Chap 12

Which of the following are important components of fostering ethical behavior in employees?

- board members setting clear ethical expectations - executive behavior that is in sync with the organization's vision and values - strategic goals that are achievable with legal means

Which of the following are examples of moral hazard?

- A CEO with a multi-million-dollar severance agreement performs poorly knowing he will be well compensated even if he is laid off. - A company dumps pollution into a local lake that will be cleaned using taxpayer money. - Banks make very risky loans with the knowledge that the government will bail them out if necessary.

Financial statements by public companies must

- adhere to generally accepted accounting principles (GAAP) - be audited by certified public accountants

Additional functions of a board of directors beyond general strategic oversight include

- selecting, evaluating, and compensating the CEO - ensuring that the firm's accounting practices and reports are accurate - assessing and mitigating risk

Which one of the following statements below can best be linked to the Nobel laureate Milton Friedman?

The social responsibility of a business is to increase its profits.

Which of the following is true of public stock companies?

There exists an implicit contract based on trust between society and the public stock company.

Which of the following is a major drawback of public stock companies, according to Michael Porter and others?

They prioritize financial performance over all else.

The hiring of a job seeker who claims to have extensive computer programming experience when his knowledge of the subject is minimal would be an example of

adverse selection

In a public stock company, the centerpiece of corporate governance is the

board of directors

One of the key characteristics of a leveraged buyout (LBO) is that it

changes the ownership structure of a company from public to private

The idea that a corporation is simply a collection of legal contracts is known as

agency theory

The interests of inside directors on the board of directors typically align with those of

senior management

Private start-up companies valued at over $1 billion, such as some of those in the tech sector, are called

unicorns

When facing an ethical dilemma, a manager should

- determine whether he or she could comfortably defend the action to the public - consider whether the action in question conforms to the firm's code of conduct and industry practices

Optics Incorporated, a publicly traded eyewear business, places profits ahead of all other performance metrics. This practice ______.

- fails to take into account the idea of corporate social responsibility - conforms to the traditional notion of shareholder capitalism

In order to reconcile economic and social needs within the shared value creation network, managers need to focus on

- making products affordable for the poorest socioeconomic groups in order to improve standards of living - expanding value chains to include NGOs and other organizations committed to social goals - creating new regional clusters and business centers

What are the two significant issues regarding the CEO pay debate?

- the relationship between firm performance and CEO pay - the size of the CEO compensation in relation to average employee pay

The ratio of CEO to average employee pay in the United States is about

300 to 1

Which of the following is one of the implications of information asymmetry between principals and agents?

Agents can pass on the information to select principals who can trade stocks based on this information.

Which of the following is a recommended guideline for the composition of a board of directors to implement corporate governance?

Close to two-thirds of the board of directors should consist of outside directors.

is a mechanism to direct and control an enterprise and attempts to address the principal-agent problem, which can occur any time an agent performs activities on behalf of a principal.

Corporate governance

Why did the San Francisco's Metro Transit Authority (MTA) order Uber to cease and desist?

MTA argued that Uber was operating a taxi service without proper licensing.Correct

Which of the following best exemplifies information asymmetry at Rainholm Industries Inc., a publicly traded software development firm?

The board of directors at Rainholm Industries makes significant structural changes to the organization and waits several weeks before issuing a press release about it.

What, according to Greg Smith, was the cause for the change in ethical climate within Goldman Sachs?

The company went public and began looking at clients and itself as counter parties to a transaction.

How is the characteristic of separation of legal ownership and management control disadvantageous to publicly traded companies?

The managers delegated to make decisions on behalf of shareholders might pursue their personal interests.

Wayne Enterprises Inc. is a publicly traded company that specializes in manufacturing consumer electronics. Which of the following best exemplifies the implementation of a shared value creation framework at Wayne Enterprises Inc.?

Wayne Enterprises uses recycled materials to create its commercially successful products.

In ______, a single investor or group of investors buys, with the help of borrowed money, the outstanding shares of a publicly traded company and assumes control of it.

a leveraged buyout

Pavel works for a successful pharmaceutical company. Despite several years of unprecedented growth, the company wants to boost profits even more. It has taken steps to drastically raise the prices of its most widely distributed medications, which are difficult to imitate. Research into employee ethical decision-making capacity indicates that Pavel will

act in a manner that reflects his company's organizational culture

In team-based environments, the principal may have difficulty determining individual contributions by members. This can create a situation in which an opportunistic employee does little work but takes credit. This is known as

adverse selection

In public stock companies, inside directors

are appointed by shareholders to provide the board with necessary company information.

Following the rise of institutional investors, the use of poison pills to avoid hostile takeover has

become rarer

Corporate governance is a system of

checks and balances

The shared value creation framework encourages managers to focus on which of the following needs?

economic, social

The idea of corporate social responsibility (CSR) suggests that a firm's obligations should

exceed the traditional imperative to increase profits

Social consequences of business activities, including pollution, energy loss, and dangerous accidents, are known as

externalities

Economist Michael Porter and many others argue that the value of public stock companies is too narrowly defined in terms of ______, leading to scandals and economic crises.

financial performance

Incentives that are too high-powered, such as an outsized bonus, may cause individuals to

focus too much attention on the incentive and not enough on strategic activities

If a company is poorly managed, its stock price may fall low enough for the firm to become a target for a(n)

hostile takeover

Under agency theory, a manager should seek to align ______ between principals and agents to minimize opportunism.

incentives

Which of the following occurs when agents are better informed than principals?

information asymmetry

The risk of employee opportunism, on behalf of agents, is exacerbated by the concept of

information asymmetry.

According to agency theory, conflicts such as the principal-agent problem are considered ______ issues.

legal

The main goal of a poison pill is to

minimize the threat of a hostile takeover

A situation in which one party has an incentive to shirk their responsibility because the costs will fall to the other party is known as

moral hazard

According to agency theory, which of the following managerial functions can be used to avoid adverse selection and moral hazard?

organization, control

The primary difference between outside and inside members of the board of directors is that

outside directors are not employees of the firms, whereas inside directors are

The subprime mortgage crisis of the early 2000s is an example of

poor corporate governance

In ________, the stockholders are the legal owners of the company who delegate decision-making authority to professional managers.

public stock companies

A board of directors is elected to represent the interests of

shareholders

The right to buy a company's stock at a predetermined price sometime in the future is known as a(n

stock option

Who sets the tone for the ethical climate within an organization?

strategic leaders

An executive can legally earn a significant profit from stock options if

the firm performs well and the actual price per share exceeds the negotiated strike price

An external governance mechanism that makes a poorly managed company vulnerable to takeover by outside investors is known as

the market for corporate control

Which of the following is a problem that corporate governance seeks to address?

the principal-agent problem

Which of the following are critical aspects of maintaining good relationships between a firm and its stakeholders?

transparency fairness

The relationship between CEO pay and job performance has been shown to be

weak

Michael Porter is in favor of the shared value creation framework because he believes that it

will not only allow companies to gain and sustain a competitive advantage, but it will also reshape capitalism and its relationship to society.