Sevi chapter 6 and 7
three primary internal governance mechanisms for monitoring and managing the behavior of managers
- committed and involved board of directors - shareholder activism and active engagement - managerial rewards and incentives
disadvantages of CEO duality
- no separation of power - can create conflict of interest that could negatively affect the interests of the shareholders - complicates the issue of CEO succession
primary participants of corporate governance
- shareholders - management - board of directors
three conditions for principal-principal conflicts
1. a dominant owner or group of owners who have interest that are distinct from minority shareholders 2. motivation for the controlling shareholders to exercise their dominant positions to their advantage 3. few formal (such as legislation or regulatory bodies) or informal constraints that would scourge or prevent the controlling shareholders form exploiting their advantageous positions
why do firms make acquisitions
1. access to new markets and distribution channels 2. access to a new capability or competency 3. strategic preemption
three basic policies to create monetary incentives for CEOs to maximize value of their companies
1. boards can require that the CEOs become substantial owners of company stock 2. salaries, bonuses, and stock options can be stricter so as to provide rewards for superior performance and penalties for poor performance 3. dismissal for poor performance should be a realistic threat
three main risks of horizontal integration
1. integration failure 2. reduced flexibility 3. increased potential for legal repercussions
How to make an effective alliance
1. make relation-specific investments 2. establish knowledge-sharing routines 3. build interfirm trust
two forms of managerial hubris
1. managers of the acquiring company convince themselves that they are able to manage the business of the target company more effectively, and they are able to create additional shareholder value 2. although most top-level managers are aware that the majority of acquisitions destroy rather than create shareholder value, they consider themselves the exceptions to the rule
Three components of alliance management capability
1. partner selection and alliance formation 2. alliance design and governance 3. post-formation alliance management
why do we see so many mergers?
1. principal-agent problems 2. the desire to overcome competitive disadvantage 3. superior acquisition and integration capability
three main benefits to horizontal integration
1. reduction in competitive intensity 2. lower costs 3. increased differentiation
two advantages of strategic preemption
1. the acquiring firm removes a potential competitor 2. the acquiring firm preempts existing competitors from buying the startup
two problems of agency theory
1. the conflicting goals of principals and agents, along with the difficulty or expensive for principals to monitor the agents 2. the different attitudes and preferences toward risk of principals and agents (risk sharing)
Benefits of CEO duality
1. when one person holds both roles they are able to act more efficiently and effectively 2. provides firms with a clear focus on both objectives and operations as well as eliminates confusion and conflict between the CEO and the chairperson
BUILD benefits
Control, organic growth, culture
what was the benefit of the alliances for GM?
Enabled GM to enter the mobile transportation and logistics market
co-opetition can lead to
Learning races
why did Lyft enter into strategic alliances with GM and Waymo?
Lyft was motivated to beat Uber in the IPO race
what was the benefit of the alliances for Waymo?
Waymo benefits from the millions of miles that Lyft cars drive every year
CEO succession
a CEO/chairperson may choose to retire as a CEO but keep their role and this puts the new CEO in a difficult position
strategic preemption
a desired reduction in competitive intensity as a motivation to acquire
managerial hubris
a from of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary
business group
a set of firms that, though legally independent, are bound together by a constellation of formal and informal ties and are accustomed to taking coordinated action
agency theory
a theory of the relationship between principals and their agents, with emphasis on two problems
______ is one external mechanism that provides a solution to opportunistic behavior by managers. a: The market for corporate control b: Board of directors review c: Strategic control d: The corporate reward system
a: The market for corporate control
Which of the following is a way institutional investors engage in shareholder activism? a: They act aggressively to protect and enhance their investments. b: They shift from acting as owners to simply trading shares of companies. c: They seek to leave the issue of corporate governance to the board of directors. d: They recognize that they are not permanent shareholders and cannot hold a corporation accountable for its actions.
a: They act aggressively to protect and enhance their investments.
When competitors enter strategic alliances and become collaborators, _________ ensues and can result in learning races. a: co-opetition b: inverted acquisition c: strategic intent d: early majority liability
a: co-opetition
When Pfizer and Wyeth merged, they reduced the size of their combined sales force while also increasing the number of drugs they could promote. This is an example of which source of value creation for M&As? a: decreased costs b: increased potential for legal repercussions c: increased flexibility d: increased competitive intensity
a: decreased costs
An unfriendly acquisition of one company of another is known as a(n) a: hostile takeover b: merger c: equity alliance d: joint venture
a: hostile takeover
A firm must decide whether to build, borrow, or buy to answer the question of a: how it will achieve growth b: who must initiate growth c: when to start growth d: why it must grow
a: how it will achieve growth
which type of alliance is the most common? a: non-equity b: equity c: joint venture
a: non-equity
which alliance allows for the sharing of explicit knowledge? a: non-equity alliance b: equity alliance
a: non-equity alliance
A horizontal integration strategy leads to industry consolidation a: true b: false
a: true
Firms can use strategic alliances to strengthen their competitive advantage when competing in battles to control industry standards. a: true b: false
a: true
Unity-of-command advocates believe that a CEO can act more efficiently and effectively when holding the positions both of CEO and chairman of the board. a: true b: false
a: true
BORROW benefits
access to resources, risk sharing, speed, diversification
Hostile takeover
acquisition in which the target company foes not wish to be acquired
shareholder activism
actions by large shareholders to protect their interests when they feel that managerial actions of a corporation diverge from shareholder value maximization
expropriation of minority shareholders
activities that enrich the controlling shareholders at the expense of minority shareholders
media
an external governance mechanism of influencing public perceptions about a companies financial prospects and the quality of its management
governmental regulatory bodies
an external governance mechanism that regulates firms subject to their importance of industry
market for corporate control
an external governance mechanism when shareholders are dissatisfied with a firms management sell their shares
auditors
an external governance mechanism where auditing firms are independent organizations staffed by certain professionals who verify the firms books of accounts
banks and analysts
an external governance mechanism where banks ensure borrowing firms finances are in order and that the loan covenants are bing followed, and analysts conduct on-going in depth studies of firms to make recommendations to buy, hold, or sell stock
______ governance occurs when shareholders, management, and the board of directors work together to align their goals. a: Synergistic b: Corporate c: Director d: Stakeholder
b: Corporate
Which of the following is a way institutional investors engage in shareholder activism? a: They seek to leave the issue of corporate governance to the board of directors. b: They act aggressively to protect and enhance their investments. c: They recognize that they are not permanent shareholders and cannot hold a corporation accountable for its actions. d: They shift from acting as owners to simply trading shares of companies.
b: They act aggressively to protect and enhance their investments.
Which of the following terms refers to when one firm purchases or takes over another firm? a: wholly owned subsidiary b: acquisition c: merger d: strategic alliance
b: acquisition
A mechanism created to allow different parties to contribute capital, expertise, and labor for the benefit of each party is called a(n) a: organization b: corporation c: franchise d: sole proprietorship
b: corporation
which alliance allows for the sharing of tacit/implicit knowledge? a: non-equity alliance b: equity alliance
b: equity alliance
A corporation's board of directors has little control over the amount bonuses and stock options that the corporation's CEO receives for his or her performance. a: true b: false
b: false
A standalone organization that two or more parent companies create and own together is a a: franchise b: joint venture c: licensing agreement d: non-equity alliance
b: joint venture
When managers of acquiring companies incorrectly convince themselves that they are able to manage the business of the target company more effectively than its current managers, they are engaging in a: integration capability problems b: managerial hubris c: the superhero delusion d: horizontal integration
b: managerial hubris
Two means of monitoring the behavior of managers through corporate governance mechanisms are through a committed board of directors and a: customer activism b: shareholder activism c: human resources regulations d: employee unions
b: shareholder activism
Corporate governance is the relationship among a: shareholders, employees, and the board of directors. b: shareholders, managers, and the board of directors correct c: various stakeholder groups, management, and the board of directors d: shareholders, customers, and the board of directors
b: shareholders, managers, and the board of directors
______ deals with the relationship between principals (owners) and their agents (managers/employees). a: Corporate theory b: Economic theory c: Agency theory d: Governance theory
c: Agency theory
Which of the following is the most likely to lead to superior financial performance of a company? a: Executives pursuing self-interest b: Withholding stock options from executives c: Good corporate governance d: The use of nonindependent directors
c: Good corporate governance
Which of the following statements about equity alliances is true? a: They result in weak ties between the partners. b: They are more common than contractual, non-equity alliances. c: They require larger investments than non-equity alliances. d: They are based on full ownership.
c: They require larger investments than non-equity alliances.
A real option gives a firm the right to continue making investments a: and requires at least half of the remaining investments be completed b: if it uses a non-interest bearing trust account c: but does not obligate the firm to do so d: but only if they act within a year
c: but does not obligate the firm to do so
How well the firms in an alliance fit together culturally is referred to as partner a: commitment b: capability c: compatibility d: governance
c: compatibility
A firm has a core competency in R&D but little else, so it enters into a strategic alliance with a larger firm to gain distribution channels and marketing expertise. In this case, distribution channels and marketing expertise would be examples of a: real options b: potential legal repercussions c: critical complementary assets d: increased differentiation
c: critical complementary assets
What is a component of post-formation alliance management? a: selecting appropriate alliance partners b: designing alliances c: establishing knowledge-sharing routines d: governing alliances
c: establishing knowledge-sharing routines
which alliance allows for the sharing of explicit knowledge and tacit knowledge? a: non-equity alliance b: equity alliance c: joint venture
c: joint venture
Which of the following has an indirect role as an external control mechanism? a: auditors b: regulatory bodies c: the media d: banks and analysts
c: the media
Horizontal integration is a good option if a: the target firm is in a different industry than the acquiring firm b: the target firm is more valuable as a continued standalone company c: the target firm will have more value when combined with the acquiring firm d: the acquiring firm is new to the industry and has no competitors
c: the target firm will have more value when combined with the acquiring firm
Agency theory is concerned with a: verifying accounting practices b: determining agents' incentives and rewards c: verifying agents' performance d: ensuring agents' privacy and authority
c: verifying agents' performance
partner compatibility
captures aspects of cultural fit between different firms
partner commitment
concerns the willingness to make the necessary resources available and to accept short-term sacrifices to ensure long-term rewards
An example of the role that public activists have played as an external control mechanism is pressuring companies to refuse to deal in valuable minerals known as _____________ minerals, which rebel groups trade to buy weapons.
conflict
Principal-principal conflict
conflicts between tow classes of principals-controlling shareholders and minority shareholders-within the context of a corporate governance system
Co-opetition
cooperation by competitors to achieve a strategic objective
BUY risks
cultural clash, financial risks, overvaluation
Which of the following is the agency theory perspective on CEO duality? a: A CEO has the clearest focus on both the objectives and operations of the company. b: Confusion and conflict should be eliminated between the CEO and chairman. c: The CEO can act more efficiently and effectively by also holding the position of chairman. d: There should be a separation of power between the CEO and the chairman.
d: There should be a separation of power between the CEO and the chairman.
Which term refers to a company's ability to handle the three specific tasks related to an alliance concurrently and effectively? a: partner alliance design b: formative specification c: alliance governance d: alliance management capability
d: alliance management capability
The duties of the ________ involve reviewing the organization's financial objectives and major strategies, providing advice to top management, and reviewing systems to ensure compliance with laws and regulations. a: customers b: chief executive officer and chief financial officer c: shareholders d: board of directors
d: board of directors
Which of the following has a fiduciary duty to ensure that the company is run consistently with the long-term interests of the business owners or shareholders and to act as an intermediary between the shareholders and management? a: corporate governors b: Federal Trade Commission c: stakeholders d: board of directors
d: board of directors
In a(n) _______, shareholders have limited liability as well as limited involvement with the business' operations. a: not-for-profit b: agency c: sole proprietorship d: corporation
d: corporation
The leadership structure in which the CEO acts as both the chief executive officer and the chair of the board of directors is called CEO a: direction b: leadership c: command d: duality
d: duality
Which of the following provides external oversight of companies? a: customers b: corporate board of directors c: shareholders d: government regulatory bodies
d: government regulatory bodies
Although the three tasks of alliance management capability often occur at the same time, in general what is the first phase of alliance management? a: strategic network manipulation b: post-formation alliance management c: alliance design and governance d: partner selection and alliance formation
d: partner selection and alliance formation
A voluntary arrangement between firms to share knowledge, resources, and capabilities to develop products, processes, or services is known as a a: hostile takeover b: wholly owned subsidiary c: merger d: strategic alliance
d: strategic alliance
BORROW risks
dependency, conflict of interest, intellectual property concerns
What are the most expensive, complicated, and difficult to undo options used to grow a firm? a: mergers b: equity alliances c: acquisitions d: joint ventures e: A and C
e: A and C
What are common reasons a firm might pursue a merger? a: Principal-agent problems. b: Superior acquisition and integration capability. c: The desire to overcome competitive disadvantage. d: To increase strategic alliances in secondary markets e: A, B, and C
e: A, B, and C
Which statements correctly describe licensing agreements? a: Licensing agreement partners frequently exchange codified information. correct b: They are contractual alliances between firms. correct c: Participants focus on their own comparative advantages. incorrect d: They are horizontal strategic alliances between firms. e: A, B, and C
e: A, B, and C
Which of the following are the three choices in the build borrow buy framework? a: internal development b: acquisition of new resources c: elimination of product costs d: strategic alliances e: A, B, and D
e: A, B, and D
Which statements correctly describe the advantages commonly possessed by firms in licensing agreements? a: Established firms generally have an invention advantage. b: Established firms typically have an innovation advantage. c: Startups often possess an invention advantage. d: Startups frequently possess an innovation advantage. e: B and C
e: B and C
Which of the following are reasons to pursue horizontal integration as a corporate strategy? a: to reduce competitive flexibility b: to provide such benefits as complementary products in their offering c: to enhance their economic value creation d: to lower costs e: B, C, and D
e: B, C, and D
Which of the following are attributes of an effective board of directors? a: Directors provide strong oversight. b: Directors rigorously evaluate senior managers, the company's strategic plan, and new senior management hires. c: Directors are actively involved. d: Directors support senior managers by rubber-stamping plans and actions. e: a, b, and c
e: a, b, and c
Which of the following are components of the unity-of-command perspective on CEO duality? a: A CEO has a clear focus on both objectives and operations. b: Confusion and conflict between the CEO and chairman is eliminated. c: A CEO can act more efficiently and effectively when holding both positions. d: Confusion and conflict between the CEO and chairman is increased. e: a, b, and c
e: a, b, and c
Which of the following statements about external auditors are true? a: They are appointed by the federal government. b: They often have lucrative consulting contracts with the firms they audit. c: They often fail to catch accounting irregularities. d: They are nonprofit organizations. e: b and c
e: b and c
Which of the following are ways that a board of directors can incentivize managers to make decisions that are in the company's shareholders' interest? a: By focusing financial and other incentives on short-term company performance b: Through structured salaries, bonuses, and stock options to provide rewards for superior performance over a long-term horizon c: By dismissing poor performing CEOs and other senior managers d: By requiring CEOs become substantial owners of company stock e: b, c, and d
e: b, c, and d
Which of the following duties are primary responsibilities of a board of directors? a: Serve as mentors for up-and-coming managers. b: Rigorously scrutinize strategic plans. c: Take control of the management succession process. d: Evaluate senior managers' performance. e: b, c, and d
e: b, c, and d
Which of the following statements are true regarding the role that good corporate governance plays on the decision to invest in companies? a: Having independent directors on a company's Board is not necessary to ensure good governance. b: The premium is larger for firms in countries where corporate governance is highly valued. c: Major institutions often choose to purchase stock of companies known for their good corporate governance practices. d: Positive governance practices often lead to superior financial performance e: b, c, and d
e: b, c, and d
what was the benefit of the alliances for Lyft?
enabled Lyft to strengthen its competitive position against Uber
What are the three mechanisms that alliances can be governed by? a: non-equity alliances b: downstream alliance c: joint ventures d: equity alliances e: upstream alliance f: A, C, and D
f: A, C, and D
Which of the following forms of agreement do non-equity alliances typically take? a: licensing b: innovation c: supply d: marketing e: distribution f: A, C, and E
f: A, C, and E
Which of the following are external governance control mechanisms? a: market for corporate control b: auditors c: board of directors d: customers e: banks and analysts f: a, b, and e
f: a, b, and e
Which of the following statements about stock analysts are true? a: They work independently and are restricted from communicating with the firms they study. b: They conduct ongoing studies of the firms they follow. c: They make recommendations to their clients to buy, hold, or sell. d: They are hired by the firms they are recommending. e: They are often more optimistic than they should be and do not often make "sell" recommendations f: b, c, and e
f: b, c, and e
explicit knowledge
knowledge than can be codified; concerns knowing about a process or product
tacit/implicit knowledge
knowledge that cannot be codified; concerns knowing how to do a certain task and can be acquired only though active participation in that task
external governance control mechanisms
method that ensure that managerial actions lead to shareholder value maximization and do not harm stakeholder groups that are outside the control of the corporate governance system
non-equity alliance
partnership based on contracts between firms
equity alliance
partnership in which at least one partner takes partial ownership in the other
public activists
pressure from activists and consumers to make decisions
BUY benefits
rapid growth, talent acquisition, market domination
Learning races in strategic alliances
situations in which both partners in a strategic alliance are motivated to form an alliance for learning, but the rate at which the firms learn may vary
joint venture
standalone organization created and jointly owned by two or more companies
what supports the disadvantages of CEO duality
the agency theory
CEO duality
the dual-leadership structure wherein the CEO acts simultaneously as the chair of the board of directors
board of directors
the intermediaries that provide a balance between a small group of key managers in the firm based at the corporate headquarters and sometimes a vast group of shareholders
merger
the joining of two interdependent companies to form a combined entity
horizontal integration
the process of merging with competitors at the same stage of the industry value chain, leading to industry consolidation
acquisition
the purchase or takeover of one company by another; can be friendly or unfriendly
corporate governance
the relationship am one various participants in determining the direction and performance of corporations
firms should go ahead with horizontal integration if
the target firm is more valuable inside the acquiring firm than as a continued standalone company
What supports the benefit of CEO duality
the unity of command
what role does shareholder activism play in corporate governance?
they assume the role of permanent shareholders and rigorously analyze issues of corporate governance
how do firms use horizontal integration to lower costs
through economies of scale
BUILD risks
time-consuming, resource constraints, innovation challenges
duty of board of directors
to ensure that company is run consistent with the long-term interests of the owners (shareholders)
strategic alliances
voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services
