Jane Smith, CFA, has recently joined Zero Asset Management, Inc. (Zero) as a board member. Since Smith is also outside council for Zero, she is already very familiar with Zero's operations and expects to begin contributing good ideas right away.
Zero is a publicly traded investment management firm that historically focused on mutual fund management. Although there is current market opportunity to add a new type of mutual fund, the board recently decided against adding the fund. Instead, the board decided to expand its business to include a hedge fund operation within the existing corporation.
Bill Week, CEO of Zero, has publicly stated that he is willing to bet the company's future on hedge fund management. Week is the founder of Zero, as well as chairman of the board, and maintains a controlling interest in the company. Like the rest of Zero, the firm's new hedge fund is quantitatively driven and index based. The fund has been set up in a separate office with new systems so that the analysts and managers can create a unique hedge fund culture. Trading and execution are the only operations that remain with Zero.
The fund is run by one of Zero's most successful portfolio managers. Smith learns that although none of the board members sit on other companies' boards, most have at one point or another worked at Zero and so they are very familiar with Zero's operations. A board member has attempted to make the health insurance and retirement concerns of the board members an agenda item, without success to date.
Smith eagerly anticipates the next board meeting as they are always in a luxurious setting. At the board meeting, Smith asks a number of questions about Zero's corporate gov- ernance system. The board becomes concerned by Smith's questions and decides to hire an independent consultant to review their corporate governance responsibilities. The consultant starts his analysis by stating that a corporate governance systetem relies upon checks and bal- ances among managers, directors, and investors. Smith asks if Zero has the proper systems in place.
The consultant says that he has looked at conflicts of interest and has one more area to review in order to verify that the board is meeting its major objectives. Concerned about the company's stock price, Smith asks the consultant what work he has done concerning Zero's corporate disclosures for investment professionals. The consultant indicates that he has reviewed Zero's regulatory filings for clear and complete information, as well as the com-pany's policies regarding related party transactions.
9. All of the following indicate Zero's board's lack of independence except:
A. personal relationships.
B. service of the outside counsel as a board member.
C. lack of interlocking directorships.
10. Which of the following is the most effective action for the board to take to address their oversight responsibilities concerning the hedge fund's proxy voting?
A. Establish corporate values and governance structure for the company.
B. Establish long-term strategic objectives that are met and fully complied with.
C. Perform adequate training so that employees are able to perform their duties.
11. Which of the following omissions best describes a corporate governance shortcoming of Zero's board of directors? The board's failure to:
A. address the potential conflicts of interest between managing the firm's hedge fund and its mutual fund business.
B. meet the market opportunity for a new kind of mutual fund.
C. establish the hedge fund operation in a separate corporation.
12. Given that Zero's directors all previously worked at the company, which of the following would you recommend for a more effective system of corporate governance?
A. Ensure that assets are used efficiently and productively and in the best interests of investors and stakeholders.
B. Eliminate or mitigate conflicts of interest among stakeholders, particulularly between managers and shareholders
. C. Identify and measure accountabilities for the performance of the board's responsibilities.
13. Which of the following best describes the objectives of Zero's board that the consultant has not yet reviewed? The board should ensure:
A. that the assets of the company are used efficiently and productively and in the best interests of the investors and other stakeholders.
B. that material foreseeable risk factors are addressed and considered.
C. compliance with applicable laws and take into account the interest of stakeholders.
14. Which of the following is the most critical activity that an analyst can engage in to assess the quality of the corporate governance system at Zero, among those that the consultant did not review?
A. Look for vague references to off-balance-sheet or insider information.
B. Identify the responsiveness of the board to shareholder proxy votes.
C. Evaluate the quality and extent of financial information provided to investors.