Smartbook Chapter 12

The ratio of CEO to average employee pay in the United States is about ______.

300 to 1

Narrowly defining public stock companies in terms of financial performance can lead to ______.

Black Swan events

What do stakeholders want above all else?

Fair treatment

Svanhildur's company is committed to corporate social responsibility but also understands that growth and profit are imperative for survival. What should Svanhildur's company do to achieve this balance?

It should use the shared value creation framework.

A public stock company is considered by law to be an entity with legal rights and obligations. This is known as ______. Multiple choice question.

Legal personality

Which of the following is a federal regulatory agency whose task it is to oversee stock trading and enforce federal securities laws?

Securities and Exchange Commission

Which of the following statements about stock options is true?

The recipient is given the right to purchase stock at a predetermined price sometime in the future.

Which of the following is a major drawback of public stock companies, according to Michael Porter and others?

They prioritize financial performance over all else.

Which type of company is considered a unicorn?

a private start-up company valued at more than $1 billion

The hiring of a job seeker who claims to have extensive computer programming experience when his knowledge of the subject is minimal would be an example of ______.

adverse selection

Additional functions of a board of directors beyond general strategic oversight include ______. (Check all that apply.)

assessing and mitigating risk ensuring that the firm's accounting practices and reports are accurate selecting, evaluating, and compensating the CEO

High-profile accounting scandals and the global financial crisis are examples of ______.

companies and industries that did not conform to business ethics

The mechanism used to guide a company toward meeting its strategic goals within the bounds of the law is known as ______.

corporate governance

The shared value creation framework encourages managers to focus on which of the following needs? (Check all that apply.)

economic social

Which of the following is an example of an application of agency theory?

employment contracts

Social consequences of business activities, including pollution, energy loss, and dangerous accidents, are known as __

externalities

True or false: Any action taken by a manager that is within the bounds of the law is, by definition, an ethical action.

false

If a company is poorly managed, its stock price may fall low enough for the firm to become a target for a(n) ______.

hostile takeover

Which of the following occurs when agents are better informed than principals?

information asymmetry

In regard to the public stock company, limited liability means that _____

investors are not responsible for any debts incurred by the company and are only at risk of losing the invested capital

According to agency theory, conflicts such as the principal-agent problem are considered ______ issues.

legal

The subprime mortgage crisis of the early 2000s is an example of ______.

poor corporate governance

A board of directors is elected to represent the interests of ______.

shareholders

The right to buy a company's stock at a predetermined price sometime in the future is known as a(n) ______.

stock option

An external governance mechanism that makes a poorly managed company vulnerable to takeover by outside investors is known as ______.

the market for corporate control

The relationship between CEO pay and job performance has been shown to be _____

weak

According to agency theory, which of the following managerial functions can be used to avoid adverse selection and moral hazard? (Check all that apply.)

control organization

Which of the following are examples of moral hazard? (Check all that apply.)

A company dumps pollution into a local lake that will be cleaned using taxpayer money. Banks make very risky loans with the knowledge that the government will bail them out if necessary. A CEO with a multi-million-dollar severance agreement performs poorly knowing he will be well compensated even if he is laid off.

Which of the following statements are correct regarding the interests of principals and agents? (Check all that apply.)

Agents may be more interested in personal goals, such as maximizing their compensation or gaining power. Principals want to maximize shareholder returns.

Which of the following are critical aspects of maintaining good relationships between a firm and its stakeholders?

Fairness Transparency

Under the shared value creation framework, which of the following strategic actions would fail to connect economic and societal needs?

Focusing exclusively on maximizing returns for shareholders.

The ideas of corporate social responsibility and stakeholder strategy are particularly prevalent in ______.

Germany

True or false: The shared value creation framework aims to reconcile the concept of gaining and sustaining a competitive advantage with corporate social responsibility.

True

In ______, a single investor or group of investors buys, with the help of borrowed money, the outstanding shares of a publicly traded company and assumes control of it.

a leveraged buyout

Pavel works for a successful pharmaceutical company. Despite several years of unprecedented growth, the company wants to boost profits even more. It has taken steps to drastically raise the prices of its most widely distributed medications, which are difficult to imitate. Research into employee ethical decision-making capacity indicates that Pavel will ______.

act in a manner that reflects his company's organizational culture

The idea that a corporation is simply a collection of legal contracts is known as ___

agency theory

Following the rise of institutional investors, the use of poison pills to avoid hostile takeover has ______.

become rarer

Which of the following are important components of fostering ethical behavior in employees?

board members setting clear ethical expectations strategic goals that are achievable with legal means executive behavior that is in sync with the organization's vision and values

The code of professional conduct based on societal norms and expectations is known as ______.

business ethics

In order to reconcile economic and social needs within the shared value creation network, managers need to focus on ______. (Check all that apply.)

creating new regional clusters and business centers making products affordable for the poorest socioeconomic groups in order to improve standards of living expanding value chains to include NGOs and other organizations committed to social goals

When facing an ethical dilemma, a manager should ______. (Check all that apply.)

determine whether he or she could comfortably defend the action to the public consider whether the action in question conforms to the firm's code of conduct and industry practices

The idea of corporate social responsibility (CSR) suggests that a firm's obligations should ______.

exceed the traditional imperative to increase profits

Optics Incorporated, a publicly traded eyewear business, places profits ahead of all other performance metrics. This practice ______. (Check all that apply.)

fails to take into account the idea of corporate social responsibility conforms to the traditional notion of shareholder capitalism

Economist Michael Porter and many others argue that the value of public stock companies is too narrowly defined in terms of ______, leading to scandals and economic crises.

financial performance

Incentives that are too high-powered, such as an outsized bonus, may cause individuals to ______.

focus too much attention on the incentive and not enough on strategic activities

The primary purpose of the board of directors is ______

general strategic oversight and guidance

Under agency theory, a manager should seek to align ______ between principals and agents to minimize opportunism.

incentives

Managers who act upon secret company information for personal gain, such as by trading stocks based on the knowledge of future initiatives, are guilty of ____

insider trading

Employees who work in organizations that emphasize ethical behavior are ______.

more likely to act ethically.

In comparison to other countries, the United States ranks ______ in terms of its acceptance of Milton Friedman's philosophy that "the social responsibility of business is to increase its profits."

near the middle

The primary difference between outside and inside members of the board of directors is that ______.

outside directors are not employees of the firms, whereas inside directors are

Corporate governance addresses the ______ problem, which underscores the risk of delegating responsibility and control to individuals who may not have the firm's best interests in mind.

principal-agent

The interests of inside directors on the board of directors typically align with those of ______.

senior management

An executive can legally earn a significant profit from stock options if ______.

the firm performs well and the actual price per share exceeds the negotiated strike price

The shared value creation framework is a tool intended to help businesses ___

benefit all stakeholders, not just shareholders

One of the key characteristics of a leveraged buyout (LBO) is that it _______.

changes the ownership structure of a company from public to private

Private start-up companies valued at over $1 billion, such as some of those in the tech sector, are called ______.

unicorns

In team-based environments, the principal may have difficulty determining individual contributions by members. This can create a situation in which an opportunistic employee does little work but takes credit. This is known as ____

adverse selection

Financial statements by public companies must ______. (Check all that apply.)

be audited by certified public accountants adhere to generally accepted accounting principles (GAAP)

Corporate governance is a system of _____

checks and balances

A fiduciary responsibility is a(n) ______.

legal duty to act in another party's interests

The main goal of a poison pill is to ______.

minimize the threat of a hostile takeover

A situation in which one party has an incentive to shirk their responsibility because the costs will fall to the other party is known as ______.

moral hazard

Who sets the tone for the ethical climate within an organization?

strategic leaders

What are the two significant issues regarding the CEO pay debate? (Check all that apply.)

the relationship between firm performance and CEO pay the size of the CEO compensation in relation to average employee pay

What are the four characteristics of a public stock company that make it an attractive corporate form? (Check all that apply.)

~transferability of investor interests ~legal personality ~separation of ownership and control ~limited liability for investors