BP 12
De Bruyne Inc., a publicly traded company, has ten members on its board. Of the ten members, six members are employees of the company and includes the CEO, who also chairs the board. The board has been failing in its responsibilities toward the shareholders who now want a new board. Assuming that the total number of board members remains constant, how many outside directors should the shareholders appoint to De Bruyne's board to achieve board independence?
7
Which of the following do not serve as additional external-governance mechanisms?
board of directors
Which of the following is an important internal corporate-governance mechanism?
board of directors
Which of the following is regarded as the most internal of control mechanisms?
business ethics
Neville and Andre are customer care employees at JPN Care. In between calls, Neville and Andre spend time on Facebook and YouTube. The relaxed guidelines at JPN allow them to do that. However, sometimes, they knowingly avoid answering calls or keep customers on hold, while they check their social networking accounts. Such behavior
can be stopped by implementing performance incentives and strict control mechanisms.
Jennifer received a tip from a close friend who is an executive manager of a publicly traded company called MegaRed Inc. The manager received some inside information about how to trade MegaRed stock to get a huge profit. He shared this information with his Jennifer. This scenario is an example of
information asymmetry.
The risk of employee opportunism on behalf of agents in a public stock company is exacerbated by
information asymmetry.
Which of the following best defines duality in a board of directors?
A person holds both the role of CEO and chairperson of the board.
_____ is illustrated by a situation in which the principal cannot determine the value created by individual members of a team.
Adverse selection
_____ suggests that the firm can be viewed as a nexus of legal contracts (loosely defined) between resource holders.
Agency theory
Which of the following is the result of a leveraged buyout (LBO)?
An LBO changes a public company into a private company.
Which of the following real-world scenarios best exemplifies information asymmetry in a public stock company?
Based on a tip-off by a Goldman Sachs employee, the Galleon Group was able to sell its holdings in Goldman Sachs' stocks prior to the announcement.
_____ are an agreed-upon code of conduct in business, based on societal norms.
Business ethics
Vijay is a firm believer in Milton Friedman's view of a firm's social obligations. With which of the following statements is Vijay most likely to agree?
Businesses can use their resources to create profit as long as they do so within the rules of the game.
Which of the following is true of business ethics?
Certain notions such as fairness, honesty, and reciprocity are universal norms.
_____ is a mechanism to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally.
Corporate governance
Which of the following is not true of corporate governance in public stock companies?
Corporate governance seeks to create a separation between ownership and control.
Which of the following perspectives best supports the shared value creation framework?
Externalities such as pollution, wasted energy, and costly accidents actually create internal costs.
Why does Michael Porter recommend expanding the customer base of an organization in terms of the shared value creation framework?
Doing so could yield significant business opportunities that could improve the standard of living of the poor.
The Securities and Exchange Commission (SEC) makes all financial reports filed by public companies available electronically via the _____ database.
EDGAR
Which of the following accurately describes GE's ecomagination initiative?
Ecomagination increases the perceived value it creates for its customers while lowering costs to produce and deliver "green" products and services.
Which of the following is an implication for the strategist in the context of corporate governance and a company's success?
Effective corporate governance and solid business ethics are critical to gaining and sustaining competitive advantage.
Frank is a board member at Lofloy Greens Inc., a publicly traded company. In addition to his duties on the board, Frank is also a full-time employee as a senior manager at Spinson Locomotives Inc. Which of the following is most likely to be true of Frank?
Frank is an outside director on Lofloy's board of directors.
Which of the following facts proves that GE's board is fairly diverse compared to other Fortune 500 companies?
GE's board is composed of 28 percent women, compared to less than 16 percent for the others.
Janis is the CEO of a firm. She has an opportunity to increase the competitive advantage of her company but is not sure if accepting the opportunity is ethical. Which of the following questions would help her decide if accepting the opportunity is ethical?
How would the media report her decision to accept the opportunity if it were to become public?
_____ are the board members who are part of a company's senior management team appointed by shareholders to provide the board with necessary information pertaining to the company's internal workings and performance.
Inside directors
What best describes transferability of investor ownership in a public stock company?
Investors are allowed to trade shares of stocks.
What was Goldman Sachs' rebuttal to SEC's claim that it defrauded investors?
It is up to the clients to assess the risks involved in any investments.
Which of the following best supports the fact that Goldman Sachs was unethical in the Abacus deal?
It knew that Paulson & Co. had bundled high-risk mortgages into the collateralized debt obligation.
What is the result of managers' pursuit of strategies that define value creation too narrowly in public stock companies?
It reduces the trust of shareholders in the organization as a vehicle for value creation.
Hoptin Inc. is a public stock company. Which of the following best exemplifies the legal personality of the company?
Jessi Hoptin, the company's founder, died a few years ago, yet the company is doing well.
Which of the following is a characteristic of a public stock company?
Legal personality allows a firm's continuation beyond the founder or the founder's family.
According to Michael Porter, which of the following is a problem with many publicly traded companies?
Many publicly traded companies have defined value creation too narrowly in terms of financial performance.
If the board of directors at GE decides to pursue a stakeholder strategy, should they change the ecomagination strategy?
No, they should not change the strategy because the strategy already helps them save costs while generating huge revenues.
_____ are board members who are not employees of the firm, but frequently are senior executives from other firms or full-time professionals.
Outside directors
Which of the following is an advantage that a private company enjoys over a public company?
Private companies are not required to disclose financial statements.
Which of the following acts in the Goldman Sachs-Galleon Group insider trading scandal is an egregious exploitation of information asymmetry?
Rajat Gupta providing information regarding Warren Buffet's impending multibillion-dollar injection into Goldman Sachs
All public companies listed on the U.S. stock exchanges must file a number of financial statements with the
Securities and Exchange Commission (SEC).
Jamiro Inc. is a public stock company. Which of the following statements about the company best illustrates the fact that its investors have limited liability?
Shareholders of Jamiro are responsible to the company only for the capital they have invested.
Which of the following statements best supports the separation of ownership and control in publicly traded companies?
Shareholders own stocks but do not run the company.
What does "limited liability for investors" imply in a public stock company?
Shareholders who provide the risk capital are liable only to the capital specifically invested.
Which of the following proves that GE's board of directors is significantly independent?
Sixteen of the 17 board directors are from outside the organization.
GE's board has only one inside director, Jeffrey Immelt, GE's CEO, who also acts as chairman of the board. This is known as duality. Which of the following statements represents the best argument for this duality in GE?
The CEO possesses invaluable inside information that can help chair the board effectively.
A bank, YPC, offers a customer a personal loan. In which of the following circumstances will this decision most likely be considered unethical?
The bank knows that the customer will be unable to pay the loan if the interest rate rises.
Which of the following statements best supports the view that GE's ecomagination strategy is in line with the shared value creation framework?
The ecomagination strategy allows GE to produce "green" products while increasing revenue and competitive advantage.
Which of the following is an important external corporate-governance mechanism?
market for corporate control
Which of the following is a common result of a hostile takeover of a company?
The new owner sells the company in pieces.
What helps notions such as fairness, honesty, and reciprocity to be codified into law?
The notions are universal norms.
Which of the following scenarios best exemplifies a leveraged buyout of a telecommunications firm, Telbok Inc.?
The owner of another company buys all the outstanding shares of Telbok.
What are poison pills?
They are defensive provisions that kick in should a buyer reach a certain level of share ownership.
Which of the following statements is true of shareholders in a public stock company
They are granted a charter of incorporation by the state and legally own company stock.
Which of the following is not true about the members of the board of directors in a public stock company?
They are not responsible to shareholders.
Which of the following is true of the board of directors in a public stock company?
Votes at shareholder meetings determine whose representatives are appointed to the board of directors.
Which of the following is true of the codes of conduct of an organization?
They detail how the organization expects an employee to behave and to represent the company in business dealings.
TopDrawer Inc. has a board of directors that consists of seven members. Which of the following is most likely an accurate statement about TopDrawer's board of directors?
TopDrawer's board of directors evaluates the firm's strategic initiatives but does not include any employees of the firm.
How did Uber conflict with Carnegie Mellon University's National Robotics Engineering Center (NREC)?
Uber poached entire NREC research teams with signing bonuses, twice the salaries, and stock options, thereby threatening the future of NREC.
In late 2014, Uber senior executive Emil Michael was heard to say that Uber should spend a million dollars to hire private investigators to dig up dirt on journalists who wrote damaging pieces on Uber. When the remarks became public, he apologized. How did Uber's CEO deal with Michael?
Uber's CEO refused to discipline Michael.
Leila is a graduate student pursuing a course in business. Presented with the case of Uber's unethical behavior, Leila wonders if Uber's board of directors should ask the CEO of Uber, Travis Kalanick, to step down. Having a strong belief in Michael Porter's idea of value creation, Leila is most likely to conclude that
Uber's board of directors should ask Kalanick to step down because it has a greater obligation toward society.
Sam is a manager at StyleOne Apparels Inc. and is friends with the company's CEO. This privilege gives Sam the information that StyleOne Apparels is in the midst of talks to take over a leading rival. Sam buys stocks of StyleOne with the expectation that its stocks will appreciate. But the deal falls through and the stocks of StyleOne depreciate in the following months. Are Sam's actions unethical? Why?
Yes, because it is unethical to trade stocks based on insider information irrespective of the final outcome.
Which of the following positions is an example of an inside director for a firm?
a chief financial officer
What is a unicorn?
a private start-up company valued at a billion dollars or more
At Opnic Corp., a cross-functional team is formed to work on a project for a new client. The team consists of Darius and four other members. At most of the team's presentations to senior management, Darius takes the lead and discusses project specifics with the management, while others chip in with additional information. At the completion of the project, Darius is recommended for promotion, while the other team members receive little recognition for their hard work. The reality is that Darius did very little actual work but spent some time compiling the project report based on different documents submitted by the others. This scenario at Opnic Corp. is a typical consequence of
adverse selection.
Raj is a recent graduate who states that he has interned at a major accounting firm so that his value as a candidate for employment increases. A start-up recruits Raj based on his stated credentials without verifying them. Two days into the job, Raj's team lead realizes that Raj does not know much of what he claimed to know during the interview. This scenario best exemplifies
adverse selection.
In publicly traded companies, individuals who are delegated to perform duties on behalf of company owners are known as
agents
Why do shareholders of public companies need to appoint a board of directors to represent their interests?
because of the separation of ownership and control
The _____ is the centerpiece of corporate governance and is composed of inside and outside members.
board of directors
According to the agency theory,
conflicts that arise in corporations should be addressed in the legal realm.
Because of poor management, the stock prices of DigiKing Inc. falls and many investors sell their shares. Soon DigiKing becomes the target of a hostile takeover, during which Charles buys enough shares to exert control over the firm. In this scenario, Charles performs the role of a(n)
corporate raider.
One of the ways to foster ethical behavior in employees is to
create a control system that encourages desired values.
Michael Porter recommends that managers use the shared value creation framework to focus on
creating new regional clusters.
The board of directors of a public stock company consists of
individuals who formally represent the firm's shareholders and oversee the work of executives.
What is the term used to describe a situation in which a manager of a company has more inside information than an investor of the company?
information asymmetry
Adverse selection in a public stock company occurs when
information asymmetry increases the likelihood of selecting inferior alternatives.
The root cause of the principal-agent problem between senior executives and lower-level employees can be explained by the
informational advantage of the lower-level employees.
Dmitri is a senior manager for the firm Kopney Inc. Because of his experience, he has been appointed to the board of HKS Inc., even though he doesn't work for this firm. He also serves on the boards of several other companies. Dmitri is a(n) _____ for Kopney and a(n) _____ for HKS.
inside director; outside director
The informational advantage that agents possess over principals is often based on the fact that
insiders are the first to learn about important developments before the information is released to the public.
Fakhir is a board member at Garfield Motors Inc. He is also a senior executive of the firm. The board is chaired by Ernest Jones, the CEO of Blixt Electronics. According to this scenario, Fakhir
is an inside director of Garfield Motors.
Serena is the CEO of Pedalo Inc., a publicly traded company. The shareholders want Serena on the board of directors despite her recent appointment as the CEO. This decision of the shareholders is most likely because Serena
is likely to provide the board with valuable inside information.
The day-to-day operations of a publicly traded company are conducted by
its managers and lower-level employees.
A mortgage-loan officer persuades unsuspecting consumers to sign up for exotic mortgages, such as "option ARMs." These mortgages offer borrowers the choice to pay less than the required interest, which is then added to the principal while the interest rate can adjust upward. Because of this setup, many borrowers are unable to repay the mortgage once the interest rates go up. Which of the following phrases best describes this scenario?
legal but not ethical
Mario founded Tapoz Communications Inc. in 1993. Ten years later, the company went public. Despite Mario's death in 2005, the company reported a 75 percent increase in revenue in 2006. Which of the following characteristics of a publicly traded company does this scenario best exemplify?
legal personality
Kaito is the CEO of Henson and Fukui Consulting Inc. Kaito's efforts to persuade the board of directors to pursue a new business strategy fail. He borrows money from different sources and purchases all the outstanding shares of Henson and Fukui Consulting. What does this scenario best exemplify?
leveraged buyout
A company scientist at a biotechnology company decides to work on his own research project, hoping to eventually start his own firm, rather than on the project he was assigned. However, the company's stockholders are unaware of this situation. This is an example of a(n) _____ in the context of a principle-agent problem.
moral hazard
In principal-agent relationships, _____ describes the difficulty of principals to ascertain whether agents have really put forth their best efforts.
moral hazard
Rajat Gupta's role in providing inside information to Galleon Group for the benefit of Galleon Group's stockholders and himself is an example of
moral hazard.
Ethics is
not synonymous with law.
Travis, the CEO of Riplon Corp., used company funds to buy a car worth $1 million and a house for $6 million in Santa Fe. This is an example of
on-the-job consumption.
Which of the following could most likely have prevented the accounting scandals of the early 2000s and the global financial crisis?
practicing effective corporate governance
An individual who is part owner of a company and hires another individual to act on his or her behalf is referred to as a(n)
principal
Clare, the CEO of Femica Inc., reports to the board of directors appointed by the shareholders of Femica. Based on shareholder suggestions, the board ties Clare's compensation to the performance of Femica. Due to this pressure, Clare begins devoting extra time to projects and undertakes other activities to ensure that she has job security and that she receives adequate compensation. This conflict between Clare's interests and the board's interests best illustrates a(n)
principal-agent problem.
GLD Inc. is a publicly traded company. The stockholders of this company delegate the authority to make decisions for the company to a CEO named George. The stockholders expect George to make decisions that will benefit the company. However, George begins to find ways to maximize his total compensation, which at times hinders GLD's performance. This scenario reflects
principal-agent problems.
MainLine Inc. is a public stock company that provides natural gas for businesses. Although this company generates a large profit, its methods of obtaining gas have at times broken down, thereby causing environmental problems. As a result, the company's value creation has suffered. This scenario supports Michael Porter's warning that
public companies have defined value creation too narrowly in terms of financial performance, thereby contributing to black swan events.
Which of the following characteristics of a public stock company deals with principals and agents?
separation of legal ownership and management control
Creating economic value for shareholders while also creating social value is known as creating
shared value.
Who appoints the board of directors in a public stock company?
shareholders
According to the perspective of shareholder capitalism,
shareholders in public stock companies have the most legitimate claim on profits.
A compensatory governance mechanism that allows executives to buy a company's stock at a predetermined price sometime in the future is called a(n)
stock option.
The MBA oath first developed at Harvard and now signed by students at over 300 business schools is modeled after
the Hippocratic oath in medicine.
Which of the following is a major issue at the forefront of CEO compensation in recent years?
the absolute size of the CEO pay package compared with the pay of the average employee
In public stock companies, which of the following expectations of principals is most likely to lead to principal-agent problems?
the expectation that the agent will act in the principal's best interest
The conflict in a principal-agent relationship arises when
the goals of the principals and agents are not aligned with each other.
Grameen Bank in Bangladesh was founded to provide microcredit to impoverished farmers who wanted to start their own entrepreneurial ventures that would help themselves climb out of poverty. This best exemplifies Michael Porter's suggestion that
the largest but poorest socioeconomic group can yield significant business opportunities.
Which of the following real-world events would act as the most likely deterrent against adopting a purely stakeholder strategy approach to business?
the nonsustainable debt levels incurred by sovereign governments to fund social programs
Which of the following is the source of the principal-agent problem in publicly traded companies?
the separation of ownership and control
John Hammergren, the CEO of McKesson, received an annual compensation of $50 million. The compensation was closely tied to the performance of McKesson's stock, which appreciated considerably during his tenure. This situation best exemplifies
the strong relationship between executive compensation and company performance.
In a public stock company, senior executives, such as the CEO, face agency problems when
they delegate authority of strategic business units to general managers.
Outside directors are more likely to watch out for the interests of shareholders of their firm because
they have more independence than inside directors.
Poison pills have become rare because
they retard an effective function of equity markets.
Which of the following best explains why a board of directors may grant stock options as part of a compensation package?
to align incentives between shareholders and management
Warren owns shares in a company called Gerarch Communications Inc. The company's financial performance has been declining over the past few months, and the value of its stock has been decreasing. Warren wants to proactively cut his losses and therefore sells his shares. Lawrence, a trading enthusiast, buys shares in Gerarch Communications because he believes that the share prices cannot go anywhere but up. Which of the following characteristics of a public stock company does this scenario best exemplify?
transferability of investor ownership
