Sevi chapter 6 and 7

three primary internal governance mechanisms for monitoring and managing the behavior of managers

- committed and involved board of directors - shareholder activism and active engagement - managerial rewards and incentives

disadvantages of CEO duality

- no separation of power - can create conflict of interest that could negatively affect the interests of the shareholders - complicates the issue of CEO succession

primary participants of corporate governance

- shareholders - management - board of directors

three conditions for principal-principal conflicts

1. a dominant owner or group of owners who have interest that are distinct from minority shareholders 2. motivation for the controlling shareholders to exercise their dominant positions to their advantage 3. few formal (such as legislation or regulatory bodies) or informal constraints that would scourge or prevent the controlling shareholders form exploiting their advantageous positions

why do firms make acquisitions

1. access to new markets and distribution channels 2. access to a new capability or competency 3. strategic preemption

three basic policies to create monetary incentives for CEOs to maximize value of their companies

1. boards can require that the CEOs become substantial owners of company stock 2. salaries, bonuses, and stock options can be stricter so as to provide rewards for superior performance and penalties for poor performance 3. dismissal for poor performance should be a realistic threat

three main risks of horizontal integration

1. integration failure 2. reduced flexibility 3. increased potential for legal repercussions

How to make an effective alliance

1. make relation-specific investments 2. establish knowledge-sharing routines 3. build interfirm trust

two forms of managerial hubris

1. managers of the acquiring company convince themselves that they are able to manage the business of the target company more effectively, and they are able to create additional shareholder value 2. although most top-level managers are aware that the majority of acquisitions destroy rather than create shareholder value, they consider themselves the exceptions to the rule

Three components of alliance management capability

1. partner selection and alliance formation 2. alliance design and governance 3. post-formation alliance management

why do we see so many mergers?

1. principal-agent problems 2. the desire to overcome competitive disadvantage 3. superior acquisition and integration capability

three main benefits to horizontal integration

1. reduction in competitive intensity 2. lower costs 3. increased differentiation

two advantages of strategic preemption

1. the acquiring firm removes a potential competitor 2. the acquiring firm preempts existing competitors from buying the startup

two problems of agency theory

1. the conflicting goals of principals and agents, along with the difficulty or expensive for principals to monitor the agents 2. the different attitudes and preferences toward risk of principals and agents (risk sharing)

Benefits of CEO duality

1. when one person holds both roles they are able to act more efficiently and effectively 2. provides firms with a clear focus on both objectives and operations as well as eliminates confusion and conflict between the CEO and the chairperson

BUILD benefits

Control, organic growth, culture

what was the benefit of the alliances for GM?

Enabled GM to enter the mobile transportation and logistics market

co-opetition can lead to

Learning races

why did Lyft enter into strategic alliances with GM and Waymo?

Lyft was motivated to beat Uber in the IPO race

what was the benefit of the alliances for Waymo?

Waymo benefits from the millions of miles that Lyft cars drive every year

CEO succession

a CEO/chairperson may choose to retire as a CEO but keep their role and this puts the new CEO in a difficult position

strategic preemption

a desired reduction in competitive intensity as a motivation to acquire

managerial hubris

a from of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary

business group

a set of firms that, though legally independent, are bound together by a constellation of formal and informal ties and are accustomed to taking coordinated action

agency theory

a theory of the relationship between principals and their agents, with emphasis on two problems

______ is one external mechanism that provides a solution to opportunistic behavior by managers. a: The market for corporate control b: Board of directors review c: Strategic control d: The corporate reward system

a: The market for corporate control

Which of the following is a way institutional investors engage in shareholder activism? a: They act aggressively to protect and enhance their investments. b: They shift from acting as owners to simply trading shares of companies. c: They seek to leave the issue of corporate governance to the board of directors. d: They recognize that they are not permanent shareholders and cannot hold a corporation accountable for its actions.

a: They act aggressively to protect and enhance their investments.

When competitors enter strategic alliances and become collaborators, _________ ensues and can result in learning races. a: co-opetition b: inverted acquisition c: strategic intent d: early majority liability

a: co-opetition

When Pfizer and Wyeth merged, they reduced the size of their combined sales force while also increasing the number of drugs they could promote. This is an example of which source of value creation for M&As? a: decreased costs b: increased potential for legal repercussions c: increased flexibility d: increased competitive intensity

a: decreased costs

An unfriendly acquisition of one company of another is known as a(n) a: hostile takeover b: merger c: equity alliance d: joint venture

a: hostile takeover

A firm must decide whether to build, borrow, or buy to answer the question of a: how it will achieve growth b: who must initiate growth c: when to start growth d: why it must grow

a: how it will achieve growth

which type of alliance is the most common? a: non-equity b: equity c: joint venture

a: non-equity

which alliance allows for the sharing of explicit knowledge? a: non-equity alliance b: equity alliance

a: non-equity alliance

A horizontal integration strategy leads to industry consolidation a: true b: false

a: true

Firms can use strategic alliances to strengthen their competitive advantage when competing in battles to control industry standards. a: true b: false

a: true

Unity-of-command advocates believe that a CEO can act more efficiently and effectively when holding the positions both of CEO and chairman of the board. a: true b: false

a: true

BORROW benefits

access to resources, risk sharing, speed, diversification

Hostile takeover

acquisition in which the target company foes not wish to be acquired

shareholder activism

actions by large shareholders to protect their interests when they feel that managerial actions of a corporation diverge from shareholder value maximization

expropriation of minority shareholders

activities that enrich the controlling shareholders at the expense of minority shareholders

media

an external governance mechanism of influencing public perceptions about a companies financial prospects and the quality of its management

governmental regulatory bodies

an external governance mechanism that regulates firms subject to their importance of industry

market for corporate control

an external governance mechanism when shareholders are dissatisfied with a firms management sell their shares

auditors

an external governance mechanism where auditing firms are independent organizations staffed by certain professionals who verify the firms books of accounts

banks and analysts

an external governance mechanism where banks ensure borrowing firms finances are in order and that the loan covenants are bing followed, and analysts conduct on-going in depth studies of firms to make recommendations to buy, hold, or sell stock

______ governance occurs when shareholders, management, and the board of directors work together to align their goals. a: Synergistic b: Corporate c: Director d: Stakeholder

b: Corporate

Which of the following is a way institutional investors engage in shareholder activism? a: They seek to leave the issue of corporate governance to the board of directors. b: They act aggressively to protect and enhance their investments. c: They recognize that they are not permanent shareholders and cannot hold a corporation accountable for its actions. d: They shift from acting as owners to simply trading shares of companies.

b: They act aggressively to protect and enhance their investments.

Which of the following terms refers to when one firm purchases or takes over another firm? a: wholly owned subsidiary b: acquisition c: merger d: strategic alliance

b: acquisition

A mechanism created to allow different parties to contribute capital, expertise, and labor for the benefit of each party is called a(n) a: organization b: corporation c: franchise d: sole proprietorship

b: corporation

which alliance allows for the sharing of tacit/implicit knowledge? a: non-equity alliance b: equity alliance

b: equity alliance

A corporation's board of directors has little control over the amount bonuses and stock options that the corporation's CEO receives for his or her performance. a: true b: false

b: false

A standalone organization that two or more parent companies create and own together is a a: franchise b: joint venture c: licensing agreement d: non-equity alliance

b: joint venture

When managers of acquiring companies incorrectly convince themselves that they are able to manage the business of the target company more effectively than its current managers, they are engaging in a: integration capability problems b: managerial hubris c: the superhero delusion d: horizontal integration

b: managerial hubris

Two means of monitoring the behavior of managers through corporate governance mechanisms are through a committed board of directors and a: customer activism b: shareholder activism c: human resources regulations d: employee unions

b: shareholder activism

Corporate governance is the relationship among a: shareholders, employees, and the board of directors. b: shareholders, managers, and the board of directors correct c: various stakeholder groups, management, and the board of directors d: shareholders, customers, and the board of directors

b: shareholders, managers, and the board of directors

______ deals with the relationship between principals (owners) and their agents (managers/employees). a: Corporate theory b: Economic theory c: Agency theory d: Governance theory

c: Agency theory

Which of the following is the most likely to lead to superior financial performance of a company? a: Executives pursuing self-interest b: Withholding stock options from executives c: Good corporate governance d: The use of nonindependent directors

c: Good corporate governance

Which of the following statements about equity alliances is true? a: They result in weak ties between the partners. b: They are more common than contractual, non-equity alliances. c: They require larger investments than non-equity alliances. d: They are based on full ownership.

c: They require larger investments than non-equity alliances.

A real option gives a firm the right to continue making investments a: and requires at least half of the remaining investments be completed b: if it uses a non-interest bearing trust account c: but does not obligate the firm to do so d: but only if they act within a year

c: but does not obligate the firm to do so

How well the firms in an alliance fit together culturally is referred to as partner a: commitment b: capability c: compatibility d: governance

c: compatibility

A firm has a core competency in R&D but little else, so it enters into a strategic alliance with a larger firm to gain distribution channels and marketing expertise. In this case, distribution channels and marketing expertise would be examples of a: real options b: potential legal repercussions c: critical complementary assets d: increased differentiation

c: critical complementary assets

What is a component of post-formation alliance management? a: selecting appropriate alliance partners b: designing alliances c: establishing knowledge-sharing routines d: governing alliances

c: establishing knowledge-sharing routines

which alliance allows for the sharing of explicit knowledge and tacit knowledge? a: non-equity alliance b: equity alliance c: joint venture

c: joint venture

Which of the following has an indirect role as an external control mechanism? a: auditors b: regulatory bodies c: the media d: banks and analysts

c: the media

Horizontal integration is a good option if a: the target firm is in a different industry than the acquiring firm b: the target firm is more valuable as a continued standalone company c: the target firm will have more value when combined with the acquiring firm d: the acquiring firm is new to the industry and has no competitors

c: the target firm will have more value when combined with the acquiring firm

Agency theory is concerned with a: verifying accounting practices b: determining agents' incentives and rewards c: verifying agents' performance d: ensuring agents' privacy and authority

c: verifying agents' performance

partner compatibility

captures aspects of cultural fit between different firms

partner commitment

concerns the willingness to make the necessary resources available and to accept short-term sacrifices to ensure long-term rewards

An example of the role that public activists have played as an external control mechanism is pressuring companies to refuse to deal in valuable minerals known as _____________ minerals, which rebel groups trade to buy weapons.

conflict

Principal-principal conflict

conflicts between tow classes of principals-controlling shareholders and minority shareholders-within the context of a corporate governance system

Co-opetition

cooperation by competitors to achieve a strategic objective

BUY risks

cultural clash, financial risks, overvaluation

Which of the following is the agency theory perspective on CEO duality? a: A CEO has the clearest focus on both the objectives and operations of the company. b: Confusion and conflict should be eliminated between the CEO and chairman. c: The CEO can act more efficiently and effectively by also holding the position of chairman. d: There should be a separation of power between the CEO and the chairman.

d: There should be a separation of power between the CEO and the chairman.

Which term refers to a company's ability to handle the three specific tasks related to an alliance concurrently and effectively? a: partner alliance design b: formative specification c: alliance governance d: alliance management capability

d: alliance management capability

The duties of the ________ involve reviewing the organization's financial objectives and major strategies, providing advice to top management, and reviewing systems to ensure compliance with laws and regulations. a: customers b: chief executive officer and chief financial officer c: shareholders d: board of directors

d: board of directors

Which of the following has a fiduciary duty to ensure that the company is run consistently with the long-term interests of the business owners or shareholders and to act as an intermediary between the shareholders and management? a: corporate governors b: Federal Trade Commission c: stakeholders d: board of directors

d: board of directors

In a(n) _______, shareholders have limited liability as well as limited involvement with the business' operations. a: not-for-profit b: agency c: sole proprietorship d: corporation

d: corporation

The leadership structure in which the CEO acts as both the chief executive officer and the chair of the board of directors is called CEO a: direction b: leadership c: command d: duality

d: duality

Which of the following provides external oversight of companies? a: customers b: corporate board of directors c: shareholders d: government regulatory bodies

d: government regulatory bodies

Although the three tasks of alliance management capability often occur at the same time, in general what is the first phase of alliance management? a: strategic network manipulation b: post-formation alliance management c: alliance design and governance d: partner selection and alliance formation

d: partner selection and alliance formation

A voluntary arrangement between firms to share knowledge, resources, and capabilities to develop products, processes, or services is known as a a: hostile takeover b: wholly owned subsidiary c: merger d: strategic alliance

d: strategic alliance

BORROW risks

dependency, conflict of interest, intellectual property concerns

What are the most expensive, complicated, and difficult to undo options used to grow a firm? a: mergers b: equity alliances c: acquisitions d: joint ventures e: A and C

e: A and C

What are common reasons a firm might pursue a merger? a: Principal-agent problems. b: Superior acquisition and integration capability. c: The desire to overcome competitive disadvantage. d: To increase strategic alliances in secondary markets e: A, B, and C

e: A, B, and C

Which statements correctly describe licensing agreements? a: Licensing agreement partners frequently exchange codified information. correct b: They are contractual alliances between firms. correct c: Participants focus on their own comparative advantages. incorrect d: They are horizontal strategic alliances between firms. e: A, B, and C

e: A, B, and C

Which of the following are the three choices in the build borrow buy framework? a: internal development b: acquisition of new resources c: elimination of product costs d: strategic alliances e: A, B, and D

e: A, B, and D

Which statements correctly describe the advantages commonly possessed by firms in licensing agreements? a: Established firms generally have an invention advantage. b: Established firms typically have an innovation advantage. c: Startups often possess an invention advantage. d: Startups frequently possess an innovation advantage. e: B and C

e: B and C

Which of the following are reasons to pursue horizontal integration as a corporate strategy? a: to reduce competitive flexibility b: to provide such benefits as complementary products in their offering c: to enhance their economic value creation d: to lower costs e: B, C, and D

e: B, C, and D

Which of the following are attributes of an effective board of directors? a: Directors provide strong oversight. b: Directors rigorously evaluate senior managers, the company's strategic plan, and new senior management hires. c: Directors are actively involved. d: Directors support senior managers by rubber-stamping plans and actions. e: a, b, and c

e: a, b, and c

Which of the following are components of the unity-of-command perspective on CEO duality? a: A CEO has a clear focus on both objectives and operations. b: Confusion and conflict between the CEO and chairman is eliminated. c: A CEO can act more efficiently and effectively when holding both positions. d: Confusion and conflict between the CEO and chairman is increased. e: a, b, and c

e: a, b, and c

Which of the following statements about external auditors are true? a: They are appointed by the federal government. b: They often have lucrative consulting contracts with the firms they audit. c: They often fail to catch accounting irregularities. d: They are nonprofit organizations. e: b and c

e: b and c

Which of the following are ways that a board of directors can incentivize managers to make decisions that are in the company's shareholders' interest? a: By focusing financial and other incentives on short-term company performance b: Through structured salaries, bonuses, and stock options to provide rewards for superior performance over a long-term horizon c: By dismissing poor performing CEOs and other senior managers d: By requiring CEOs become substantial owners of company stock e: b, c, and d

e: b, c, and d

Which of the following duties are primary responsibilities of a board of directors? a: Serve as mentors for up-and-coming managers. b: Rigorously scrutinize strategic plans. c: Take control of the management succession process. d: Evaluate senior managers' performance. e: b, c, and d

e: b, c, and d

Which of the following statements are true regarding the role that good corporate governance plays on the decision to invest in companies? a: Having independent directors on a company's Board is not necessary to ensure good governance. b: The premium is larger for firms in countries where corporate governance is highly valued. c: Major institutions often choose to purchase stock of companies known for their good corporate governance practices. d: Positive governance practices often lead to superior financial performance e: b, c, and d

e: b, c, and d

what was the benefit of the alliances for Lyft?

enabled Lyft to strengthen its competitive position against Uber

What are the three mechanisms that alliances can be governed by? a: non-equity alliances b: downstream alliance c: joint ventures d: equity alliances e: upstream alliance f: A, C, and D

f: A, C, and D

Which of the following forms of agreement do non-equity alliances typically take? a: licensing b: innovation c: supply d: marketing e: distribution f: A, C, and E

f: A, C, and E

Which of the following are external governance control mechanisms? a: market for corporate control b: auditors c: board of directors d: customers e: banks and analysts f: a, b, and e

f: a, b, and e

Which of the following statements about stock analysts are true? a: They work independently and are restricted from communicating with the firms they study. b: They conduct ongoing studies of the firms they follow. c: They make recommendations to their clients to buy, hold, or sell. d: They are hired by the firms they are recommending. e: They are often more optimistic than they should be and do not often make "sell" recommendations f: b, c, and e

f: b, c, and e

explicit knowledge

knowledge than can be codified; concerns knowing about a process or product

tacit/implicit knowledge

knowledge that cannot be codified; concerns knowing how to do a certain task and can be acquired only though active participation in that task

external governance control mechanisms

method that ensure that managerial actions lead to shareholder value maximization and do not harm stakeholder groups that are outside the control of the corporate governance system

non-equity alliance

partnership based on contracts between firms

equity alliance

partnership in which at least one partner takes partial ownership in the other

public activists

pressure from activists and consumers to make decisions

BUY benefits

rapid growth, talent acquisition, market domination

Learning races in strategic alliances

situations in which both partners in a strategic alliance are motivated to form an alliance for learning, but the rate at which the firms learn may vary

joint venture

standalone organization created and jointly owned by two or more companies

what supports the disadvantages of CEO duality

the agency theory

CEO duality

the dual-leadership structure wherein the CEO acts simultaneously as the chair of the board of directors

board of directors

the intermediaries that provide a balance between a small group of key managers in the firm based at the corporate headquarters and sometimes a vast group of shareholders

merger

the joining of two interdependent companies to form a combined entity

horizontal integration

the process of merging with competitors at the same stage of the industry value chain, leading to industry consolidation

acquisition

the purchase or takeover of one company by another; can be friendly or unfriendly

corporate governance

the relationship am one various participants in determining the direction and performance of corporations

firms should go ahead with horizontal integration if

the target firm is more valuable inside the acquiring firm than as a continued standalone company

What supports the benefit of CEO duality

the unity of command

what role does shareholder activism play in corporate governance?

they assume the role of permanent shareholders and rigorously analyze issues of corporate governance

how do firms use horizontal integration to lower costs

through economies of scale

BUILD risks

time-consuming, resource constraints, innovation challenges

duty of board of directors

to ensure that company is run consistent with the long-term interests of the owners (shareholders)

strategic alliances

voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services