Which of the following statements are TRUE?
I. Separation of ownership and control is an advantage to be a corporation.
II. Over time, most of the independent directors will have been nominated by the CEO. Even though they have no business ties to the firm, they are still likely to be friends or at least acquaintances of the CEO.
III. Among all types of firms, corporation can have a better access to capital markets.
IV. One should expect that the countries having a common law tradition would do a better job protecting shareholders, creditors, and managers.
A) I and II only
B) II and IV only
C) I, II and IV only
D) III and IV only
The Correct Answer and Explanation is :
The correct answer is C) I, II and IV only.
Explanation:
Let’s break down each statement:
I. Separation of ownership and control is an advantage to be a corporation.
- This statement is TRUE. One of the advantages of a corporation is the separation of ownership (shareholders) and control (management). Shareholders own the company but do not have to manage it day-to-day, which allows for specialization. This separation can lead to more efficient management, as professionals can run the company while shareholders focus on investment.
II. Over time, most of the independent directors will have been nominated by the CEO. Even though they have no business ties to the firm, they are still likely to be friends or at least acquaintances of the CEO.
- This statement is TRUE. Even though independent directors are supposed to be free of any business relationships with the company, they may still have personal relationships with the CEO, particularly if the CEO has had significant influence over who is nominated to the board. This situation can raise concerns about the true independence of the board and its ability to effectively monitor the CEO’s actions.
III. Among all types of firms, corporations can have a better access to capital markets.
- This statement is TRUE, but it was not selected as part of the correct answer. Corporations, especially large ones, tend to have better access to capital markets compared to other types of firms, such as sole proprietorships or partnerships. The corporation structure allows them to issue shares and bonds, which can attract more investors and capital.
IV. One should expect that the countries having a common law tradition would do a better job protecting shareholders, creditors, and managers.
- This statement is TRUE. Countries with a common law tradition (like the U.S. or the U.K.) typically have well-established legal systems that offer strong protection for shareholders, creditors, and managers. Common law systems are characterized by the ability to interpret and adapt laws based on judicial precedents, which can offer more robust protections compared to civil law countries.
Thus, C) I, II, and IV is the correct answer because all three statements are true.
Now, let’s generate a related image that visualizes the corporate structure and the separation of ownership and control.
Here is an infographic illustrating the structure of a corporation, showing the separation of ownership and control. It highlights the roles of shareholders (owners) and management (CEO, executives) and the flow of decisions and information between them. This visual representation aligns with the concept of separation between ownership and control in a corporation.