MGMT 466 Ch. 10

A rule approved by the U.S. Securities and Exchange Commission (SEC) allows large shareholders (owning 1 to 5 percent of a company's stock) to nominate up to _____ percent of a company's board of directors.

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Corporate governance in Germany

Agency problems are not as prevelant in many private German firms b.Employees, union members, and shareholders appoint members to the Aufsichtsrat (the supervisory tier of the board). d.The Vorstand of a German corporation makes decisions about strategy and management.

Christina's contract with Nationwide Mutual Insurance Company is an example of:

Agency relationship

Diffuse ownswership

As ownership of the corporation is diffused, shareholders' ability to monitor managerial decisions is weakened. One reason for this is that diffuse owernship makes it difficult for owners to effectively coordinate their actions

Employee stock option plans (ESOPs), recapitalization, issuance of additional debt, and share buybacks are actions associated with which of the following hostile takeover defense strategies?

Capital structure change

Which of the following concepts is an important influence in Japanese corporate governance?

Consensus

Corporate governance includes

Ensuring that top level managers' interests are aligned with the interests of stakeholders Establishing and maintaining harmony between the firm's owners and its top level managers whose interests may conflict Using mechanisms to determine and control the strategic direction and performance of organizations

Internal governance mechanisms used in the modern corporation

Executive compensation The board of directors Ownership concentration

Which of the following hostile takeover defense strategies involves the repurchase of the target firm's shares of stock that were obtained by the acquiring firm at a premium in exchange for an agreement that the acquirer will no longer target the company for takeover?

Greenmail

A _____ is an acquisition of a target company by an acquiring firm that is accomplished not by coming to an agreement with the target company's management but by going directly to the company's shareholders or fighting to replace management in order to get the acquisition approved.

Hostile takeover

_____ are financial institutions, such as mutual funds and pension funds, that control large-block shareholder positions.

Institutional owners

Effectively using executive compensation as a governance mechanism is particularly challenging for firms implementing _____ strategies.

International

Which of the following is a benefit that product diversification can create for top-level managers that shareholders do not enjoy?

It provides an opportunity for top level managers to increase their compensation

_____ typically own at least 5 percent of a company's issued shares.

Large block shareholders

Which of the following hostile takeover defense strategies has a positive effect on shareholder wealth?

Litigation

_____ includes the threat of job loss, loss of compensation, and loss of managerial reputation.

Managerial employment risk

A.D. Industries has been aggressively buying up stock in B.C. Enterprises, and the firm now possesses close to 20 percent of B.C.'s shares. The other B.C. shareholders are concerned that A.D. is getting ready for a hostile takeover, which will result in the termination of B.C.'s CEO and other executives. Which of the following managerial defense strategies would allow B.C.'s shareholders to block A.D. by diluting its existing stake in B.C.?

Poison pill

Company XYZ is being targeted for a hostile takeover by Company ABC. Which of the following defense strategies that Company XYZ could employ would likely be the most successful?

Poison pill

Principals establish governance and control mechanisms to:

Prevent agents from active opportunistically

Managerial employment risk is _____ with increased diversification because a firm and its upper-level managers are less vulnerable to the _____ in demand associated with a single or limited number of product lines or businesses.

Reduced; reduction

Which of the following is a means considered to improve the effectiveness of outside directors?

Requiring outside directors to own significant equity stakes in the frim as a prerequisite to holding a board seat

What is the governance mechanism most closely connected with deterring unethical behaviors by holding top-level managers fully accountable for developing and supporting an organizational culture in which only ethical behaviors are permitted?

The board of directors

Who are typically assumed to be responsible for an undervalued firm's poor performance?

Top level managers

Which of the following is NOT one of the groups that board of directors' members are generally classified into?

Unrelated outsiders.

In general, family-controlled businesses will outperform nonfamily-controlled businesses because they:

Want to maintain the family legacy

Consequences of the Sarbanes Oxley Act

a.A decreased number of foreign firm listings resulted on U.S. stock exchanges. c.Internal auditing scrutiny in firms' financial reporting improved. d.Section 404 increased costs for firms.

Which of the following is NOT an agency problem that often exists in modern corporations?

a.CEOs who feel constrained by governance mechanisms are less likely to seek external advice.

Ownership concentration

a.Ownership of many modern corporations is now concentrated in the hands of institutional investors rather than individual stockholders. b.Research evidence suggests that ownership concentration is associated with lower levels of firm product diversification. c.Ownership concentration as a governance mechanism has received considerable interest, because large-block shareholders are increasingly active in their demands that firms adapt effective governance mechanisms to control managerial decisions so that they will best represent owners' interests. d.Research indicates that institutional activism may not have a strong direct effect on firm performance, but it may indirectly influence a targeted firm's strategic decisions (including those concerned with social issues).

Which of the following best explains why German executives aren't dedicated to the maximization of shareholder wealth to the degree that their counterparts are in the United Kingdom and the United States?

a.Private shareholders rarely have major ownership positions in German firms.

Which classification of board member is defined as having some relationship with the firm, contractual or otherwise, that may create questions about their independence, but are not involved with the corporation's day-to-day activities?

a.Related outsiders

Which of the following statements regarding the Sarbanes-Oxley Act (SOX) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) is NOT true?

a.SOX is intended to align financial institutions' actions with society's interests.

The Dodd-Frank Wall Street Reform and Consumer Protection Act does all of the following

a.provides a new framework to regulate derivatives. b.establishes new corporate governance requirements. d.regulates credit rating agencies and securitizations.

Overdiversification is

an example of self serving and opportunistic managerial behavior. OVersiversification occurs when managers use free cash flow to diversify the firm in ways that do not have a strong possibility of creating additional value for shareholders

The market for corporate control is

an external governance mechanism that is active when a firm's internal governance mechanisms fail. The market for corporate control is composed of individuals and firms that buy ownership positions in or purchase all of potentially undervalued corporations typically for the purpose of forming new divisions in established companies or merging two previously separate firms.

Agency costs include

are the sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals because governance mechanisms cannot guarantee total compliance by the agent.

What is the Japanese "keiretsu"?

b.A group of firms tied together by cross-shareholdings

Which of the following is a reason why it can be difficult for boards of directors to effectively assess top-level managers' decisions on a regular basis?

b.Typically, the effects of top-level managers' decisions are stronger on the firm's long-term performance than its short-term performance.

Businesswoman Marybeth Johnson just purchased an additional 2,000 shares of Western Telecomm, which means she now possesses about 7 percent of the firm's issued shares. This makes her a(n):

b.large-block shareholder.

Which of the following statements about the effectiveness of boards of directors is NOT true?

c.Evidence suggests that boards have been highly effective in monitoring and controlling top-level managers' decisions and subsequent actions.

Markham Food Services contracts with elementary schools in three states to supply meals for children. In order to increase profits, Markham uses substandard ingredients in these meals but has passed its quality investigations with the various school districts. Who is ultimately responsible for the corporate climate that resulted in this wrongdoing?

c.Markham's board of directors

Which of the following statements about the preferences of shareholders and top-level managers with regard to a firm's level of diversification is true?

c.Shareholders seek a level of diversification that reduces the risk of the firm's total failure while simultaneously increasing its value.

Which of the following statements regarding the use of defense tactics by the target firm during a hostile takeover is NOT true?

c.Using takeover defenses increases the amount of pressure managers feel to seek short-term performance gains.

Thompson Manufacturing is looking to enhance the effectiveness of its board of directors. All of the following are ways this can be done EXCEPT:

c.increasing stock options as part of board members' compensation.

Ownership concentration is defined by the number of _____ and the _____.

c.large-block shareholders; total percentage of the firm's shares they own

Research suggests that stock option incentives

can be associated with top level managers' fraudulent behavior, such as earnings manipulation Because long-term incentives, such as stock options, tie a manager's overall wealth to the firm in a way that is inflexible, such incentives may not be valued as highly by a manager as by outside investors.

The Dodd-Frank Act includes provisions related to

capital requirements for banks executive compensation systemic risk oversight

Which of the following statements regarding corporate governance is NOT true?

d.At its core, corporate governance is concerned with making sure a firm and its shareholders behave in an ethical manner.

Which of the following statements regarding the market for corporate control is true?

d.Research suggests that the market for corporate control is an imperfect governance mechanism due to the fact that investors sometimes use the market for corporate control to take an ownership position in firms that are performing well.

Which of the following is NOT a factor that affects shareholders' preferences for a diversified position?

d.The magnitude of executive compensation as compared to mid-level management compensation

In recent years, the number of individuals who are large-block shareholders has:

declinedq

_____ is where a large number of shareholders with small holdings and few, if any, large-block shareholders exist, producing weak monitoring of managers' decisions.

diffuse ownership

In contrast to managers, shareholders may prefer that free cash flow be:

distributed to them as dividends

To manage her investment risk as a shareholder, Jennifer should maintain a(n) _____ portfolio by investing in several companies to _____ her overall risk.

diversified; reduce

_____ is a governance mechanism that seeks to align the interests of managers and owners through salaries, bonuses, and long-term incentives such as stock awards and options.

executive compensation

Long-term incentives increase, rather than decrease,

executive exposure to risks associated with uncontrollable events, such as market fluctuations and industry decline.

With _____ degrees of ownership concentration, the probability is _____ that managers' decisions will be designed to maximize shareholder value.

high; greater

In the majority of cases, _____ are the principal means by which the market for corporate control is activated.

hostile takeovers

A widely accepted view is that a board of directors with a significant percentage of _____ provides relatively _____ monitoring and control of managerial decisions.

insiders; weak

Research suggests that firms in which families own enough equity to have influence without major control tend to:

make the best strategic decisions

An agency relationship exists when

one or more persons (the principal or principals) hire another person or persons (the agent or agents) as decision-making specialists to perform a service. Modern corporations are characterized by an agency relationship in which the firm's owners hire and pay top-level managers to make decisions that maximize the firm's value.

Some research suggest that a firm performs better if

outside directors own significant equity stakes in the firm

In general, ownership concentration's influence on strategies is _____, and ownership concentration's influence on firm performance is _____.

positive; positive

Managers are likely to pursue higher levels of compensation in order to

reach the financial goals set by outsider-dominated boards. A virtually exclusive reliance on financial evaluations shifts risks to top-level managers who, in turn, may make decisions to maximize their interests and reduce their employment risk

Activist pension funds are _____ in nature, while activist hedge funds are _____.

reactive; proactive

The separation of ownership and managerial control allows shareholders to purchase stock, but the right to purchase stock and the potential to receive income from the firm's operations requires them to take a risk. This risk is that they will receive income only if the firm's _____ exceed(s) its _____.

revenues; expenses

Which of the following two parties are the focus of corporate governance?

shareholders and manager

Commonly, those managing small firms own a _____ percentage of the firm, which means there is _____ separation between ownership and managerial control.

significant; less

China's economy exhibits traits of both _____ and _____.

socialism; market orientation

Standstill agreement

which is a contract between the target firm and the potential acquirer specifying that the acquirer will not purchase additional shares of the target firm for a specified period of time in exchange for a fee paid by the target firm.