Chapter 12 MGT449
10) The risk of employee opportunism on behalf of agents in a public stock company is exacerbated by ________. A) information asymmetry B) groupthink C) stakeholder strategy D) corporate governance
A
12) The root cause of the principal-agent problem between senior executives and lower-level employees can be explained by the: A) informational advantage of the lower-level employees. B) knowledge of employees regarding day-to-day tasks. C) higher number of lower-level employees than senior executives. D) operational expertise of lower-level employees in concentrated areas of a particular field.
A
22) ________ 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. A) Inside directors B) Auditors C) Investors D) Outside directors
A
24) The ________ is the centerpiece of corporate governance and is composed of inside and outside members. A) board of directors B) group of shareholders C) institutional investors group D) scientific advisory board
A
46) Which of the following is an important external corporate-governance mechanism? A) Market for corporate control B) Executive compensation C) Shareholder capitalism D) Board of directors
A
36) 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) ________. A) agent B) principal C) manager D) employee
B
43) 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) ________. A) bonus B) stock option C) stock exchange D) commission
B
47) Which of the following is an important internal corporate-governance mechanism? A) Market for corporate control B) Board of directors C) Shareholder capitalism D) Activist investors
B
49) All public companies listed on the U.S. stock exchanges must file a number of financial statements with the ________. A) Wall Street Journal B) Securities and Exchange Commission (SEC) C) GovernanceMetrics International (GMI) D) EDGAR database
B
16) Outside directors are more likely to watch out for the interests of shareholders of their firm because: A) they have more independence than inside directors. B) they are part-time employees of the firm. C) they do not have the safety of serving on the boards of other firms. D) they are more likely to benefit from using inside information to trade stocks.
A
27) Rajat Gupta's role in providing inside information to Galleon Group for the benefit of Galleon Group's stockholders and Rajat Gupta himself is an example of ________. A) moral hazard B) shareholder capitalism C) shared value creation D) adverse selection
A
29) In principal-agent relationships, ________ describes the difficulty of principals to ascertain whether agents have really put forth their best efforts. A) moral hazard B) adverse selection C) on-the-job consumption D) the agency problem
A
33) Which of the following real-world scenarios best exemplifies information asymmetry in a public stock company? A) Based on a tipoff by a Goldman Sachs employee, the Galleon Group was able to sell its holdings in Goldman Sachs' stocks prior to the announcement. B) Mark Hurd, CEO of HP, was unaware of the sexual harassment allegations, and the board's demand for him to resign caught him by surprise. C) Goldman Sachs was party to the Abacus deal despite knowing its shortcomings. D) GE knew that it could create a profitable venture out of producing green products, so it rolled out the ecomagination strategy.
A
39) Which of the following proves that GE's board of directors is significantly independent? A) 16 of the 17 board directors are from outside the organization. B) 26 percent of the board members at GE are female. C) The CEO of GE is also the chairman of the board. D) GE's board has five committees, each with its own chair.
A
40) Which of the following best defines duality in a board of directors? A) A person holds both the role of CEO and chairperson of the board. B) A person holds both the role of inside director and outside director of the board. C) A person holds the role of CEO on the boards of two companies. D) A person holds both the role of director and shareholder of the company.
A
44) Which of the following is a major issue at the forefront of CEO compensation in recent years? A) The absolute size of the CEO pay package compared with the pay of the average employee B) The performance of the CEO as an employee versus the performance as a board member C) A comparison of the compensation of senior management hired during and before the CEO's tenure D) A comparison of the performance of the organization before and after the CEO's tenure
A
45) 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 ________. A) the strong relationship between executive compensation and company performance B) the inversely proportional relationship between CEO compensation and the pay of the average employee C) the avoidance of control mechanisms to guide performance D) the public's perception of a company's stock value based on executive compensation figures
A
55) Which of the following is an implication for the strategist in the context of corporate governance and a company's success? A) Effective corporate governance and solid business ethics are critical to gaining and sustaining competitive advantage. B) Leading by ethical example often has a less strong effect on employee behavior than words. C) A firm that restricts its responsiveness to stockholders (and no other stakeholders) and keeps them committed to its vision will be successful. D) Very few and specific corporate governance mechanisms can be effective in addressing the principal-agent problem.
A
Which of the following statements is true of shareholders in a public stock company? A) They are granted a charter of incorporation by the state and legally own company stock. B) They directly supervise and coordinate the manufacture of products and delivery of services. C) They are the centerpiece of corporate governance. D) They are appointed by a board of directors to oversee the company's management.
A
26) Who appoints the board of directors in a public stock company? A) CEOs B) Employees C) Shareholders D) Auditors
C
13) Which of the following acts in the Goldman Sachs-Galleon Group insider trading scandal is an egregious exploitation of information asymmetry? A) Galleon Group's decision to trust Rajat Gupta's information as accurate B) Rajat Gupta providing information regarding Warren Buffet's impending multibillion-dollar injection into Goldman Sachs C) Warren Buffet's decision to inject a huge amount of money into Goldman Sachs based on its financial reports D) Rajaratnam receiving information regarding Warren Buffet's impending multibillion-dollar injection into Goldman Sachs
B
14) 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: A) typically exemplifies the agency problem of adverse selection. B) can be stopped by implementing performance incentives and strict control mechanisms. C) is neither unlawful nor unethical hence, Neville and Andre cannot be reprimanded. D) goes against the principles of shareholder capitalism.
B
15) The day-to-day operations of a publicly traded company are conducted by: A) people who finance the company, such as investors. B) its managers and lower-level employees. C) the CEO and the board of directors. D) people who own the company, such as shareholders.
B
19) 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: A) is also the CEO of other companies. B) is likely to provide the board with valuable inside information. C) is a board member of a major client. D) is more likely than other board members to take care of the stockholders.
B
20) Hashim is a board member at Kluster Motors Inc. He is also a senior executive of the firm. On the other hand, the board is chaired by Compton Smith, the CEO of Jensen Electronics. According to this scenario, Hashim ________. A) cannot serve on the board of any other organization B) is an inside director of Kluster Motors C) can use information from board meetings to trade stocks of Kluster Motors D) is more likely than Compton to take care of stockholder interests
B
51) Ethics is: A) always universal and cannot differ between cultures. B) not synonymous with law. C) impossible to codify into law. D) the minimum acceptable standard in business practice.
B
8) 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) ________. A) inside director-outside director conflict B) principal-agent problem C) shareholder capitalism scenario D) fiduciary responsibility oversight
B
21) ________ are board members who are not employees of the firm but frequently are senior executives from other firms or full-time professionals. A) Auditors B) CEOs C) Inside directors D) Outside directors
D
18) Which of the following is NOT true about the members of the board of directors in a public stock company? A) They may hire and fire top management. B) They oversee the firm's operations. C) They are not responsible to shareholders. D) They represent the shareholders' interests.
C
2) ________ is a mechanism to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally. A) Stakeholder impact analysis B) Corporate social responsibility C) Corporate governance D) Shareholder capitalism
C
25) Which of the following is true of the board of directors in a public stock company? A) The board of directors acts as a facilitator to convey interests of the stockholders to the management without any real authority. B) The functions of the board of directors are limited to ensuring the hiring and firing of CEOs. C) Votes at shareholder meetings determine whose representatives are appointed to the board of directors. D) Because shareholders generally have uniform interests, the composition of the board is generally a unanimous decision.
C
32) Johan 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 startup recruits Johan based on his stated credentials without verifying them. Two days into the job, Johan's team lead realizes that Johan does not know much of what he claimed to know during the interview. This scenario best exemplifies ________. A) shared value creation B) corporate governance C) adverse selection D) moral hazard
C
34) Which of the following is NOT true of corporate governance in public stock companies? A) Corporate governance attempts to address the principal-agent problem. B) Corporate governance seeks to benefit multiple stakeholders, not just shareholders. C) Corporate governance seeks to create a separation between ownership and control. D) Corporate governance provides rules for making decisions on corporate affairs.
C
35) According to the agency theory, ________. A) companies should focus on generating profits for stockholders B) principals and agents have interchangeable roles C) conflicts that arise in corporations should be addressed in the legal realm D) corporations are more than a set of contracts between parties
C
37) 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 ________. A) shared value creation B) adverse selection C) on-the-job consumption D) corporate governance
C
4) In public stock companies, which of the following expectations of principals is most likely to lead to principal-agent problems? A) The expectation that the agent will go above and beyond the call of duty B) The expectation that the agent will reconnect economic and social needs C) The expectation that the agent will act in the principal's best interest D) The expectation that the agent will follow the country's laws and regulations
C
41) 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? A) The CEO might be able to influence the board through setting the meeting agendas. B) The CEO is likely to be more responsible because he is setting his own performance targets. C) The CEO possesses invaluable inside information that can help chair the board effectively. D) The CEO will suggest board appointees who are friendly toward him or her.
C
48) Which of the following do NOT serve as additional external-governance mechanisms? A) Industry analysts B) Government regulators C) Board of directors D) Auditors
C
52) A bank, YPC, offers a customer a personal loan. In which of the following circumstances will this decision most likely be considered unethical? A) The bank is not aware of the investments made by the customer. B) The bank is depending on the customer to pay back the loan before term completion. C) The bank knows that the customer will be unable to pay the loan if the interest rate rises. D) The bank has the financial statements of the customer, but it is not aware of each source of income.
C
11) In publicly-traded companies, individuals who are delegated to perform duties on behalf of company owners are known as ________. A) shareholders B) principals C) clients D) agents
D
17) 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? A) Frank is a stockholder of Lofloy Greens. B) Frank cannot serve as a director on Spinson Locomotives' board. C) Frank is a part-time employee at Lofloy Greens. D) Frank is an outside director on Lofloy's board of directors.
D
23) The board of directors of a public stock company consists of: A) employees of a company who belong to the senior management and directly report to the CEO of the firm. B) managers appointed by the owners of a company to run its day-to-day operations. C) the legal owners of a publicly traded company that was purchased in a leveraged buyout. D) individuals who formally represent the firm's shareholders and oversee the work of executives.
D
28) ________ is illustrated by a situation in which the principal cannot determine the value created by individual members of a team. A) Moral hazard B) Shareholder capitalism C) Information asymmetry D) Adverse selection
D
3) Which of the following could most likely have prevented the accounting scandals of the early 2000s and the global financial crisis? A) Adopting the principles of shareholder capitalism B) Adopting a narrow shareholder perspective C) Separating economic interests and social needs D) Practicing effective corporate governance
D
30) Adverse selection in a public stock company occurs when: A) a firm's work tasks, incentives, and employment contracts minimize opportunism by agents. B) an agent manipulates information to benefit stockholders. C) a principal is not aware of the context from which information from an agent is derived. D) information asymmetry increases the likelihood of selecting inferior alternatives.
D
31) 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 ________. A) moral hazard B) shared value creation C) corporate governance D) adverse selection
D
38) Postrupe 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 Postrupe's board to achieve board independence? A) 5 B) 1 C) 3 D) 7
D
42) Which of the following best explains why a board of directors may grant stock options as part of a compensation package? A) To bring about a separation of CEO/chair duality B) To change the liability of shareholders from limited to unlimited C) To reduce the transferability of stocks between stockholders D) To align incentives between shareholders and management
D
5) Which of the following is the source of the principal-agent problem in publicly traded companies? A) Transferability of investor ownership B) The law of legal personality C) Limited liability for investors D) The separation of ownership and control
D
50) Which of the following is true of business ethics? A) Business ethics is an agreed-upon code of conduct in business, based on laws. B) The perception of what is ethical and what is not is similar across different cultures. C) Business ethics needs to be codified into law in order to be followed. D) Certain notions such as fairness, honesty, and reciprocity are universal norms.
D
53) Which of the following is true of the codes of conduct of an organization? A) They help the board of directors and the CEO implement shareholder capitalism. B) They are a guide to determine what is lawful and what is unlawful. C) They are a reiteration of the laws pertaining to business dealings in a corporate environment. D) They detail how the organization expects an employee to behave and to represent the company in business dealings.
D
54) One of the ways to foster ethical behavior in employees is to: A) view clients as counter parties to transactions. B) align the vision statement of the organization with its informal culture. C) avoid codifying organizational culture. D) create a control system that encourages desired values.
D
6) Saul is a manager at Holden Apparels Inc. and is friends with the company's CEO. This privilege gives Saul the information that Holden Apparels is in the midst of talks to take over a leading rival. Saul buys stocks of Holden with the expectation that its stocks will appreciate. But the deal falls through and the stocks of Holden depreciate in the following months. Are Saul's actions unethical? Why? A) Yes, because it is illegal and unethical for Saul to possess any kind of insider information. B) No, because Saul did not make any profits from trading stocks using this information. C) No, because Saul did not ask the CEO to disclose such information to him. D) Yes, because it is unethical to trade stocks based on insider information irrespective of the final outcome.
D
7) The informational advantage that agents possess over principals is often based on the fact that: A) the information is extremely secure and protected from exposure to anyone outside the company. B) public stock companies are characterized by information symmetry. C) agents are legally permitted to freely trade the information in exchange for benefits, unlike principals. D) insiders are the first to learn about important developments before the information is released to the public.
D
9) The conflict in a principal-agent relationship arises when: A) stockholders and agents are involved in the day-to-day operations of the company. B) the company has more outside directors than inside directors. C) the strategy adopted by the company's agents tries to emulate the mission statement created by the principals. D) the goals of the principals and agents are not aligned with each other.
D
