MGMT 493 Chapter 12 - Berns

Which of the following best defines duality in a board of directors? A. A person holds both the role of CEO and chairperson of the board. B. A person holds both the role of inside director and outside director of the board. C. A person holds both the role of director and shareholder of the company. D. A person holds the role of CEO on the boards of two companies.

A. A person holds both the role of CEO and chairperson of the board. (As mentioned in Strategy Highlight 12.1, in roughly one half of U.S. public firms, the CEO of the company also serves as chair of the board of directors. This practice of duality—holding both the role of CEO and chairperson of the board—has been declining somewhat in recent years.)

Which of the following real-world scenarios best exemplifies information asymmetry in a public stock company? A. Based on a tip-off by a Goldman Sachs employee, the Galleon Group was able to sell its holdings in Goldman Sachs' stocks prior to the announcement. B. GE knew that it could create a profitable venture out of producing green products, so it rolled out the ecomagination strategy. C. Mark Hurd, CEO of HP, was unaware of the sexual harassment allegations, and the board's demand for him to resign caught him by surprise. D. Goldman Sachs was party to the Abacus deal despite knowing its shortcomings.

A. Based on a tip-off by a Goldman Sachs employee, the Galleon Group was able to sell its holdings in Goldman Sachs' stocks prior to the announcement. (The real-world scenario that best exemplifies information symmetry in a public stock company is that based on a tip-off by a Goldman Sachs employee, the Galleon Group was able to sell its holdings in Goldman Sachs' stocks prior to the announcement. Insider trading cases provide an example of egregious exploitation of information asymmetry.)

Vijay is a firm believer in Milton Friedman's view of a firm's social obligations. With which of the following statements is Vijay most likely to agree? A. Businesses can use their resources to create profit as long as they do so within the rules of the game. B. Firms should not go beyond their economic responsibility to increase profits. C. Firms should define value creation more narrowly in terms of financial performance. D. Businesses should engage in open and free competition without deception or fraud, only as long as their competitors do so.

A. Businesses can use their resources to create profit as long as they do so within the rules of the game. (Vijay is most likely to agree with Milton Friedman's view that a business can use its resources anyhow to create value as long as it does so within the rules of the game. Nobel laureate Milton Friedman stated his view of the firm's social obligations: "There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.")

Which of the following is true of business ethics? A. Certain notions such as fairness, honesty, and reciprocity are universal norms. B. Business ethics is an agreed-upon code of conduct in business, based on laws. C. The perception of what is ethical and what is not is similar across different cultures. D. Business ethics needs to be codified into law in order to be followed.

A. Certain notions such as fairness, honesty, and reciprocity are universal norms. (The principles, norms, and standards of business practice differ to some degree in different cultures around the globe. But a large number of research studies have found that some notions—such as fairness, honesty, and reciprocity—are universal norms.)

Why does Michael Porter recommend expanding the customer base of an organization in terms of the shared value creation framework? A. Doing so could yield significant business opportunities that could improve the standard of living of the poor. B. Doing so is the best way to ensure that shareholders have the most legitimate claim on profits made by the organization. C. Doing so could be the only way to meet stockholder expectations in a highly competitive market. D. Doing so will help to prevent the inclusion of more nontraditional partners into internal firm value chains.

A. Doing so could yield significant business opportunities that could improve the standard of living of the poor. (Michael Porter suggests expanding the customer base to bring in nonconsumers such as those at the bottom of the pyramid—the largest but poorest socioeconomic group of the world's population. The bottom of the pyramid in the global economy can yield significant business opportunities, which—if satisfied—could improve the living standard of the world's poorest.)

Which of the following is an advantage that a private company enjoys over a public company? A. Private companies are not required to disclose financial statements. B. Private companies experience more scrutiny from analysts. C. Private companies can focus more on short-term viability. D. Private companies often do not have a CEO.

A. Private companies are not required to disclose financial statements. (Private companies enjoy certain benefits that public companies do not. Private companies are not required to disclose financial statements. They experience less scrutiny from analysts and can often focus more on long-term viability.)

What was Goldman Sachs' rebuttal to SEC's claim that it defrauded investors? A. It is up to the clients to assess the risks involved in any investments. B. Fabrice Tourre was responsible for putting the deal together, and it was the lapse of an individual, not the entire firm. C. John Paulson did not reveal his intentions behind creating Abacus. D. Goldman Sachs' itself lost $100 million in the deal.

A. It is up to the clients to assess the risks involved in any investments. (As discussed in Strategy Highlight 12.2, the SEC argued that Goldman Sachs knowingly misled investors by not revealing their motives in putting Abacus together and not informing them about John Paulson's role in this transaction. Basically, the SEC alleged that Goldman violated its fiduciary responsibility and defrauded its clients. Mounting a strong legal defense, Goldman Sachs argued that it is up to the clients to assess the risks involved in any investments.)

A bank, YPC, offers a customer a personal loan. In which of the following circumstances will this decision most likely be considered unethical? A. The bank knows that the customer will be unable to pay the loan if the interest rate rises. B. The bank is not aware of the investments made by the customer. C. The bank has the financial statements of the customer, but it is not aware of each source of income. D. The bank is depending on the customer to pay back the loan before term completion.

A. The bank knows that the customer will be unable to pay the loan if the interest rate rises. (In this scenario, if the bank knows that the customer will be unable to pay the loan and still offers him a loan, it is an unethical decision. Law and ethics, however, are not synonymous. This distinction is important. Staying within the law is a minimum acceptable standard. A manager's actions can be completely legal, but ethically questionable.)

Which of the following is a common result of a hostile takeover of a company? A. The new owner sells the company in pieces. B. The new owner keeps the company intact. C. The new owner keeps the board of directors of the company the same. D. The new owner enhances the reputations of the company's management.

A. The new owner sells the company in pieces. (If a hostile takeover attempt is successful, the new owner frequently replaces the old management and board of directors in order to manage the company in a way that creates more value for shareholders. The new owner will often break up the company and sell off its pieces. The firm's existing management faces the threat of losing their jobs and their reputations as effective executives.)

Which of the following scenarios best exemplifies a leveraged buyout of a telecommunications firm, Telbok Inc.? A. The owner of another company buys all the outstanding shares of Telbok. B. A private equity firm, Rainbow Inc., buys a large amount of shares of Telbok. C. Telbok sells all its shares and declares bankruptcy. D. Telbok buys back a large amount of its own shares from the stock market.

A. The owner of another company buys all the outstanding shares of Telbok. (The scenario that best exemplifies a leveraged buyout of Telbok Inc. is that the owner of another company buys all outstanding shares of Telbok. In a leveraged buyout (LBO), a single investor or group of investors buys, with the help of borrowed money (leveraged against the company's assets), the outstanding shares of a publicly traded company in order to take it private.)

Which of the following is true of the codes of conduct of an organization? A. They detail how the organization expects an employee to behave and to represent the company in business dealings. B. They are a reiteration of the laws pertaining to business dealings in a corporate environment. C. They are a guide to determine what is lawful and what is unlawful. D. They help the board of directors and the CEO implement shareholder capitalism.

A. They detail how the organization expects an employee to behave and to represent the company in business dealings. (To go beyond the minimum acceptable standard codified in law, many organizations have explicit codes of conduct. These codes go above and beyond the law in detailing how the organization expects an employee to behave and to represent the company in business dealings. Codes of conduct allow an organization to overcome moral hazards and adverse selections as they attempt to resonate with employees' deeper values of justice, fairness, honesty, integrity, and reciprocity.)

Which of the following is true of the board of directors in a public stock company? A. Votes at shareholder meetings determine whose representatives are appointed to the board of directors. B. Because shareholders generally have uniform interests, the composition of the board is generally a unanimous decision. C. The board of directors acts as a facilitator to convey interests of the stockholders to the management without any real authority. D. The functions of the board of directors are limited to ensuring the hiring and firing of CEOs.

A. Votes at shareholder meetings determine whose representatives are appointed to the board of directors. (The shareholders of public stock companies appoint a board of directors to represent their interests. The board of directors is the centerpiece of corporate governance in such companies. Votes at shareholder meetings, generally in proportion to the amount of ownership, determine whose representatives are appointed to the board of directors.)

Sam is a manager at StyleOne Apparels Inc. and is friends with the company's CEO. This privilege gives Sam the information that StyleOne Apparels is in the midst of talks to take over a leading rival. Sam buys stocks of StyleOne with the expectation that its stocks will appreciate. But the deal falls through and the stocks of StyleOne depreciate in the following months. Are Sam's actions unethical? Why? A. Yes, because it is unethical to trade stocks based on insider information irrespective of the final outcome. B. Yes, because it is illegal and unethical for Sam to possess any kind of insider information. C. No, because Sam did not ask the CEO to disclose such information to him. D. No, because Sam did not make any profits from trading stocks using this information.

A. Yes, because it is unethical to trade stocks based on insider information irrespective of the final outcome. (Yes, Sam's actions are unethical because it is illegal and unethical to trade stocks based on insider information irrespective of the final outcome. Although possessing insider information is not illegal and indeed is part of an executive's job, what is illegal is acting upon it through trading stocks or passing on the information to others who might do so. Insider trading cases provide an example of egregious exploitation of information asymmetry.)

Why do shareholders of public companies need to appoint a board of directors to represent their interests? A. because of the separation of ownership and control B. because employees of a company cannot be shareholders C. because the board of directors itself is made up of shareholders D. because they want tighter control over day-to-day operations of a company

A. because of the separation of ownership and control (Since all shareholders cannot possibly be directly involved in the running of a company, they appoint representatives. The shareholders of public stock companies appoint a board of directors to represent their interests. The board of directors is the centerpiece of corporate governance in such companies.)

Which of the following is regarded as the most internal of control mechanisms? A. business ethics B. executive compensation C. the market for corporate control D. government regulation

A. business ethics (Corporate-governance mechanisms play an important part in aligning the interests of principals and agents. They enable closer monitoring and controlling, as well as provide incentives to align interests of principals and agents. Perhaps even more important are the most internal of control mechanisms: business ethics.)

According to the agency theory, A. conflicts that arise in corporations should be addressed in the legal realm. B. corporations are more than a set of contracts between parties. C. companies should focus on generating profits for stockholders. D. principals and agents have interchangeable roles.

A. conflicts that arise in corporations should be addressed in the legal realm. (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.)

Michael Porter recommends that managers use the shared value creation framework to focus on A. creating new regional clusters. B. narrowing the customer base to eliminate nonconsumers. C. streamlining traditional internal firm value chains. D. reducing the involvement of nongovernmental organizations.

A. creating new regional clusters. (Michael Porter recommends that managers focus on three things within the shared value creation framework: 1. Expand the customer base to bring in nonconsumers such as those at the bottom of the pyramid—the largest but poorest socioeconomic group of the world's population. 2. Expand traditional internal firm value chains to include more nontraditional partners such as nongovernmental organizations (NGOs). 3. Focus on creating new regional clusters, such as Silicon Valley in the United States; Electronic City in Bangalore, India; and Chilecon Valley in Santiago, Chile.)

Adverse selection in a public stock company occurs when A. information asymmetry increases the likelihood of selecting inferior alternatives. B. a firm's work tasks, incentives, and employment contracts minimize opportunism by agents. C. a principal is not aware of the context from which information from an agent is derived. D. an agent manipulates information to benefit stockholders.

A. information asymmetry increases the likelihood of selecting inferior alternatives. (In general, adverse selection occurs when information asymmetry increases the likelihood of selecting inferior alternatives. In principal-agent relationships, for example, adverse selection describes a situation in which an agent misrepresents his or her ability to do the job.)

Jennifer received a tip from a close friend who is an executive manager of a publicly traded company called MegaRed Inc. The manager received some inside information about how to trade MegaRed stock to get a huge profit. He shared this information with his Jennifer. This scenario is an example of A. information asymmetry. B. adverse selection. C. stakeholder strategy. D. shared value creation.

A. information asymmetry. (This scenario is an example of information asymmetry. Information asymmetry happens when managers, executives, and board members have access to private information concerning important company developments that outsiders, especially investors, are not privy to. Although possessing insider information is not illegal and indeed is part of an executive's job, what is illegal is acting upon it through trading stocks or passing on the information to others who might do so.)

The root cause of the principal-agent problem between senior executives and lower-level employees can be explained by the A. informational advantage of the lower-level employees. B. higher number of lower-level employees than senior executives. C. knowledge of employees regarding day-to-day tasks. D. operational expertise of lower-level employees in concentrated areas of a particular field.

A. informational advantage of the lower-level employees. (Senior executives, such as the CEO, face agency problems when they delegate authority of strategic business units to general managers. Employees who perform the actual operational labor are agents who work on behalf of the managers. Such front-line employees often enjoy an informational advantage over management.)

A mortgage-loan officer persuades unsuspecting consumers to sign up for exotic mortgages, such as "option ARMs." These mortgages offer borrowers the choice to pay less than the required interest, which is then added to the principal while the interest rate can adjust upward. Because of this setup, many borrowers are unable to repay the mortgage once the interest rates go up. Which of the following phrases best describes this scenario? A. legal but not ethical B. ethical but not legal C. legal and ethical D. neither legal nor ethical

A. legal but not ethical (The officer's actions are completely legal but ethically questionable.)

Ethics is A. not synonymous with law. B. impossible to codify into law. C. always universal and cannot differ between cultures. D. the minimum acceptable standard in business practice.

A. not synonymous with law. (Law and ethics are not synonymous. This distinction is important. Staying within the law is a minimum acceptable standard.)

A compensatory governance mechanism that allows executives to buy a company's stock at a predetermined price sometime in the future is called a(n) A. stock option. B. commission. C. stock exchange. D. bonus.

A. stock option. (Stock options are the most commonly used compensation means. This incentive mechanism gives the recipient the right to buy a company's stock at a predetermined price sometime in the future.)

Which of the following real-world events would act as the most likely deterrent against adopting a purely stakeholder strategy approach to business? A. the nonsustainable debt levels incurred by sovereign governments to fund social programs B. the financial crisis in Europe brought about by money lenders seeking to make quick money C. the collapse of the economy in the U.S. brought about by the housing crisis D. the rise of GDP in countries that do not believe in Milton Friedman's philosophy

A. the nonsustainable debt levels incurred by sovereign governments to fund social programs (Some critics argue that too strong a focus on the social dimension contributed to the European debt crisis because sovereign governments such as Greece, Italy, and Spain took on nonsustainable debt levels to fund social programs such as early retirement plans, government-funded health care, and so on.)

John Hammergren, the CEO of McKesson, received an annual compensation of $50 million. The compensation was closely tied to the performance of McKesson's stock, which appreciated considerably during his tenure. This situation best exemplifies A. the strong relationship between executive compensation and company performance. B. the public's perception of a company's stock value based on executive compensation figures. C. the avoidance of control mechanisms to guide performance. D. the inversely proportional relationship between CEO compensation and the pay of the average employee.

A. the strong relationship between executive compensation and company performance. (This situation best exemplifies the strong relationship between executive compensation and company performance. In some instances, the relationship between executive pay and firm performance is strong; in others it is nonexistent or even negative.)

In a public stock company, senior executives, such as the CEO, face agency problems when A. they delegate authority of strategic business units to general managers. B. they decide to get involved in the day-to-day operations of a company. C. the board of directors possesses more information about the company than they do. D. the firm designs work tasks, incentives, and employments that minimize opportunism.

A. they delegate authority of strategic business units to general managers. (Senior executives, such as the CEO, face agency problems when they delegate authority of strategic business units to general managers. Employees who perform the actual operational labor are agents who work on behalf of the managers. Such front-line employees often enjoy an informational advantage over management.)

_____ is illustrated by a situation in which the principal cannot determine the value created by individual members of a team. A. Moral hazard B. Adverse selection C. Information asymmetry D. Shareholder capitalism

B. Adverse selection (In general, adverse selection occurs when information asymmetry increases the likelihood of selecting inferior alternatives. In principal-agent relationships, for example, adverse selection describes a situation in which an agent misrepresents his or her ability to do the job.)

Which of the following is the result of a leveraged buyout (LBO)? A. An LBO changes the CEO of a public company. B. An LBO changes a public company into a private company. C. An LBO changes a private company into a public company. D. An LBO changes the board of directors of a private company.

B. An LBO changes a public company into a private company. (A leverage buyout (LBO) changes the ownership structure of a company from public to private.)

Which of the following is an implication for the strategist in the context of corporate governance and a company's success? A. Very few and specific corporate-governance mechanisms can be effective in addressing the principal-agent problem. B. Effective corporate governance and solid business ethics are critical to gaining and sustaining competitive advantage. C. Leading by ethical example often has a less strong effect on employee behavior than words. D. A firm that restricts its responsiveness to stockholders (and no other stakeholders) and keeps them committed to its vision will be successful.

B. Effective corporate governance and solid business ethics are critical to gaining and sustaining competitive advantage. (An important implication for the strategist is the recognition that effective corporate governance and solid business ethics are critical to gaining and sustaining competitive advantage. A variety of corporate-governance mechanisms can be effective in addressing the principal-agent problem.)

What best describes transferability of investor ownership in a public stock company? A. Investors can give out company stocks as a gift. B. Investors are allowed to trade shares of stocks. C. Investors are allowed to participate in strategy formulation. D. Investors can be hired as employees.

B. Investors are allowed to trade shares of stocks. (Investors are allowed to trade stocks freely in the stock market on exchanges such as the New York Stock Exchange (NYSE) and NASDAQ.)

What is the result of managers' pursuit of strategies that define value creation too narrowly in public stock companies? A. It gives the managers greater control of the performance of the organization in the long term. B. It reduces the trust of shareholders in the organization as a vehicle for value creation. C. It helps companies increase firm profits by creating shared value. D. It enables companies to create social value by addressing society's needs but prevents them from creating economic value for shareholders.

B. It reduces the trust of shareholders in the organization as a vehicle for value creation. (Managers' pursuit of strategies that define value creation too narrowly may have negative consequences for society at large, as evidenced during the global financial crisis. This narrow focus has contributed to the loss of trust in the corporation as a vehicle for value creation, not only for shareholders but also other stakeholders and society.)

According to Michael Porter, which of the following is a problem with many publicly traded companies? A. Shareholders of publicly traded companies do not have a legitimate claim on profits. B. Many publicly traded companies have defined value creation too narrowly in terms of financial performance. C. There is no transferability of stock ownership in publicly traded companies. D. The legal owners of publicly traded companies also make management decisions for the company.

B. Many publicly traded companies have defined value creation too narrowly in terms of financial performance. (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.)

If the board of directors at GE decides to pursue a stakeholder strategy, should they change the ecomagination strategy? A. Yes, they should change the strategy because it provides benefits to the society. B. No, they should not change the strategy because the strategy already helps them save costs while generating huge revenues. C. No, they should not change the strategy because the change would necessitate making tough ethical decisions. D. Yes, they should change the strategy because creating value for society is against the principles of stakeholder strategy.

B. No, they should not change the strategy because the strategy already helps them save costs while generating huge revenues. (They should not change the strategy because the strategy already helps them save costs while generating huge revenues. It has also helped them develop competitive advantage.)

_____ are board members who are not employees of the firm, but frequently are senior executives from other firms or full-time professionals. A. Inside directors B. Outside directors C. CEOs D. Auditors

B. Outside directors (Outside directors are not employees of the firm. They frequently are senior executives from other firms or full-time professionals, who are appointed to a board and who serve on several boards simultaneously. Given their independence, they are more likely to watch out for the interests of shareholders.)

The _____ is the centerpiece of corporate governance and is composed of inside and outside members. A. institutional investors group B. board of directors C. group of shareholders D. scientific advisory board

B. board of directors (The board of directors is the centerpiece of corporate governance in public stock companies. A firm's board of directors consists of inside and outside directors.)

All public companies listed on the U.S. stock exchanges must file a number of financial statements with the A. GovernanceMetrics International (GMI). B. Securities and Exchange Commission (SEC). C. EDGAR database. D. The Wall Street Journal.

B. Securities and Exchange Commission (SEC). (All public companies listed on the U.S. stock exchanges must file a number of financial statements with the Securities and Exchange Commission (SEC), a federal regulatory agency whose task it is to oversee stock trading and enforce federal securities laws.)

What does "limited liability for investors" imply in a public stock company? A. Shareholders are liable for their invested capital and personal wealth and not for any other investments made. B. Shareholders who provide the risk capital are liable only to the capital specifically invested. C. Shareholders are liable for all the decisions made by the board of directors of the company. D. Shareholders have financial but not legal responsibilities toward the public stock company.

B. Shareholders who provide the risk capital are liable only to the capital specifically invested. (Limited liability for investors means that the shareholders who provide the risk capital are liable only to the capital specifically invested, and not for other investments they may have made or for their personal wealth. Limited liability encourages investments by the wider public and entrepreneurial risk-taking.)

Which of the following statements is true of shareholders in a public stock company? A. They directly supervise and coordinate the manufacture of products and delivery of services. B. They are granted a charter of incorporation by the state and legally own company stock. C. They are the centerpiece of corporate governance. D. They are appointed by a board of directors to oversee the company's management.

B. They are granted a charter of incorporation by the state and legally own company stock. (The state (or society) grants a charter of incorporation to the company's shareholders—its owners, who legally own stock in the company. The shareholders appoint a board of directors to govern and oversee the firm's management. The managers in turn hire, supervise, and coordinate employees to manufacture products and provide services.)

How did Uber conflict with Carnegie Mellon University's National Robotics Engineering Center (NREC)? A. Uber promised a large donation to NREC but then reneged on the offer when NREC would not provide Uber with researchers. B. Uber poached entire NREC research teams with signing bonuses, twice the salaries, and stock options, thereby threatening the future of NREC. C. Uber allegedly stole ideas from the NREC research team and then claimed that these ideas were generated by their own researchers. D. Uber bribed NREC officials to give permission for building an extension to the NREC facility that focuses solely on Uber research.

B. Uber poached entire NREC research teams with signing bonuses, twice the salaries, and stock options, thereby threatening the future of NREC. (As discussed in Chapter Case 12, in spring 2015, Uber opened its Advanced Tech Center in Pittsburgh to develop autonomous cars and sophisticated mapping services. Soon Uber poached entire NREC research teams with signing bonuses, twice the salaries, and stock options. It is also building a super-modern research center adjacent to the CMU campus. The NREC was left a shell, with its entire future in question.)

Leila is a graduate student pursuing a course in business. Presented with the case of Uber's unethical behavior, Leila wonders if Uber's board of directors should ask the CEO of Uber, Travis Kalanick, to step down. Having a strong belief in Michael Porter's idea of value creation, Leila is most likely to conclude that A. Uber's board of directors should not ask Kalanick to step down because doing so would cause a profit dip that would affect its shareholders. B. Uber's board of directors should ask Kalanick to step down because it has a greater obligation toward society. C. Uber's board of directors should not ask Kalanick to step down because he was responsible for an almost 90 percent appreciation of the company's stock. D. Uber's board of directors should ask Kalanick to step down because agents, unlike principals, are disposable.

B. Uber's board of directors should ask Kalanick to step down because it has a greater obligation toward society. (Leila is most likely to conclude that Uber's board of directors should ask Kalanick to step down because it has a greater obligation toward society. According to Michael Porter, many public companies have defined value creation too narrowly in terms of financial performance. This implies that a firm's obligations should frequently go beyond the economic responsibility to increase profits, extending to legal, ethical, and philanthropic expectations that society has of the business enterprise.)

Which of the following positions is an example of an inside director for a firm? A. a senior consultant who is not an employee B. a chief financial officer C. a board member who is not an employee D. a middle manager

B. a chief financial officer (Inside directors are generally part of the company's senior management team, such as the chief financial officer (CFO) and the chief operating officer (COO). They are employees of the firm who are appointed by shareholders to provide the board with necessary information pertaining to the company's internal workings and performance.)

At Opnic Corp., a cross-functional team is formed to work on a project for a new client. The team consists of Darius and four other members. At most of the team's presentations to senior management, Darius takes the lead and discusses project specifics with the management, while others chip in with additional information. At the completion of the project, Darius is recommended for promotion, while the other team members receive little recognition for their hard work. The reality is that Darius did very little actual work but spent some time compiling the project report based on different documents submitted by the others. This scenario at Opnic Corp. is a typical consequence of A. moral hazard. B. adverse selection. C. shared value creation. D. corporate governance.

B. adverse selection. (This scenario at Opnic Corp. is a typical consequence of adverse selection. In general, adverse selection occurs when information asymmetry increases the likelihood of selecting inferior alternatives. In principal-agent relationships, for example, adverse selection describes a situation in which an agent misrepresents his or her ability to do the job. Such misrepresentation is common during the recruiting process. The problem is especially pronounced in team production, when the principal often cannot ascertain the contributions of individual team members. This in turn creates an incentive for opportunistic employees to free-ride on the efforts of others.)

Raj is a recent graduate who states that he has interned at a major accounting firm so that his value as a candidate for employment increases. A start-up recruits Raj based on his stated credentials without verifying them. Two days into the job, Raj's team lead realizes that Raj does not know much of what he claimed to know during the interview. This scenario best exemplifies A. moral hazard. B. adverse selection. C. shared value creation. D. corporate governance.

B. adverse selection. (This scenario best exemplifies adverse selection. In general, adverse selection occurs when information asymmetry increases the likelihood of selecting inferior alternatives. In principal-agent relationships, for example, adverse selection describes a situation in which an agent misrepresents his or her ability to do the job.)

Which of the following is an important internal corporate-governance mechanism? A. shareholder capitalism B. board of directors C. market for corporate control D. activist investors

B. board of directors (Whereas the board of directors and executive compensation are internal corporate-governance mechanisms, the market for corporate control is an important external corporate-governance mechanism.)

One of the ways to foster ethical behavior in employees is to A. avoid codifying organizational culture. B. create a control system that encourages desired values. C. view clients as counter parties to transactions. D. align the vision statement of the organization with its informal culture.

B. create a control system that encourages desired values. (To foster ethical behavior in employees, top management must create an organizational structure, culture, and control system that values and encourages desired behavior. Furthermore, a company's formal and informal cultures must be aligned, and executive behavior must be in sync with the formally stated vision and values.)

The board of directors of a public stock company consists of A. managers appointed by the owners of a company to run its day-to-day operations. B. individuals who formally represent the firm's shareholders and oversee the work of executives. C. the legal owners of a publicly traded company that was purchased in a leveraged buyout. D. employees of a company who belong to the senior management and directly report to the CEO of the firm.

B. individuals who formally represent the firm's shareholders and oversee the work of executives. (The board of directors of a public stock company consists of individuals who formally represent the firm's shareholders and oversee the work of executives.)

The risk of employee opportunism on behalf of agents in a public stock company is exacerbated by A. stakeholder strategy. B. information asymmetry. C. corporate governance. D. groupthink.

B. information asymmetry. (Information asymmetry means agents usually know more than the principals, and it causes an increased risk of employee opportunism.)

The day-to-day operations of a publicly traded company are conducted by A. people who own the company, such as shareholders. B. its managers and lower-level employees. C. people who finance the company, such as investors. D. the CEO and the board of directors.

B. its managers and lower-level employees. (The day-to-day business operations of a publicly traded stock company are conducted by its managers and employees, under the direction of the chief executive officer (CEO) and the oversight of the board of directors.)

Mario founded Tapoz Communications Inc. in 1993. Ten years later, the company went public. Despite Mario's death in 2005, the company reported a 75 percent increase in revenue in 2006. Which of the following characteristics of a publicly traded company does this scenario best exemplify? A. transferability of investor ownership B. legal personality C. limited liability for investors D. separation of legal ownership and management control

B. legal personality (The scenario best exemplifies the law of legal personality. Legal personality regards a non-living entity such as a for-profit firm as similar to a person, with legal rights and obligations. Legal personality allows a firm's continuation beyond the founder or the founder's family.)

Travis, the CEO of Riplon Corp., used company funds to buy a car worth $1 million and a house for $6 million in Santa Fe. This is an example of A. corporate governance. B. on-the-job consumption. C. adverse selection. D. shared value creation.

B. on-the-job consumption. (This is an example of on-the-job consumption. Information asymmetry can breed on-the-job consumption, perquisites, and excessive compensation. Although use of company funds for golf outings, resort retreats, attending professional sporting events, or having elegant dinners and other entertainment is an everyday manifestation of on-the-job consumption, other forms are more extreme.)

GLD Inc. is a publicly traded company. The stockholders of this company delegate the authority to make decisions for the company to a CEO named George. The stockholders expect George to make decisions that will benefit the company. However, George begins to find ways to maximize his total compensation, which at times hinders GLD's performance. This scenario reflects A. value creation problems. B. principal-agent problems. C. inside director-outside director problems. D. fiduciary responsibility problems.

B. principal-agent problems. (This scenario reflects principal-agent problems. This problem can arise whenever principals delegate decision making and control over resources to agents, with the expectation that they will act in the principals' best interest. The conflict arises if the agents pursue their own personal interests, which can be at odds with the principals' goals.)

MainLine Inc. is a public stock company that provides natural gas for businesses. Although this company generates a large profit, its methods of obtaining gas have at times broken down, thereby causing environmental problems. As a result, the company's value creation has suffered. This scenario supports Michael Porter's warning that A. public companies often do not keep economic needs and societal needs separate from each other, thereby contributing to low value creation. B. public companies have defined value creation too narrowly in terms of financial performance, thereby contributing to black swan events. C. public companies do not focus enough on increasing firm profits, thereby contributing to low value creation. D. public companies have defined value creation too narrowly and as a result have ignored political lobbying, thereby contributing to black swan events.

B. public companies have defined value creation too narrowly in terms of financial performance, thereby contributing to black swan events. (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.)

Who appoints the board of directors in a public stock company? A. auditors B. shareholders C. employees D. CEOs

B. shareholders (The shareholders of public stock companies appoint a board of directors to represent their interests. The board of directors is the centerpiece of corporate governance in such companies.)

According to the perspective of shareholder capitalism, A. shareholders in public stock companies are restricted from buying shares of two competing companies. B. shareholders in public stock companies have the most legitimate claim on profits. C. shareholders in public stock companies have significant decision-making power. D. shareholders in public stock companies have unlimited financial liability.

B. shareholders in public stock companies have the most legitimate claim on profits. (According to the perspective of shareholder capitalism, shareholders—the providers of the necessary risk capital and the legal owners of public companies—have the most legitimate claim on profits.)

Which of the following is the source of the principal-agent problem in publicly traded companies? A. the law of legal personality B. the separation of ownership and control C. limited liability for investors D. transferability of investor ownership

B. the separation of ownership and control (The separation of ownership and control is one of the major advantages of the public stock companies. This benefit, however, is also the source of the principal-agent problem.)

_____ suggests that the firm can be viewed as a nexus of legal contracts (loosely defined) between resource holders. A. Shareholder capitalism B. Stakeholder strategy C. Agency theory D. Corporate governance

C. Agency theory (Agency theory suggests that the firm can be viewed as a nexus of legal contracts (loosely defined) between resource holders.)

_____ is a mechanism to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally. A. Corporate social responsibility B. Stakeholder impact analysis C. Corporate governance D. Shareholder capitalism

C. Corporate governance (Corporate governance concerns the mechanisms to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally. Corporate governance is about checks and balances and about asking the tough questions at the right time.)

The Securities and Exchange Commission (SEC) makes all financial reports filed by public companies available electronically via the _____ database. A. GAAP B. JASON C. EDGAR D. PARMER

C. EDGAR (As part of its disclosure policy, the SEC makes all financial reports filed by public companies available electronically via the EDGAR database. This database contains more than 7 million financial statements, going back several years.)

Frank is a board member at Lofloy Greens Inc., a publicly traded company. In addition to his duties on the board, Frank is also a full-time employee as a senior manager at Spinson Locomotives Inc. Which of the following is most likely to be true of Frank? A. Frank is a part-time employee at Lofloy Greens. B. Frank cannot serve as a director on Spinson Locomotives' board. C. Frank is an outside director on Lofloy's board of directors. D. Frank is a stockholder of Lofloy Greens.

C. Frank is an outside director on Lofloy's board of directors. (Frank is an outside director on Lofloy's board of directors. Outside directors are not employees of the firm. They frequently are senior executives from other firms or full-time professionals, who are appointed to a board and who serve on several boards simultaneously. Given their independence, they are more likely to watch out for the interests of shareholders.)

Which of the following facts proves that GE's board is fairly diverse compared to other Fortune 500 companies? A. GE's board is composed of 94 percent outside directors, compared to less than 70 percent for the others. B. GE's board is chaired by its CEO while other companies have outside directors. C. GE's board is composed of 28 percent women, compared to less than 16 percent for the others. D. GE's board has five committees, each with its own chair, compared with less than three for the others.

C. GE's board is composed of 28 percent women, compared to less than 16 percent for the others. (As mentioned in Strategy Highlight 12.1, in general, women and minorities remain underrepresented on boards of directors across the U.S. and throughout most of the world. GE's board is actually fairly diverse when compared with other Fortune 500 companies, which averaged less than 16 percent women on their boards (versus 28 percent for GE).)

Janis is the CEO of a firm. She has an opportunity to increase the competitive advantage of her company but is not sure if accepting the opportunity is ethical. Which of the following questions would help her decide if accepting the opportunity is ethical? A. What are the chances that her decision to accept the opportunity will be made public? B. How much profit would be made if she decided to accept the opportunity? C. How would the media report her decision to accept the opportunity if it were to become public? D. How long lasting would the competitive advantage be if she decided to accept the opportunity?

C. How would the media report her decision to accept the opportunity if it were to become public? (Asking the question "How would the media report her decision to accept the opportunity if it were to become public?" would help her decide if accepting the opportunity is ethical. Because business decisions are not made in a vacuum but are embedded within a societal context that expects ethical behavior, managers can improve their decision making by also considering this question.)

_____ are the board members who are part of a company's senior management team appointed by shareholders to provide the board with necessary information pertaining to the company's internal workings and performance. A. Investors B. Outside directors C. Inside directors D. Auditors

C. Inside directors (Inside directors are generally part of the company's senior management team, such as the chief financial officer (CFO) and the chief operating officer (COO). They are appointed by shareholders to provide the board with necessary information pertaining to the company's internal workings and performance.)

Which of the following best supports the fact that Goldman Sachs was unethical in the Abacus deal? A. It was given a "triple A" rating for Abacus. B. It made no effort to ascertain the stability of the real estate market. C. It knew that Paulson & Co. had bundled high-risk mortgages into the collateralized debt obligation. D. It lost $100 million in the Abacus fiasco.

C. It knew that Paulson & Co. had bundled high-risk mortgages into the collateralized debt obligation. (As discussed in Strategy Highlight 12.2, Paulson & Co., approached Goldman Sachs with a trading idea to place a billion-dollar bet that the real estate bubble was about to burst. This would occur when borrowers began to default on their mortgages in large numbers. Since Goldman Sachs knew the real reason behind Abacus, its dealings of the same can be considered unethical.)

Which of the following is a characteristic of a public stock company? A. Shareholders who provide risk capital are liable for all losses incurred by the company. B. Investor ownership cannot be transferred easily between investors. C. Legal personality allows a firm's continuation beyond the founder or the founder's family. D. In publicly traded companies, professional managers are the legal owners of the company.

C. Legal personality allows a firm's continuation beyond the founder or the founder's family. (The law concerning legal personality regards a non-living entity such as a for-profit firm as similar to a person, with legal rights and obligations. Legal personality allows a firm's continuation beyond the founder or the founder's family.)

Jamiro Inc. is a public stock company. Which of the following statements about the company best illustrates the fact that its investors have limited liability? A. Employees of Jamiro are legally permitted to invest their capital in the company's stock. B. Employees of Jamiro are also the owners of the company. C. Shareholders of Jamiro are responsible to the company only for the capital they have invested. D. Shareholders of Jamiro are not permitted to trade their company stock at the New York Stock Exchange (NYSE).

C. Shareholders of Jamiro are responsible to the company only for the capital they have invested. (Limited liability means that the shareholders who provide the risk capital are liable only to the capital specifically invested, and not for other investments they may have made or for their personal wealth. Limited liability encourages investments by the wider public and entrepreneurial risk-taking.)

Which of the following statements best supports the separation of ownership and control in publicly traded companies? A. Shareholders are liable only for the capital they invest and not for their personal wealth. B. Shareholders can freely trade the company stocks. C. Shareholders own stocks but do not run the company. D. Managers control the company but may also have stock ownership.

C. Shareholders own stocks but do not run the company. (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).)

Which of the following proves that GE's board of directors is significantly independent? A. Twenty-six percent of the board members at GE are female. B. The CEO of GE is also the chairman of the board. C. Sixteen of the 17 board directors are from outside the organization. D. GE's board has five committees, each with its own chair.

C. Sixteen of the 17 board directors are from outside the organization. (As mentioned in Strategy Highlight 12.1, at GE, 16 of the 17 board members (94 percent) are independent outside directors. To achieve board independence, experts in corporate governance recommend that two thirds of its directors be outsiders. GE's board has only one inside director, Jeffrey Immelt, GE's CEO, who also acts as chairman of the board.)

GE's board has only one inside director, Jeffrey Immelt, GE's CEO, who also acts as chairman of the board. This is known as duality. Which of the following statements represents the best argument for this duality in GE? A. The CEO is likely to be more responsible because he is setting his own performance targets. B. The CEO might be able to influence the board through setting the meeting agendas. C. The CEO possesses invaluable inside information that can help chair the board effectively. D. The CEO will suggest board appointees who are friendly toward him or her.

C. The CEO possesses invaluable inside information that can help chair the board effectively. (As mentioned in Strategy Highlight 12.1, arguments can be made both for and against splitting the roles of CEO and chairman of the board. On the one hand, the CEO has invaluable inside information that can help in chairing the board effectively. On the other hand, the chairperson may influence the board unduly through setting the meeting agendas or suggesting board appointees who are friendly toward the CEO.)

What helps notions such as fairness, honesty, and reciprocity to be codified into law? A. The notions are synonymous with law. B. The notions differ to some degree in different cultures around the globe. C. The notions are universal norms. D. The notions are characteristics inherited by each person irrespective of the culture.

C. The notions are universal norms. (The principles, norms, and standards of business practice differ to some degree in different cultures around the globe. But a large number of research studies have found that some notions—such as fairness, honesty, and reciprocity—are universal norms.)

What is a unicorn? A. a public stock company valued at a billion dollars or more B. a public stock company valued at a million dollars or more C. a private start-up company valued at a billion dollars or more D. a private start-up company valued at a million dollars or more

C. a private start-up company valued at a billion dollars or more (Private start-up companies valued at a billion dollars or more are called unicorns because they are as rare.)

In publicly traded companies, individuals who are delegated to perform duties on behalf of company owners are known as A. principals. B. shareholders. C. agents. D. clients.

C. agents. (In publicly traded companies, the stockholders are the legal owners of the company, but they delegate decision-making authority to professional managers. These managers are called agents.)

Which of the following do not serve as additional external-governance mechanisms? A. auditors B. government regulators C. board of directors D. industry analysts

C. board of directors ("Auditors, government regulators, and industry analysts serve as additional external-governance mechanisms." All public companies listed on the U.S. stock exchanges must file a number of financial statements with the Securities and Exchange Commission (SEC), a federal regulatory agency whose task it is to oversee stock trading and enforce federal securities laws.)

Because of poor management, the stock prices of DigiKing Inc. falls and many investors sell their shares. Soon DigiKing becomes the target of a hostile takeover, during which Charles buys enough shares to exert control over the firm. In this scenario, Charles performs the role of a(n) A. inside director. B. outside director. C. corporate raider. D. corporate consultant.

C. corporate raider. (In this scenario, Charles performs the role of a corporate raider. Corporate raiders or private equity firms and hedge funds often buy enough shares to exert control over a company.)

The informational advantage that agents possess over principals is often based on the fact that A. the information is extremely secure and protected from exposure to anyone outside the company. B. public stock companies are characterized by information symmetry. C. insiders are the first to learn about important developments before the information is released to the public. D. agents are legally permitted to freely trade the information in exchange for benefits, unlike principals.

C. insiders are the first to learn about important developments before the information is released to the public. (Managers, executives, and board members tend to have access to private information concerning important company developments that outsiders, especially investors, are not privy to. Often this informational advantage is based on timing—insiders are the first to learn about important developments before the information is released to the public.)

Fakhir is a board member at Garfield Motors Inc. He is also a senior executive of the firm. The board is chaired by Ernest Jones, the CEO of Blixt Electronics. According to this scenario, Fakhir A. cannot serve on the board of any other organization. B. is more likely than Ernest to take care of stockholder interests. C. is an inside director of Garfield Motors. D. can use information from board meetings to trade stocks of Garfield Motors.

C. is an inside director of Garfield Motors. (Fakhir is an inside director. Inside directors are generally part of the company's senior management team, such as the chief financial officer (CFO) and the chief operating officer (COO). They are appointed by shareholders to provide the board with necessary information pertaining to the company's internal workings and performance.)

Kaito is the CEO of Henson and Fukui Consulting Inc. Kaito's efforts to persuade the board of directors to pursue a new business strategy fail. He borrows money from different sources and purchases all the outstanding shares of Henson and Fukui Consulting. What does this scenario best exemplify? A. buyback B. merger C. leveraged buyout D. initial public offering

C. leveraged buyout (This scenario best exemplifies a leveraged buyout. In a leveraged buyout (LBO), a single investor or group of investors buys, with the help of borrowed money (leveraged against the company's assets), the outstanding shares of a publicly traded company in order to take it private.)

Which of the following is an important external corporate-governance mechanism? A. shareholder capitalism B. board of directors C. market for corporate control D. executive compensation

C. market for corporate control (Whereas the board of directors and executive compensation are internal corporate-governance mechanisms, the market for corporate control is an important external corporate-governance mechanism.)

A company scientist at a biotechnology company decides to work on his own research project, hoping to eventually start his own firm, rather than on the project he was assigned. However, the company's stockholders are unaware of this situation. This is an example of a(n) _____ in the context of a principle-agent problem. A. adverse selection B. stakeholder strategy C. moral hazard D. shared value creation

C. moral hazard (This is an example of a moral hazard in the context of a principle-agent problem. In the principal-agent relationship, moral hazard describes the difficulty of the principal to ascertain whether the agent has really put forth a best effort.)

Which of the following could most likely have prevented the accounting scandals of the early 2000s and the global financial crisis? A. adopting a narrow shareholder perspective B. separating economic interests and social needs C. practicing effective corporate governance D. adopting the principles of shareholder capitalism

C. practicing effective corporate governance (Corporate governance is about checks and balances and about asking the tough questions at the right time. The accounting scandals of the early 2000s and the global financial crisis of 2008 and beyond got so out of hand because the enterprises involved did not practice effective corporate governance.)

Which of the following characteristics of a public stock company deals with principals and agents? A. limited liability of investors B. transferability of investor ownership C. separation of legal ownership and management control D. legal personality

C. separation of legal ownership and management control (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).)

Creating economic value for shareholders while also creating social value is known as creating A. a social market economy. B. shareholder capitalism. C. shared value. D. stakeholder strategy.

C. shared value. (Porter argues that executives should not concentrate exclusively on increasing firm profits. Rather, the strategist should focus on creating shared value, a concept that involves creating economic value for shareholders while also creating social value by addressing society's needs and challenges.)

The MBA oath first developed at Harvard and now signed by students at over 300 business schools is modeled after A. Level-5 leadership. B. the Sarbanes-Oxley pledge. C. the Hippocratic oath in medicine. D. Goldman Sach's code.

C. the Hippocratic oath in medicine. (The MBA Oath was modeled after both the Hippocratic oath for doctors and bar association standards for attorneys. The oath explicitly recognizes the role of business in society and its responsibilities beyond shareholders. It also holds managers to a high ethical standard based on more or less universally accepted principles in order to "create value responsibly and ethically.")

Which of the following is a major issue at the forefront of CEO compensation in recent years? A. a comparison of the performance of the organization before and after the CEO's tenure B. the performance of the CEO as an employee versus the performance as a board member C. the absolute size of the CEO pay package compared with the pay of the average employee D. a comparison of the compensation of senior management hired during and before the CEO's tenure

C. the absolute size of the CEO pay package compared with the pay of the average employee (Executive compensation—CEO pay, in particular—has attracted significant attention in recent years. Two issues are at the forefront: the absolute size of the CEO pay package compared with the pay of the average employee and the relationship between firm performance and CEO pay.)

Which of the following best explains why a board of directors may grant stock options as part of a compensation package? A. to reduce the transferability of stocks between stockholders B. to bring about a separation of CEO/chair duality C. to align incentives between shareholders and management D. to change the liability of shareholders from limited to unlimited

C. to align incentives between shareholders and management (The board of directors determines executive compensation packages. To align incentives between shareholders and management, the board may grant stock options as part of the compensation package.)

De Bruyne Inc., a publicly traded company, has ten members on its board. Of the ten members, six members are employees of the company and includes the CEO, who also chairs the board. The board has been failing in its responsibilities toward the shareholders who now want a new board. Assuming that the total number of board members remains constant, how many outside directors should the shareholders appoint to De Bruyne's board to achieve board independence? A. 1 B. 3 C. 5 D. 7

D. 7 (The stakeholders should appoint at least 7 outside directors for optimal functioning of the board. As mentioned in Strategy Highlight 12.1, to achieve board independence, experts in corporate governance recommend that two thirds of its directors be outsiders.)

_____ are an agreed-upon code of conduct in business, based on societal norms. A. Fiduciary responsibilities B. Poison pills C. Strategic business points D. Business ethics

D. Business ethics (Business ethics are an agreed-upon code of conduct in business, based on societal norms.)

Which of the following is not true of corporate governance in public stock companies? A. Corporate governance seeks to benefit multiple stakeholders, not just shareholders. B. Corporate governance provides rules for making decisions on corporate affairs. C. Corporate governance attempts to address the principal-agent problem. D. Corporate governance seeks to create a separation between ownership and control.

D. Corporate governance seeks to create a separation between ownership and control. (Corporate governance concerns the mechanisms to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally. Corporate governance seeks to address the problems that arise due to the separation between ownership and control.)

Which of the following accurately describes GE's ecomagination initiative? A. Ecomagination decreases the perceived value it creates for its customers while raising costs to produce and deliver "green" products and services. B. Ecomagination decreases the perceived value it creates for its customers while lowering costs to produce and deliver "green" products and services. C. Ecomagination increases the perceived value it creates for its customers while raising costs to produce and deliver "green" products and services. D. Ecomagination increases the perceived value it creates for its customers while lowering costs to produce and deliver "green" products and services.

D. Ecomagination increases the perceived value it creates for its customers while lowering costs to produce and deliver "green" products and services. (Ecomagination increases the perceived value it creates for its customers while lowering costs to produce and deliver "green" products and services. Ecomagination allows GE to solve the trade-off between increasing value creation and lower costs at the same time. This in turn enhances GE's economic value creation and its competitive advantage.)

Which of the following perspectives best supports the shared value creation framework? A. Markets are more often than not defined by societal needs rather than economic needs. B. Failing to create value for society almost always reflects on the bottom line. C. A firm's competitive advantage depends on pitting economic and societal needs in a trade-off. D. Externalities such as pollution, wasted energy, and costly accidents actually create internal costs.

D. Externalities such as pollution, wasted energy, and costly accidents actually create internal costs. (The shared value creation framework proposes that managers maintain a dual focus on shareholder value creation and value creation for society. It recognizes that markets are defined not only by economic needs but also by societal needs. It also advances the perspective that externalities such as pollution, wasted energy, and costly accidents actually create internal costs, at least in lost reputation if not directly on the bottom line.)

Hoptin Inc. is a public stock company. Which of the following best exemplifies the legal personality of the company? A. Rosa can legally sell shares of Hoptin in the stock market. B. John is a shareholder of Hoptin but does not have any managerial duties. C. Kevin, an employee at Hoptin, is not responsible for any losses that Hoptin incurs. D. Jessi Hoptin, the company's founder, died a few years ago, yet the company is doing well.

D. Jessi Hoptin, the company's founder, died a few years ago, yet the company is doing well. (The continuation of Hoptin Inc. despite Jessi Hoptin's death best exemplifies legal personality. Legal personality allows a firm's continuation beyond the founder or the founder's family.)

Which of the following acts in the Goldman Sachs-Galleon Group insider trading scandal is an egregious exploitation of information asymmetry? A. Galleon Group's decision to trust Rajat Gupta's information as accurate B. Rajaratnam receiving information regarding Warren Buffet's impending multibillion-dollar injection into Goldman Sachs C. Warren Buffet's decision to inject a huge amount of money into Goldman Sachs based on its financial reports D. Rajat Gupta providing information regarding Warren Buffet's impending multibillion-dollar injection into Goldman Sachs

D. Rajat Gupta providing information regarding Warren Buffet's impending multibillion-dollar injection into Goldman Sachs (In this case, Rajat Gupta proving information to Galleon Group would be regarded as an exploitation of information asymmetry.)

Which of the following statements best supports the view that GE's ecomagination strategy is in line with the shared value creation framework? A. The ecomagination strategy is the brainchild of the founder of the company. B. The ecomagination strategy helps GE spend more on research and development than other similar companies. C. The ecomagination strategy generated $3 billion in revenues for GE during 2012. D. The ecomagination strategy allows GE to produce "green" products while increasing revenue and competitive advantage.

D. The ecomagination strategy allows GE to produce "green" products while increasing revenue and competitive advantage. (Ecomagination solutions and products allow GE to increase the perceived value it creates for its customers while lowering costs to produce and deliver the "green" products and services. This indicates that GE's ecomagination strategy is in line with the shared value creation framework.)

What are poison pills? A. They are used by shareholders to prevent the founder of a company from taking the company private through a leveraged buyout. B. They are unspecified conditions in the contract between stakeholders in an organization. C. They are used by companies in a bid to perform a hostile takeover of competing firms. D. They are defensive provisions that kick in should a buyer reach a certain level of share ownership.

D. They are defensive provisions that kick in should a buyer reach a certain level of share ownership. (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.)

Which of the following is not true about the members of the board of directors in a public stock company? A. They represent the shareholders' interests. B. They may hire and fire top management. C. They oversee the firm's operations. D. They are not responsible to shareholders.

D. They are not responsible to shareholders. (A firm's board of directors may not be independent, and many times the CEO is often the chair of the board. To achieve board independence, experts in corporate governance recommend that two thirds of its directors be outsiders.)

TopDrawer Inc. has a board of directors that consists of seven members. Which of the following is most likely an accurate statement about TopDrawer's board of directors? A. TopDrawer's board of directors ensures the firm's compliance with laws and regulations but does not conduct risk assessments. B. TopDrawer's board of directors provides guidance for the firm's CEO but does not monitor the firm's corporate actions. C. TopDrawer's board of directors oversees the firm's succession plan but does not evaluate the firm's CEO. D. TopDrawer's board of directors evaluates the firm's strategic initiatives but does not include any employees of the firm.

D. TopDrawer's board of directors evaluates the firm's strategic initiatives but does not include any employees of the firm. (TopDrawer's board of directors most likely evaluates the firm's strategic initiatives but does not include any employees of the firm. The board of director's functions include: • Selecting, evaluating, and compensating the CEO. The CEO reports to the board. Should the CEO lose the board's confidence, the board may fire him or her. • Overseeing the company's CEO succession plan • Providing guidance to the CEO in the selection, evaluation, and compensation of other senior executives • Reviewing, monitoring, evaluating, and approving any significant strategic initiatives and corporate actions such as large acquisitions • Conducting a thorough risk assessment and proposing options to mitigate risk • Ensuring that the firm's audited financial statements represent a true and accurate picture of the firm • Ensuring the firm's compliance with laws and regulations)

In late 2014, Uber senior executive Emil Michael was heard to say that Uber should spend a million dollars to hire private investigators to dig up dirt on journalists who wrote damaging pieces on Uber. When the remarks became public, he apologized. How did Uber's CEO deal with Michael? A. Uber's CEO demoted Michael. B. Uber's CEO fired Michael. C. Uber's CEO promoted Michael. D. Uber's CEO refused to discipline Michael.

D. Uber's CEO refused to discipline Michael. (As discussed in Chapter Case 12, Uber CEO Kalanick said that Michael's comments were "a departure from our values and ideals," but Michael was not otherwise disciplined as disclosed.)

Neville and Andre are customer care employees at JPN Care. In between calls, Neville and Andre 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. is neither unlawful nor unethical; hence, Neville and Andre cannot be reprimanded. B. typically exemplifies the agency problem of adverse selection. C. goes against the principles of shareholder capitalism. D. can be stopped by implementing performance incentives and strict control mechanisms.

D. can be stopped by implementing performance incentives and strict control mechanisms. (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.)

What is the term used to describe a situation in which a manager of a company has more inside information than an investor of the company? A. insider monopoly B. stakeholder strategy C. moral hazard D. information asymmetry

D. information asymmetry (Information asymmetry is the term used to describe a situation in which a manager of a company has more inside information than an investor of the company.)

Dmitri is a senior manager for the firm Kopney Inc. Because of his experience, he has been appointed to the board of HKS Inc., even though he doesn't work for this firm. He also serves on the boards of several other companies. Dmitri is a(n) _____ for Kopney and a(n) _____ for HKS. A. CEO; COO B. COO; CEO C. outside director; inside director D. inside director; outside director

D. inside director; outside director (Dmitri is an inside director for Kopney and an outside director for HKS. Inside directors are generally part of the company's senior management team. Outside directors, unlike inside directors, are not employees of the firm. They frequently are senior executives from other firms or full-time professionals, who are appointed to a board and who serve on several boards simultaneously.)

Serena is the CEO of Pedalo Inc., a publicly traded company. The shareholders want Serena on the board of directors despite her recent appointment as the CEO. This decision of the shareholders is most likely because Serena A. is a board member of a major client. B. is more likely than other board members to take care of the stockholders. C. is also the CEO of other companies. D. is likely to provide the board with valuable inside information.

D. is likely to provide the board with valuable inside information. (Serena was mostly likely appointed to the board because she is likely to provide the board with valuable inside information. Without this valuable inside information, the board would not be able to effectively monitor the firm.)

In principal-agent relationships, _____ describes the difficulty of principals to ascertain whether agents have really put forth their best efforts. A. the agency problem B. adverse selection C. on-the-job consumption D. moral hazard

D. moral hazard (Moral hazard describes a situation in which information asymmetry increases the incentive of one party to take undue risks or shirk other responsibilities because the costs incur to the other party. In the principal-agent relationship, moral hazard describes the difficulty of the principal to ascertain whether the agent has really put forth a best effort.)

Rajat Gupta's role in providing inside information to Galleon Group for the benefit of Galleon Group's stockholders and himself is an example of A. shareholder capitalism. B. adverse selection. C. shared value creation. D. moral hazard.

D. moral hazard. (Rajat Gupta's role in providing inside information to Galleon Group for the benefit of Galleon Group's stockholders and himself is an example of moral hazard. Moral hazard describes a situation in which information asymmetry increases the incentive of one party to take undue risks or shirk other responsibilities because the costs incur to the other party.)

Clare, the CEO of Femica Inc., reports to the board of directors appointed by the shareholders of Femica. Based on shareholder suggestions, the board ties Clare's compensation to the performance of Femica. Due to this pressure, Clare begins devoting extra time to projects and undertakes other activities to ensure that she has job security and that she receives adequate compensation. This conflict between Clare's interests and the board's interests best illustrates a(n) A. shareholder capitalism scenario. B. inside director-outside director conflict. C. fiduciary responsibility oversight. D. principal-agent problem.

D. principal-agent problem. (This conflict represents a principal-agent problem. In publicly traded companies, the stockholders are the legal owners of the company, but they delegate decision-making authority to professional managers. The conflict arises if the agents pursue their own personal interests, which can be at odds with the principals' goals. For their part, agents may be more interested in maximizing their total compensation, including benefits, job security, status, and power. Principals desire maximization of total returns to shareholders.)

An individual who is part owner of a company and hires another individual to act on his or her behalf is referred to as a(n) A. agent. B. manager. C. employee. D. principal.

D. principal. (The shareholders of a publicly traded company are referred to as principals. In publicly traded companies, the stockholders are the legal owners of the company, but they delegate decision-making authority to professional managers.)

In public stock companies, which of the following expectations of principals is most likely to lead to principal-agent problems? A. the expectation that the agent will follow the country's laws and regulations B. the expectation that the agent will go above and beyond the call of duty C. the expectation that the agent will reconnect economic and social needs D. the expectation that the agent will act in the principal's best interest

D. the expectation that the agent will act in the principal's best interest (Corporate governance attempts to address the principal-agent problem, which can occur any time an agent performs activities on behalf of a principal. This problem can arise whenever a principal delegates decision making and control over resources to agents, with the expectation that they will act in the principal's best interest.)

The conflict in a principal-agent relationship arises when A. the company has more outside directors than inside directors. B. the strategy adopted by the company's agents tries to emulate the mission statement created by the principals. C. stockholders and agents are involved in the day-to-day operations of the company. D. the goals of the principals and agents are not aligned with each other.

D. the goals of the principals and agents are not aligned with each other. (In publicly traded companies, the stockholders are the legal owners of the company, but they delegate decision-making authority to professional managers. The conflict arises if the agents pursue their own personal interests, which can be at odds with the principals' goals.)

Grameen Bank in Bangladesh was founded to provide microcredit to impoverished farmers who wanted to start their own entrepreneurial ventures that would help themselves climb out of poverty. This best exemplifies Michael Porter's suggestion that A. managers need to keep economic needs and societal needs disconnected from each other. B. a firm should expand its internal value chain to include nontraditional partners. C. businesses should focus on creating regional clusters such as Silicon Valley in the U.S. D. the largest but poorest socioeconomic group can yield significant business opportunities.

D. the largest but poorest socioeconomic group can yield significant business opportunities. (Michael Porter suggests expanding the customer base to bring in nonconsumers such as those at the bottom of the pyramid—the largest but poorest socioeconomic group of the world's population. Muhammad Yunus, winner of the 2006 Nobel Prize, founded Grameen Bank in Bangladesh to provide small loans (termed microcredit) to impoverished villagers, who used the funding for entrepreneurial ventures that would help themselves climb out of poverty.)

Outside directors are more likely to watch out for the interests of shareholders of their firm because A. they are more likely to benefit from using inside information to trade stocks. B. they do not have the safety of serving on the boards of other firms. C. they are part-time employees of the firm. D. they have more independence than inside directors.

D. they have more independence than inside directors. (Outside directors frequently are senior executives from other firms or full-time professionals, who are appointed to a board and who serve on several boards simultaneously. Given their independence, they are more likely to watch out for the interests of shareholders.)

Poison pills have become rare because A. leveraged buyouts can effectively skirt the measures put in place by poison pills. B. the market for corporate control is dead. C. federal laws prevent hostile takeovers. D. they retard an effective function of equity markets.

D. they retard an effective function of equity markets. (To avoid being taken over against their consent, some firms put in place poison pills. With the rise of actively involved institutional investors, poison pills have become rare because they retard an effective function of equity markets.)

Warren owns shares in a company called Gerarch Communications Inc. The company's financial performance has been declining over the past few months, and the value of its stock has been decreasing. Warren wants to proactively cut his losses and therefore sells his shares. Lawrence, a trading enthusiast, buys shares in Gerarch Communications because he believes that the share prices cannot go anywhere but up. Which of the following characteristics of a public stock company does this scenario best exemplify? A. separation of legal ownership and management control B. legal personality C. limited liability for investors D. transferability of investor ownership

D. transferability of investor ownership (This scenario best exemplifies transferability of investor ownership. Investors are allowed to trade shares of stock freely in the stock market on exchanges such as the New York Stock Exchange (NYSE) and NASDAQ.)