Professional Documents
Culture Documents
Solutions Manual
Chapter 2
Basic
8. Partnerships [LO1] Why are professional firms, such as
accountants and lawyers, more likely to have a partnership form
rather than a sole ownership or limited company structure?
Answer: Professional firms are more likely to choose a partnership
corporate form because it allows partners to maintain their sole
proprietorship business model but draw from the economies of scale
that come from combining business operations. That is, partners can
keep and grow their own clients and have the benefit of paying for a
share of admin resources, overheads and assets.
9. Macro Governance [LO3] Why do you think corporate behaviour
in bank-based financial systems would be different from that in
market-based financial systems? How do you think other differences
in the macro environment can affect corporate objectives?
Answer: Corporate behaviour in bank-based financial systems
would be different from market-based financial systems because of
the nature of financing between the two financial systems. In a bank
based financial system, companies will strive to meet the
requirements set out by their chief financiers, which are banks.
Banks, as a major source of funding, will influence corporate risk
taking behaviour and encourage longer investment horizons. On the
other hand, corporations in market based environment must satisfy
the needs of the investing public, who naturally focus on share price
performance.
10.
Corporate Governance Principles [LO3] In your opinion
what is the most important issue in corporate governance? Explain
your answer.
Answer: Many issues are important in running a firm and your
answer depends on the type of firm you are discussing. Moreover,
your role in a company would make you feel one issue is more
important than any other. For example, if you are a minority
shareholder, you would be concerned with how the majority or
controlling shareholders engage with management and whether
they are able to abuse their power. If you are an international
investor, then country-level corporate governance would be more
important.
11.
Corporate Governance [LO1] Explain why the corporate
governance of a sole proprietorship should be different from that of
a partnership, which in turn should be different from that of a limited
corporation.
13.
Sole Proprietorship [LO1] Sole proprietorship is the most
common type of business throughout the world. Why do you think
this is the case? What are the benefits of sole proprietorships over
other forms of business?
Answer: Sole proprietorships are the most common types of
business throughout the world because they are the simplest to set
up. In many countries, you do not need to complete any forms or
registration to begin running a sole proprietorship.
14.
Stakeholders [LO2] Discuss what is meant by a stakeholder.
In what ways are stakeholders represented in two-tier board
structures? How does this differ from companies with a unitary
board structure? Use real examples to illustrate your answer.
Answer: A stakeholder is any party which has an interest in the
operations of the company, either directly or indirectly. Examples
include shareholders, employees, creditors, customers, suppliers,
normal citizens, etc. In a two tier board system, the board structure
is divided into two parts consisting of the supervisory and executive
board. The supervisory board is composed of outside shareholders
and other stakeholders, such as employee groups (trade unions) and
banks (capital providers). A good example of a supervisory board is
DaimlerChrysler AG, which was comprised of 20 members - half of
which were elected by shareholders at the Annual Meeting. The
other half comprises members elected by the companys employees
who work in Germany (Annual report, 2008). The supervisory board
can hire or fire any member of the executive board. The latter is
composed of executive directors who direct the day-to-day
McGraw-Hill Education 2014
operations of the firm. In a unitary board, the executive and nonexecutive directors sit on the same board and it is very rare for
stakeholders such as employees to be represented.
Intermediate
15.
Agency Problems [LO2] Who owns a corporation? Describe
the process whereby the owners control the firms management.
What is the main reason why an agency relationship exists in the
corporate form of organization? In this context, what kinds of
problem can arise?
Answer: In the corporate form of ownership, the shareholders are
the owners of the firm. The shareholders elect the directors of the
corporation, who in turn appoint the firms management. This
separation of ownership from control in the corporate form of
organization is what causes agency problems to exist. Management
may act in its own or someone elses best interests, rather than
those of the shareholders. If such events occur, they may contradict
the goal of maximizing the share price of the equity of the firm.
16.
Board Committees [LO2] Explain why you think public listed
companies have board subcommittees like the remuneration
committee, audit committee and risk management committee?
Why could this responsibility not simply be left to the board of
directors? Explain.
Answer: In large complex corporations, the sheer range of tasks
and responsibilities can be exceptionally large. The board of
directors or executive board should be seen as the apex of a
corporations management structure. If other tasks are required by
the board that draw on specialized skills or experiences, or if an
activity (such as audit or remuneration) must be handled
independently to ensure accountability, then sub-committees will be
formed.
17.
Corporate Governance [LO3] Is it possible to improve one
aspect of corporate governance in a firm but weaken another at the
same time? Use an illustration to explain your answer.
Answer: Yes, it is possible to improve one aspect of a corporate
governance principle and weaken another. For example, if you
improve the rights of shareholders, it may weaken the rights of
other stakeholders such as employees and communities. Many
examples can be given here and lecturers should encourage
students to come up with their own solutions.
18.
Government
Ownership
[LO3]
In
recent
years,
governments have taken control of banks through buying their
shares. What impact does this have on the lending culture of these
McGraw-Hill Education 2014