Ch. 10 Questions

Laws and regulations require independent outsider directors to lead important committees, such as audit and compensation. Why are these rules in place?

b. To avoid the influence of insider directors who may sway the Board in their self-interests

Melissa is the CEO of her company and has to make a business decision. She is faced with a scenario where she can please one group of stakeholders, or all of them minimally. What is Melissa's most likely action?

b. To please as many stakeholders as possible, because if stakeholders are not minimally satisfied, they will give support to another company

Why are corporate governance mechanisms important to foreign investors?

b. To protect their investments; governance mechanisms are designed to protect shareholders

Kevin is on the Board of Directors of a local company and has become concerned with a situation that came to his attention. The Board is in talks to elect the current CEO as Chairman of the Board. Does Kevin have a reason for concern?

b. Yes, as the CEO will not be able to be forced out if his or her performance becomes unacceptable.

Do German firms have the presence of agency problems as much as U.S. firms?

. No. Many German firms are managed and owned by the same individual.

Activists are very unhappy with the Board of Directors' recent pattern of decisions. They believe that they need to be given more decision-making capabilities, have their voices heard, and nominate another Board member. What should the activists propose?

a. A proxy vote

What is the market for corporate control?

a. An external governance mechanism that is active when a firm's internal governance mechanisms fail

Susan is worried about her performance as CEO. She thinks that she may lose her position, receive a cut to her salary, or be seen by her peers as incompetent and ineffective. What is another term for what Susan is worried about?

a. Managerial employment risk

What is another instance where decision-making bodies are separated like the Board structure in German firms?

a. The United States' three branches of government

Why is bribery a major issue confronted by multinational companies operating in international markets?

a. The prevalence of bribery in foreign markets leaves industries at a competitive disadvantage.

Elected individuals whose primary responsibility is to act in the owners' best interest by formally monitoring and controlling the firm's top level managers is the definition for _______.

b. Board of Directors

What are the concepts that affect attitudes toward corporate governance in Japan?

b. Obligation, family, consensus

If a company were to only have insider directors and related outsider directors, which would leave out the independence of outsider directors, what could the consequences be?

b. Stockholders' interests could be ignored due to executives desire for personal financial gain without regard for all shareholders

What is the definition of ownership concentration?

b. The number of large-block shareholders and the total percentage of the firm's shares they own

An institution that holds 15 percent of shares in a company in order to be a powerful governance mechanism is an example of a(n):

b. institutional owner.

Greg is the CEO of a leading company in the consumer packaged goods industry. He is trying to grow his company for personal gain and wealth. However, Greg sees that his company has an opportunity to break into the chemical industry. He has decided to invest free cash flow into acquiring small chemical companies that have the potential of growth, if funded properly. Shareholders are not happy. Their case for wanting to cease these actions is that Greg is practicing ______.

b. overdiversification

After a recent round of share releases, many individuals bought up shares and reduced the number of large-block shareholders. The company's managers recently had the luxury of performing without much interference or monitoring by their shareholders. The managers are now engaging in risky strategic tactics that may not be in the best interest of shareholders. What type of ownership does this company have?

c. Diffuse ownership

Christopher is the CEO of a company that another company is trying to acquire. The success of Christopher's company has declined dramatically over recent years. Chris knows that the acquisition could help save the shareholders and other stakeholders from the turmoil that would ensue if the company went bankrupt. However, this is Christopher's only line of income for his family. He decides to defend his company from being taken over to help secure his position. Which defense strategy would you recommend be implemented that would benefit all stakeholders?

c. Golden parachute

Who are seen as the most significant stakeholders in the United States?

c. Shareholders

What is believed to be a likely consequence if shareholders, lawmakers, and regulators are not critical and attentive to the actions of a company's top managers?

d. A financial crisis due to manager ineffectiveness and lack of focus on all stakeholders, causing the company to fail, resulting in a rise in unemployment

How does the market for corporate control help stakeholders?

d. By taking undervalued companies and helping them grow and become more profitable, thus benefitting all stakeholders

Lisa is the CEO of her company and is on the Board of Directors as an insider director. She has recently become suspicious of certain events and discussions. The discussions have been about replacing management. These discussions have been sparked by letters from shareholders, which have become more frequent. What may Lisa be suspicious of?

d. Hostile takeover

Why could many large-block owners be beneficial to a company?

d. Large-block owners will be able to easily collaborate on current issues and drive change in an organization, more so than many small share owners.

A company is part of a keiretsu in Japan. Its leaders are worried about the company's financial viability and ask for help from other members of the keiretsu. Why would other participants of the keiretsu feel the need to aid the failing company?

d. Members of the keiretsu are seen as family, which commands the attention and allegiance.

What is the agency relationship the text is most concerned with?

d. The relationship between management and the individuals who have a stake in the company

The Carter family has been the successful owner of a manufacturing company for over 50 years. The company has always performed better than expected and was projected to grow for years to come. To help with this growth, the Carters decided to hire a CEO who is not from the family, the first time in its history. After the hire, the performance of the company shifts for the worse, and there is a separation of ownership and managerial control. What factors should the Carter family change?

c. The Carters should appoint a family member as CEO, as research shows that family-owned firms perform better when a member of the family is the CEO.

What are the benefits of having strong corporate governance?

c. The ability to be strategically competitive and perform without risk of being ethically or legally exposed.

Which is an alternate definition for "poison pill"?

c. When a company decides to increase the number of overall shares, which will both dilute the hostile company's shares and also increase the cost of the company overall, making the company less appealing to take over

Without strong corporate governance, what is likely to become of a company?

d. The company will fail because of legal issues, lack of strategic focus and risky behavior.

What is an agency relationship?

d. When one party delegates decision-making responsibility to a second party for compensation