Final SM 11

Principals almost always have more information about the resources that agents are managing than the agents themselves.

False

There is a certain amount of performance ambiguity inherent in the relationship between a principal and agent.

True

While many agency relationships work well, problems arise when agents and principals have different goals.

True

Gamma Corp. has recently bought stocks in an under performing company that has failed to maximize stockholder wealth. Gamma Corp. has made changes to the top management structure of the company and has persuaded the management to pursue strategies that maximize the wealth of stockholders. Gamma Corp. has been able to earn millions by doing so. Which of the following concepts is illustrated in this scenario? a. Greenmail b. Agency theory c. Information asymmetry d. Self-dealing e. On-the-job consumption

a. Greenmail

Matthew is a divisional manager at Venus Inc. and reports to the CEO of the company. The CEO delegates resources and authority to Matthew so that he can ensure good performance from the division. Matthew has more employees working under him than required and he has not told the CEO about this, even though there are other departments that are in need of more employees. Which of the following concepts is illustrated here? a. Information asymmetry b. On-the-job consumption c. Greenmail d. Glass-ceiling effect e. Takeover constraint

a. Information asymmetry

The internal research department of Libra Inc. has found that the packaging of health supplements produced by the company is faulty, and is resulting in poor quality. Despite this knowledge, the company has not improved the packaging and instead has advertised to its customers that their packaging is foolproof. Which of the following concepts is illustrated in this scenario? a. Information manipulation b. Anticompetitive behavior c. Agency strategy d. Information symmetry e. On-the-job consumption

a. Information manipulation

Gemini Corp. is a large automobile manufacturer that has contracts with several suppliers. To gain more benefits from an upholstery supplier, Gemini Corp. unilaterally changed the contract and pressurized the supplier to lower its prices. Which of the following concepts is illustrated in this scenario? a. Opportunistic exploitation b. On-the-job consumption c. Agency strategy d. Greenmail e. Self-dealing

a. Opportunistic exploitation

Which of the following is NOT a governance mechanism used to align the interests of managers and stockholders? a. Self-dealing b. The board of directors c. Stock-based compensation schemes d. Strategic control systems e. Takeover constraints

a. Self-dealing

Which of the following statements is true in the context of financial statements and auditors? a. The information contained in the financial statements can enable a stockholder to calculate the ROIC of a company in which he or she invests. b. Publicly traded companies in the United States are not required to file quarterly or annual reports with the SEC. c. So far, there have been no cases in which the auditors were found complying with the companies to misrepresent financial information. d. The SEC requires that the accounts be audited by a committee formed by the board members and senior employees of the company. e. Sarbanes-Oxley Act in 2002 barred CEOs and CFOs from endorsing their company's financial statements.

a. The information contained in the financial statements can enable a stockholder to calculate the ROIC of a company in which he or she invests.

Which of the following statements is true in the context of unethical behavior? a. Business ethics significantly differ from personal ethics. b. An individual with a strong sense of personal ethics is more likely to engage in self-dealing. c. A personal ethical code will exert a profound influence on the way individuals behave as businesspeople. d. Focusing only on applying straightforward business calculus can completely eliminate ethical concerns. e. An organizational culture that fosters decision making on purely economic terms eliminates unethical practices.

c. A personal ethical code will exert a profound influence on the way individuals behave as businesspeople.

Which of the following is a major function of the board of directors of a company? a. Approving decisions made by divisional managers b. Monitoring line managers c. Aligning corporate strategy with stockholder interests d. Creating contracts with suppliers e. Designing marketing strategies for the company

c. Aligning corporate strategy with stockholder interests

Which of the following is NOT an accurate statement about current levels of pay for CEOs ofU.S.-based firms? a. CEOs also earn from the stock options that they grant to managers. b. Empire building helps CEOs increase their earnings. c. CEO compensation is closely tied to corporate performance in most firms. d. CEO pay is rising more rapidly than pay for other workers. e. The level of CEO compensation is determined by the corporate board of directors.

c. CEO compensation is closely tied to corporate performance in most firms.

Alpha LLC. is large paint manufacturing company. Despite government regulations, the company has been illegally disposing its chemical wastes in a lake, which is an important habitat for several fish and birds. Which of the following ethical concerns is illustrated in this scenario? a. On-the-job consumption b. Opportunistic exploitation c. Environmental degradation d. Self-dealing e. Substandard working conditions

c. Environmental degradation

______ is a situation where an agent has more knowledge about resources he or she is managing than the principal has. a. Information manipulation b. On-the-job consumption c. Information asymmetry d. Greenmail e. Self-dealing

c. Information asymmetry

______ are internal stakeholders in a company a. Customers b. Goverrnnent regulators c. Board members d. Suppliers e. Creditors

e. Creditors

Ethical dilemmas are situations where there is no agreement over exactly what the accepted principles of right and wrong are.

True

Financial statements can be a tool of effective governance only if they provide consistent, detailed, and accurate information.

True

Governance mechanisms help align the incentives between principals and agents, and help monitor and control agents.

True

If a company fails to take stakeholder claims into account, stakeholders may withdraw their support.

True

In corporations, agency theory is used to explain the relationship between stockholders and corporate managers, and between upper-level managers and the lower-level managers they supervise.

True

Stock-based compensation schemes for senior executives are designed to align the interests of managers with those of stockholders.

True

Stockholders receive a return on their investment in a company's stock from dividend payments and capital appreciation.

True

Strategic control systems are the primary governance mechanisms established within a company to reduce the scope of the agency problem between levels of management.

True

Strike price is the price at which the stock was trading when the option was originally granted.

True

A union and the general public are examples of internal stakeholders.

False

An effective governance arrangement exists when the CEO is also the chairman of the board of directors.

False

Emphasizing on current profitability at the expense of future profitability and profit growth makes an enterprise more attractive to shareholders.

False

Inside directors are not full-time employees of the company.

False

Maximizing long-run profitability and profit growth is the best way to satisfy the claims of several key stakeholder groups irrespective of how the company does so.

False

According to an SEC investigation, Computer Associates, one of the world's largest software companies, backdated contracts to boost the company's reported revenues. This is not prescribed as an ethical business practice.

True

Agency theory offers a way of understanding why managers do not always act in the best interests of stakeholders.

True

All stakeholders have an exchange relationship with the company.

True

An agency relationship continues down a hierarchy within a company.

True

Attaining future profit growth may require investments that reduce the current rate of profitability.

True

Which of the following statements concerning stock-based compensation schemes for executives is NOT true? a. Under accounting regulations that were enforced until 2005, stock options, like wages and salaries, were expensed. b. Huge stock-option grants can align the interests of management and stockholders. c. Stock-based compensation schemes can dilute the equity of stockholders. d. Huge stock-option grants increase the outstanding number of shares in a company. e. Top managers can earn huge bonuses from stock options that were granted several years prior.

a. Under accounting regulations that were enforced until 2005, stock options, like wages and salaries, were expensed.

When corporate CEOs and top managers use their power and control over funds to satisfy their personal desires for wealth or status, it is called: a. on-the-job consumption b. greenmail. c. information asymmetry. d. self-dealing. e. risk capital.

a. on-the-job consumption

When managers of a firm seek to unilaterally rewrite the terms of a contract with suppliers, buyers, or complement providers in a way that is more favorable to their firm, they are engaging in: a. opportunistic exploitation. b. information manipulation. c. downsizing. d. greenmail. e. self-dealing.

a. opportunistic exploitation

Members of the board of directors are supposed to be agents for: a. stockholders. b. employees. c. executive officers. d. customers. e. suppliers.

a. stockholders.

Which of the following statements is true in the context of principal-agent relationships? a. The agency relationship is confirmed to the top management and does not continue down the hierarchy within the company. b. Agents almost always have more information about the resources they are managing than the principal does. c. Information asymmetry can make it easier for principals to measure how well an agent is performing. d. In a principal-agent relationship, the decision making power rests entirely with the principals. e. The relationship between the company and the suppliers is an example of a principal-agent relationship.

b. Agents almost always have more information about the resources they are managing than the principal does.

______ is a source of gaining wealth by corporate raiders who benefit by pushing companies to either change their corporate strategy to one that will benefit stockholders, or by charging a premium for these stocks when the company wants to buy them back. a. Stock option b. Greenmail c. Self dealing d. On-the-job consumption e. Risk capital

b. Greenmail

Arnold is a CEO at Gamma LLC. He has control over the corporate funds of the company. Arnold has often taken funds from the company to pay for his travel and hotel expenses. The funds could otherwise have increased stockholder returns. Which of the following concepts is illustrated in this scenario? a. Corporate governance b. On-the-job consumption c. Greenmail d. Information asymmetry e. Information manipulation

b. On-the-job consumption

Jacob is a senior manager at Aries LLC. Jacob has been earning a lot of money in addition to his salary. He often misrepresents the financial information about the operations he handles; he acquires more financial resources than he actually needs to run operations. Which of the following concepts is illustrated in this scenario? a. Glass-ceiling effect b. Self-dealing c. Agency strategy d. Takeover constraints e. Stock options

b. Self-dealing

Which of the following statements is true in the context of stock-based compensation? a. Stock options usually result in information asymmetry. b. Stock-based compensation schemes for executives can align management and stockholder interests. c. A particular cause for concern is that stock options are often granted at extremely high strike prices. d. Critics deny that stock-based compensations motivate managers to improve company performance. e. Granting more stock options often results in an increase in stockholder equity.

b. Stock-based compensation schemes for executives can align management and stockholder interests.

Which of the following governance mechanisms is regarded as the option of last resort? a. Strategic control system b. Takeover constraint c. Board of directors d. Stock-based compensation system e. Financial statements and auditors

b. Takeover constraint

To foster ethical behavior through organizational culture, businesses should: a. avoid explicitly articulating values that place a strong emphasis on ethical behavior. b. draft a formal statement of the ethical priorities to which a business adheres. c. encourage self-dealing among managers. d. eliminate the need of a moral compass. e. avoid putting strong governance processes in place.

b. draft a formal statement of the ethical priorities to which a business adheres.

Managers using company funds for their own personal consumption is called a. information manipulation b. self-dealing c. takeover constraint d. greenmail e. information asymmetry

b. self-dealing

Which of the following is true of stakeholders? a. Creditors are examples of internal stakeholders. b. Stakeholders do not engage in an exchange relationship with their company. c. Stockholders are internal stakeholders that provide an enterprise with risk capital. d. The goals of different stakeholder groups within a company are the same, and therefore do not lead to any conflicts. e. It is mandatory for a company to satisfy the claims of all stakeholders.

c. Stockholders are internal stakeholders that provide an enterprise with risk capital.

Which of the following statements is true about strategic control systems? a. They are usually set by government regulators that top management is required to follow. b. Their primary purpose is to foster on-the-job consumption. c. Their purpose is to ensure that the wealth of stockholders is maximized. d. They relieve employees and management of legal and ethical constraints. e. They are designed to encourage information asymmetry.

c. Their purpose is to ensure that the wealth of stockholders is maximized.

Which of the following statements is true about corporate raiders? a. They are underperforming corporations that have been acquired by other companies. b. They are government-funded organizations that help underperforming companies recover. c. They may purchase stock in a company to take over the business and run it more efficiently. d. They lack power to interfere with the top management decisions. e. They discourage companies from pursuing strategies that help maximize stockholder wealth.

c. They may purchase stock in a company to take over the business and run it more efficiently.

The purpose of governance mechanisms in corporations is to: a. centralize company resources to the top management. b. reduce the scope and frequency of the agency problems. c. satisfy the requirements of the Securities and Exchange Commission (SEC). d. limit corporate growth to manageable rates. e. monitor the performance of the board of directors.

c. satisfy the requirements of the Securities and Exchange Commission (SEC).

A stock option is a right to buy: a. shares of the company's stock at the stock's current price. b. shares of the company's stock at half the stock's current price. c. shares of the company's stock at a predetermined price at some point in the future. d. bonds issued by the company. e. stock in an under performing company.

c. shares of the company's stock at a predetermined price at some point in the future.

To make sure that ethical issues are considered in business decisions: a. companies should eliminate the principal-agent approach. b. companies should have a no-layoff policy. c. top managers should articulate and model ethical behaviors. d. top managers should generously grant stock options. e. companies should hire and promote employees with a strong focus on economic gains.

c. top managers should articulate and model ethical behaviors.

Which of the following statements about the board of directors is NOT true? a. Board members are elected by stockholders. b. The board can be held legally accountable for a company's actions. c. The board has the legal authority to hire, fire, and compensate the CEO. d. All the directors are full-time employees of the company. e. Outside directors help perform the monitoring function of the board.

d. All the directors are full-time employees of the company.

Venus LLC. is a large monopolistic electronic firm. The firm has been putting a lot of pressure on some of the complementor companies, asking them to bundle their products along with the products made by Venus LLC, which will make it mandatory for customers to buy Venus LLC. products along with the complementary products, even if they are unrelated. In this scenario, Which of the following does Venus LLC's actions demonstrate? a. Agency strategy b. Dumping strategy c. Price limiting d. Anticompetitive behavior e. On-the-job consumption

d. Anticompetitive behavior

________ are external stakeholders in a company. a. Stockholders b. Managers c. Employees d. Customers e. Board members

d. Customers

Which of the following is NOT a responsibility of the board of directors? a. Monitor corporate strategy decisions and ensure that they are consistent with stockholder interests b. Apply sanctions on management when appropriate c. Hire, fire, and compensate the CEO d. Develop targets for divisional managers e. Make sure the audited financial statements present a true picture of the company's financial situation

d. Develop targets for divisional managers

Nicole is a salesperson at a local Ford dealership. Her bonus pay is dependent upon surpassing sales targets, thus increasing the profitability of the company. Which of the following governance mechanisms is illustrated in this scenario? a. Stock options b. Self-dealing c. The takeover constraint d. Employee incentives e. Greenmail

d. Employee incentives

Which of the following statements concerning profitability and profit growth is NOT true? a. Attaining future profit growth may require investments that reduce the current rate of profitability. b. Managers must find the right balance between profitability and profit growth. c. Too much emphasis on current profitability at the expense of profit growth can make an enterprise less attractive to shareholders. d. Satisfying the claims of other key stakeholder groups happens at the risk of decreased profitability and profit growth. e. Too much emphasis on profit growth can reduce profitability and make an enterprise less attractive to shareholders.

d. Satisfying the claims of other key stakeholder groups happens at the risk of decreased profitability and profit growth.

To ensure that basic ethical principles are adhered to in the organization, managers should: a. build an organizational culture that places a high value on economic aspects. b. make sure that leaders within the business only articulate the rhetoric of ethical behavior. c. put minimal governance processes in place. d. check with prior employees regarding someone's reputation before hiring. e. foster and encourage on-the-job consumption.

d. check with prior employees regarding someone's reputation before hiring.

A criticism of stock-based compensation plans is that: a. they discourage empire building. b. they reduce motivation among agents. c. they do not align management and stockholder interests d. they dilute stockholders' equity. e. they adversely affect the earnings of principals.

d. they dilute stockholders' equity.

Which of the following statements is true about the board of directors? a. The board members are directly elected by the employees of the company. b. The board has no legal authority to hire, fire, and compensate the CEO. c. Some of the board members hold positions on the boards of several companies. d. The board has no power to nominate people for positions in the management. e. Divisional and functional managers usually form the board.

e. Divisional and functional managers usually form the board.

Which of the following statements is true about takeover constraint? a. It encourages managers to put their own interests above those of stockholders. b. It usually occurs when the management has maximized the wealth of the stockholders. c. It often gives senior managers more independence when it comes to granting stock options. d. It has ceased to exist in companies since the late 1990s. e. It is the governance mechanism of last resort invoked only when the others have failed.

e. It is the governance mechanism of last resort invoked only when the others have failed.

In order to reduce its production costs, Delta LLC. has moved its manufacturing units to an underdeveloped country where there are few labor laws. The employees at the manufacturing units are children and teenagers, and they receive minimal wages. Which of the following ethical issues is illustrated in this scenario? a. On-the-job consumption b. Opportunistic exploitation c. Self-dealing d. Information manipulation e. Substandard working conditions

e. Substandard working conditions

When managers pay bribes to gain access to lucrative business contracts, they are engaging in: a. information asymmetry b. utilitarianism. c. self-dealing. d. greenmail. e. corruption.

e. corruption.