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Weaknesses in corporate governance practices and stakeholder management processes expose a company and its stakeholders to several risks. The reverse scenario is that effective corporate governance and stakeholder management practices can create several benefits for a company and its stakeholders.
Question
Which of the following is most likely a benefit of an effective corporate governance structure?
- Default risk may increase.
- Operating performance may improve.
- Managers may make decisions which benefit them but not the shareholders.
Solution
The correct answer is B.
Improvement in operational and financial performance is a potential benefit of an effective corporate governance structure.
A is incorrect because effective corporate governance leads to a decrease, not increase in default risk.
C is incorrect due to the fact that when managers make decisions which only benefit them, they are not considering the interests of other stakeholders, namely shareholders.