CH.12 BUSA 4900
The _____ is the centerpiece of corporate governance and is composed of inside and outside members.
board of directors
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.
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.
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
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
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
According to the perspective of shareholder capitalism,
. shareholders in public stock companies have the most legitimate claim on profits.
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
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
_____ are an agreed-upon code of conduct in business, based on societal norms.
business ethics
_____ suggests that the firm can be viewed as a nexus of legal contracts (loosely defined) between resource holders.
Agency theory
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
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 perspectives best supports the shared value creation framework?
Externalities such as pollution, wasted energy, and costly accidents actually create internal costs.
What best describes transferability of investor ownership in a public stock company?
Investors are allowed to trade shares of stocks.
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 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
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..
Which of the following positions is an example of an inside director for a firm?
a chief financial officer
In principal-agent relationships, _____ describes the difficulty of principals to ascertain whether agents have really put forth their best efforts.
moral hazard
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
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
Creating economic value for shareholders while also creating social value is known as creating
shared value
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.
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
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.
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
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
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.
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.
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)
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 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.
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.
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
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.
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
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.
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
The risk of employee opportunism on behalf of agents in a public stock company is exacerbated by
information asymmetry
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
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
_____ 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
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
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
_____ 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 could most likely have prevented the accounting scandals of the early 2000s and the global financial crisis?
practicing effective corporate governance
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
Who appoints the board of directors in a public stock company?
shareholders
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 is the source of the principal-agent problem in publicly traded companies?
the separation of ownership and control
Poison pills have become rare because
they retard an effective function of equity markets
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