHOLDERS

Question 1

Which of the following best describes the role of the board of directors in corporate governance?
A. Ensuring government compliance and setting tax policies
B. Managing day-to-day operations and approving transactions
C. Protecting shareholder interests and overseeing senior management

Answer 1

Correct Answer: C

Explanation:

The board is responsible for protecting shareholder interests, setting strategic direction, hiring and firing senior managers, and monitoring performance.

Option A is a responsibility of government/regulators, not the board.

Option B refers to senior management, not the board.

Question 2

Inside directors on a corporate board are most likely to:
A. Have a conflict of interest with shareholders
B. Be completely independent from company management
C. Represent the interests of creditors

Answer 2

Correct Answer: A

Explanation:

Inside directors are often executives or founders and may have conflicts of interest due to their dual roles.

Option B describes independent directors.

Option C is not the role of any directors; board members represent shareholders.

Question 3

Which of the following best distinguishes a one-tier board structure?
A. It includes only inside directors.
B. It separates management and supervisory functions into two boards.
C. It includes both inside and independent directors on a single board.

Answer 3

Correct Answer: C

Explanation:

A one-tier board structure includes both inside and independent directors.

Option A is incorrect as both types are included.

Option B refers to a two-tier board, common in continental Europe.

Question 4

In a staggered board, shareholder control is reduced because:
A. Board elections happen monthly.
B. Only a portion of directors is elected each year.
C. The CEO appoints all new directors.

Answer 4

Correct Answer: B

Explanation:

Staggered boards elect only a portion of directors each year, reducing shareholders’ ability to replace the full board quickly.

Option A is incorrect—elections are typically annual.

Option C is inaccurate—the board, not the CEO, controls appointments.

Question 5

Executive compensation that is primarily performance-based aligns management interests with:
A. Government regulators
B. Shareholders
C. Competitors

Answer 5

Correct Answer: B

Explanation:

Bonuses and equity-based compensation motivate managers to increase shareholder value.

Option A is irrelevant.

Option C describes a competitor’s interests, which may conflict with the firm’s.

Question 6

Which of the following stakeholders has a residual claim on a company’s assets?
A. Suppliers
B. Equity holders
C. Lenders

Answer 6

Correct Answer: B

Explanation:

Equity holders are entitled to what remains after all obligations are paid.

Suppliers and lenders have contractual or senior claims.

Residual claims = higher risk, but higher potential return.

Question 7

Which of the following is the primary risk concern for lenders?
A. Company profitability
B. Ability to repay obligations
C. Equity dilution

Answer 7

Correct Answer: B

Explanation:

Lenders prioritize the firm’s ability to meet interest and principal payments.

Option A matters, but only as it impacts credit risk.

Option C is an equity concern, not a lender’s.

Question 7

What is the maximum return a debtholder can typically expect?
A. Unlimited upside from company growth
B. Regular interest and full principal repayment
C. Capital appreciation through equity markets

Answer 7

Correct Answer: B

Explanation:

Lenders receive fixed interest and principal—no upside beyond that.

Option A applies to equity holders.

Option C relates to equity investments, not debt.

Question 8

Equity holders may prefer a company to issue debt rather than equity to:
A. Minimize bankruptcy risk
B. Avoid regulatory scrutiny
C. Prevent dilution of ownership

Answer 8

Correct Answer: C

Explanation:

Debt doesn’t dilute equity ownership.

Option A is incorrect—debt increases bankruptcy risk.

Option B is not a relevant motivation.

Question 8

Why might debtholders oppose increased leverage by a firm?
A. It increases the potential for equity appreciation.
B. It increases the company’s default risk without increasing their return.
C. It results in more voting rights for debt holders.

Answer 8

Correct Answer: B

Explanation:

More debt = higher risk of default with no upside for lenders.

Option A benefits equity, not debt.

Option C is incorrect—debt holders don’t get voting rights.

Question 9

An employee stock participation plan is intended to:
A. Replace traditional retirement benefits
B. Align employee and shareholder interests
C. Prevent employee turnover

Answer 9

Correct Answer: B

Explanation:

Giving employees equity aligns their goals with shareholders’.

Option A is unrelated to stock participation.

Option C may be a side benefit, but not the primary purpose.

Question 10

To protect their interests, lenders often include which of the following in loan agreements?
A. Shareholder voting rights
B. Executive compensation limits
C. Financial covenants

Answer 10

Correct Answer: C

Explanation:

Covenants (like leverage ratios) limit risky behavior.

Option A is for equity holders.

Option B is not typically a lender concern unless indirectly through covenants.

Question 10

Which stakeholder is most concerned with product quality and ongoing relationship?
A. Employees
B. Customers
C. Governments

Answer 10

Correct Answer: B

Explanation:

Customers care about quality, pricing, and long-term relationship with the company.

Option A is focused on compensation/career.

Option C is more concerned with taxes and employment.

Question 11

Which of the following best describes the focus of corporate governance under shareholder theory?
A. Balancing the interests of all stakeholders, including employees and customers
B. Maximizing the market value of the firm’s common equity
C. Ensuring compliance with environmental and social responsibilities

Answer 11

Correct Answer: B

Explanation:

The shareholder theory focuses on maximizing shareholder value, especially the market value of common equity.

Option A describes stakeholder theory.

Option C refers to broader ESG considerations, more aligned with stakeholder interests.

Question 12

Which stakeholder group holds a residual claim on the assets of the firm?
A. Bondholders
B. Shareholders
C. Senior Managers

Answer 12

Correct Answer: B

Explanation:

Shareholders are residual claimants—they get what’s left after liabilities are paid.

Bondholders are paid before shareholders and are not residual claimants.

Senior managers are employees, not asset claimants.

Question 12

Under stakeholder theory, corporate governance is primarily concerned with:
A. The company’s profitability and dividend policy
B. Conflicts between management and shareholders only
C. Managing the conflicts of interest among all stakeholders

Answer 12

Correct Answer: C

Explanation:

Stakeholder theory takes a broad view, managing multiple stakeholder relationships.

Option A is a narrow financial focus.

Option B describes shareholder theory.

Question 13

Which of the following best differentiates private debtholders from public bondholders?
A. Private debtholders have voting rights
B. Public bondholders have more influence on management decisions
C. Private debtholders may receive nonpublic financial information

Answer 13

Correct Answer: C

Explanation:

Private debtholders often have direct relationships and access to inside info.

Option A is incorrect; lenders generally do not have voting rights.

Option B is incorrect; public bondholders usually have less influence.

Question 14

In a two-tier board structure common in continental Europe:
A. All directors are independent and serve on one board
B. Supervisory and management boards are separate
C. The board is staggered, with members elected every few years

Answer 14

Correct Answer: B

Explanation:

Two-tier structures separate oversight (supervisory board) from execution (management board).

Option A describes a one-tier structure.

Option C refers to staggered boards, not board structure types.

Question 14

Which of the following is most likely a reason for implementing a staggered board structure?
A. To enhance shareholder control
B. To promote continuity in strategic direction
C. To allow full board turnover every year

Answer 14

Correct Answer: B

Explanation:

A staggered board limits sudden shifts in strategy and board makeup.

Option A is incorrect; staggered boards reduce shareholder influence.

Option C is false; staggered boards prevent full turnover annually.

Question 15

Which of the following stakeholder groups is most likely to be concerned with covenants in loan agreements?
A. Customers
B. Employees
C. Lenders

Answer 15

Correct Answer: C

Explanation:

Lenders use covenants to protect their interests in the firm’s financial health.

Customers and employees typically are not involved in debt covenants.

Question 16

Compared to inside directors, independent directors are more likely to:
A. Be involved in daily operations
B. Protect the interests of shareholders
C. Set executive compensation only

Answer 16

Correct Answer: B

Explanation:

Independent directors provide unbiased oversight on behalf of shareholders.

Option A describes inside directors.

Option C is a duty of the full board, not limited to independents.

Question 17

A company’s employees are most likely interested in:
A. Tax revenue, sustainability, and economic development
B. Salary, career development, and job security
C. Receiving dividends and voting on corporate matters

Answer 17

Correct Answer: B

Explanation:

Employees seek pay, advancement, and stable working conditions.

Option A aligns with government interests.

Option C relates to shareholders.

Question 18

Which of the following best describes a customer’s primary interest in a corporation?
A. Long-term capital appreciation
B. High-quality products at reasonable prices
C. Executive bonus structure transparency

Answer 18

Correct Answer: B

Explanation:

Customers care most about product quality, price, and service.

Option A is relevant to shareholders.

Option C is typically not a customer concern.

Question 19

Which of the following groups may hold both equity and debt positions in the same company?
A. Government regulators
B. Private lenders
C. Customers

Answer 19

Correct Answer: B

Explanation:

Private lenders (e.g., VC firms) may take equity stakes to gain upside.

Governments regulate but don’t typically hold stakes.

Customers do not provide capital to the firm.

Question 20

Which of the following would most likely increase alignment between employees and shareholders? A. Executive retirement perks B. Debt covenants C. Employee stock ownership plans (ESOPs)

Answer 20

Correct Answer: C Explanation: ESOPs give employees a direct interest in stock performance. Option A benefits executives, not employees. Option B is a lender protection tool.

Question 21

The primary interest of senior managers in the company typically includes: A. Voting rights and dividend returns B. Career longevity and compensation maximization C. Ensuring product quality for customers

Answer 21

Correct Answer: B Explanation: Executives focus on job security and performance-based compensation. Option A is for shareholders. Option C is a mid-level or operational goal.

Question 22

Compared to independent directors, inside directors are more likely to: A. Have material relationships with the company B. Be elected by bondholders C. Only serve in supervisory boards

Answer 22

Correct Answer: A Explanation: Inside directors are executives or founders—clearly tied to the firm. Option B is false—shareholders elect board members. Option C misrepresents board structures.

Question 23

Which of the following stakeholders is most interested in regulatory compliance and employment creation? A. Government B. Suppliers C. Shareholders

Answer 23

Correct Answer: A Explanation: Governments care about laws, taxes, jobs, and economic welfare. Suppliers care about contracts and ongoing trade. Shareholders seek returns.

Question 24

Which stakeholder group is typically concerned about training opportunities and working conditions? A. Customers B. Employees C. Debtholders

Answer 24

Correct Answer: B Explanation: Employees look for career growth, benefits, and a safe workplace. Option A focuses on product quality. Option C focuses on financial metrics.

Question 25

In a one-tier board structure: A. Only inside directors serve on the board B. There are two separate boards for oversight and management C. Inside and independent directors serve on the same board

Answer 25

Correct Answer: C Explanation: One-tier boards combine all directors into a single board. Option A is incorrect; most boards require some independent members. Option B is a two-tier structure.

Question 26

What is a primary concern of suppliers when evaluating a relationship with a company? A. Long-term capital gains B. Solvency and ongoing profitability C. Government tax incentives

Answer 26

Correct Answer: B Explanation: Suppliers want to ensure they get paid and can continue business. Option A is a shareholder concern. Option C is a government issue.

Question 27

Which of the following most accurately describes the role of the board of directors? A. Providing debt financing for expansion B. Managing daily operations C. Overseeing strategy and protecting shareholder interests

Answer 27

Correct Answer: C Explanation: The board sets strategic direction and oversees executives. Option A is a lender function. Option B is a managerial role.

Question 28

Which group of stakeholders is least likely to have access to nonpublic company information? A. Private debtholders B. Public bondholders C. Board of directors

Answer 28

Correct Answer: B Explanation: Public bondholders rely on public filings. Private lenders and board members often get internal data. Directors are deeply involved in strategic decisions.

Question 29

Which of the following best describes why ESG factors are increasingly considered by investors? A. ESG factors only affect a company's short-term earnings. B. ESG factors are mainly important for legal compliance. C. ESG factors can materially affect company performance and investor decisions.

Answer 29

Correct Answer: C Explanation: ESG factors can influence a company’s reputation, customer loyalty, legal exposure, and long-term performance, making them relevant for investors. A is incorrect because ESG factors also impact long-term outcomes, not just short-term. B is incorrect because ESG factors go beyond legal compliance and relate to risk, value creation, and ethics.

Question 30

Which of the following is most likely an example of a negative externality? A. A company issuing bonds to finance expansion. B. A company polluting a river without incurring cleanup costs. C. A company paying employees overtime wages.

Answer 30

Correct Answer: B Explanation: Pollution without bearing the cost is a classic negative externality, where society bears the cost. A is financing activity, not an externality. C reflects ethical labor practices, not an externality.

Question 31

What type of risk arises from government-imposed regulations requiring a shift to low-carbon activities? A. Physical risk B. Transition risk C. Operational risk

Answer 31

Correct Answer: B Explanation: Transition risk refers to the financial and operational risks that arise from changes such as new climate policies or regulations. A is incorrect because physical risk refers to direct impacts from weather events. C is broader and not specific to ESG regulation-driven transitions.

Question 32

tranded assets are most likely: A. Assets destroyed in natural disasters. B. Assets rendered obsolete due to climate policy changes. C. Assets written off due to accounting errors.

Answer 32

Correct Answer: B Explanation: Stranded assets lose their value due to regulatory or societal shifts away from high-carbon industries. A relates to physical risk but not stranded assets. C involves financial reporting errors, not ESG-related obsolescence.

Question 33

Which of the following environmental factors is least likely to be a material risk for a technology company? A. Data privacy B. Water scarcity C. Energy efficiency

Answer 33

Correct Answer: B Explanation: Water scarcity may not be as material for tech firms as for manufacturing or agriculture. A is a social, not environmental factor but highly relevant to tech. C is increasingly important for all industries, including tech.

Question 34

A company with poor environmental safety policies is most at risk for: A. Reduced dividend payments B. Oil spills and litigation costs C. Increased capital investment

Answer 34

Correct Answer: B Explanation: Poor safety policies heighten risks of spills, contamination, and resulting costs. A is an indirect effect but not specific to safety. C may occur but is not the most direct risk.

Question 35

Social factors include all of the following EXCEPT: A. Employee engagement B. Executive compensation C. Diversity and inclusion

Answer 35

Correct Answer: B Explanation: Executive compensation is a governance factor. A and C are both social factors.

Question 36

Which of the following best describes the benefit of managing social risks? A. Higher capital expenditures B. Reduced product demand C. Improved employee productivity and customer loyalty

Answer 36

Correct Answer: C Explanation: Strong social practices can boost morale, loyalty, and reduce turnover and legal risk. A increases costs. B is an adverse effect, not a benefit.

Question 37

Which of the following is NOT typically considered a governance factor? A. Bribery and corruption B. Political lobbying C. Customer satisfaction

Answer 37

Correct Answer: C Explanation: Customer satisfaction is a social factor. A and B are key governance concerns.

Question 38

Why are equity investors generally more exposed to ESG risks than debt investors? A. They have fixed claims on company assets. B. They receive returns before creditors. C. They bear the residual risk of adverse outcomes.

Answer 38

Correct Answer: C Explanation: Equity holders take on more risk after debts are paid; ESG-related losses can wipe out equity value. A is true for debt, not equity. B is incorrect; equity holders are paid last.

Question 39

Longer-maturity bondholders face greater ESG risk exposure because: A. ESG issues only affect short-term financials. B. Long-term assets are less sensitive to ESG factors. C. ESG-related risks may take time to materialize.

Answer 39

Correct Answer: C Explanation: Some risks, like regulation shifts or climate changes, may impact over a longer horizon. A is false; ESG impacts both short- and long-term. B is incorrect; long-term assets can be very sensitive to ESG trends.

Question 40

Which of the following best describes the role of governance in ESG? A. Tracking carbon emissions B. Ensuring fair board composition and internal audits C. Promoting brand recognition

Answer 40

Correct Answer: B Explanation: Governance includes oversight structures, audit committees, and executive conduct. A is an environmental issue. C is more related to marketing and social perception.

Question 41

A company facing increased ESG scrutiny is most likely to: A. Be less concerned with transparency. B. Update its policies on executive pay and whistleblowing. C. Focus solely on profit maximization.

Answer 41

Correct Answer: B Explanation: Scrutiny pushes firms to enhance governance policies. A and C conflict with responsible ESG practices.

Question 41

What is a potential financial risk of poor governance? A. Higher earnings growth B. Managers acting in shareholders' best interest C. Executives using company resources for personal gain

Answer 41

Correct Answer: C Explanation: Poor governance can lead to self-dealing and mismanagement. A is not a risk. B is actually a goal of good governance.

Question 42

When evaluating ESG risks, an analyst should primarily: A. Ignore non-financial factors. B. Measure how ESG issues can affect future cash flows. C. Focus only on past ESG violations.

Answer 42

Correct Answer: B Explanation: The core goal is to understand how ESG factors impact financial performance, especially future cash flows. A and C miss the forward-looking nature of ESG analysis.