Chapter 12 - Quiz

David and Fred are customer care employees at JPN Care. In between calls, David and Fred 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. can be stopped by implementing performance incentives and strict control mechanisms. b. is neither unlawful nor unethical; hence, David and Fred cannot be reprimanded. c. typically exemplifies the agency problem of adverse selection. d. demonstrates the dangers of information asymmetry.

A - Such behavior can be best described as opportunism by agents and can be stopped by implementing performance incentives and strict control mechanisms. The managerial implication of agency theory relates to the management functions of organization and control: The firm needs to design work tasks, incentives, and employment contracts and other control mechanisms in ways that minimize opportunism by agents.

Which of the following descriptions best exemplifies adverse selection? a. A manager cannot ascertain the contributions of individual team members in team production. b. An employee spends time on social networking sites during work hours. c. An interview candidate lists his qualifications in chronological order. d. A research scientist uses the organization's resources to conduct personal research.

A - The description that best exemplifies adverse selection is that a manager cannot ascertain the contributions of individual team members in team production. In principal-agent relationships, for example, adverse selection describes a situation in which an agent misrepresents his or her ability to do the job. The problem is especially pronounced in team production, when the principal often cannot ascertain the contributions of individual team members.

Angie owns and runs Archana, a private start-up company with a current value of $1.3 billion. Archana is interested in going public to fund future growth. Which action should Angie take before Archana's initial public offering? a. She should investigate Archana's existing or potential problems with ethics or the law, if such problems exist. b. Angie should come up with a business plan for what c. Archana will do once it is no longer publicly traded. She and senior managers should write down their code of ethics. d. Angie should not embark on an IPO until Archana's value is higher.

A - To fund future growth, companies frequently need to go public. Private start-up companies valued at a billion dollars or more are called unicorns, because at one time they seemed as rare as the mythical beast. But their elusiveness has changed. As long as these unicorns remain private, they do not have to follow the stringent financial reporting and auditing requirements that public stock companies do. Consider that there may be a connection between firm structure and the degree that it integrates ethics. Not needing to expose themselves to as much public scrutiny as a publicly traded company allows unicorns to undertake risky actions in their legal and ethical business practices. A potential downside is, however, that a track record of ethics and legal problems may prevent a successful initial public offering (IPO) in the future.

Which of the following characteristics of a public stock company deals with principals and agents? a. transferability of investor ownership b. legal personality c. separation of legal ownership and management control d. limited liability of investors

C - Separation of legal ownership and management control deals with principals and agents. In publicly traded companies, the stockholders (the principals, represented by the board of directors) are the legal owners of the company, and they delegate decision-making authority to professional managers (the agents).

According to the agency theory, a. principals and agents have interchangeable roles. b. companies should focus on generating profits for stockholders. 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 - The principal-agent problem is a core part of agency theory, which views the firm as a nexus of legal contracts. In this perspective, corporations are viewed merely as a set of legal contracts between different parties. Conflicts that may arise are to be addressed in the legal realm.

According to Michael Porter, which of the following is a problem with many publicly traded companies? a. There is no transferability of stock ownership in publicly traded companies. b. Publicly traded companies have no legal standing and are not responsible for their debts. c. They have defined value creation too narrowly in terms of financial performance. d. Shareholders of publicly traded companies do not have a legitimate claim on profits.

C - The public stock company has been a major contributor to value creation since its inception as a new organizational form over one hundred years ago. Michael Porter and others, however, argue that many public companies have defined value creation too narrowly in terms of financial performance.

What are poison pills? a. Companies use them in a bid to perform a hostile takeover of competing firms. b. Shareholders use them to prevent the founder of a company from taking the company private through a leveraged buyout. c. They are defensive provisions that kick in should a buyer reach a certain level of share ownership. d. They are unspecified conditions in the contract between stakeholders in an organization.

C - To avoid being taken over against their consent, some firms put in place poison pills. These are defensive provisions that kick in should a buyer reach a certain level of share ownership without top management approval.

Starling Inc. is a public stock company that provides natural gas for businesses. Although this company generates a large profit, management's focus on reducing costs caused the maintenance budget to be trimmed. Its pipelines have at times leaked, which created significant environmental problems. As a result, the company's value creation has suffered. This scenario supports Michael Porter's warning that public companies a. often do not keep economic needs and societal needs separate from each other, thereby contributing to low value creation. b. have defined value creation too narrowly and as a result have ignored political lobbying, thereby contributing to black swan events. c. do not focus enough on increasing firm profits, thereby contributing to low value creation. d. have defined value creation too narrowly in terms of financial performance, thereby contributing to black swan events.

D - Michael Porter and others argue that many public companies have defined value creation too narrowly in terms of financial performance. This in turn has contributed to some of the black swan events.

It is up to shareholders to make certain that the financial statements that their firms release are correct and not misleading. True False

F - Auditors and board members are responsible for this task.

If a privately held company has a history of legal and ethical problems, those problems can prevent a successful initial public offering (IPO) from taking place. True False

T - As long as companies remain private, they do not have to follow the stringent financial reporting and auditing requirements that public stock companies do. Consider that there may be a connection between firm structure and the degree that it integrates ethics. Not needing to expose themselves to as much public scrutiny as a publicly traded company allows companies such as Uber to push the envelope in their legal and ethical business practices. A potential downside is that a track record of ethics and legal problems may prevent a successful initial public offering (IPO) in the future.