MGT 3830 Chapter 12 examples

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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?

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.

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.

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.

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.

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.

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.

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

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

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

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.

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

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.

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.

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

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.

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.

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.

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.

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

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.

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.

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.

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.

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