CH 12
In publicly traded companies, individuals who are delegated to perform duties on behalf of company owners are known as
agents
Ethics is
not synonymous with law.
Which of the following is the result of a leveraged buyout (LBO)?
An LBO changes a public company into a private company.
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?
Businesses can use their resources to create profit as long as they do so within the rules of the game.
Which of the following is an implication for the strategist in the context of corporate governance and a company's success?
Effective corporate governance and solid business ethics are critical to gaining and sustaining competitive advantage.
Which of the following perspectives best supports the shared value creation framework?
Externalities such as pollution, wasted energy, and costly accidents actually create internal costs.
What best describes transferability of investor ownership in a public stock company?
Investors are allowed to trade shares of stocks.
What is the result of managers' pursuit of strategies that define value creation too narrowly in public stock companies?
It reduces the trust of shareholders in the organization as a vehicle for value creation.
Which of the following is a characteristic of a public stock company?
Legal personality allows a firm's continuation beyond the founder or the founder's family.
According to Michael Porter, which of the following is a problem with many publicly traded companies?
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?
No, they should not change the strategy because the strategy already helps them save costs while generating huge revenues.
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?
Shareholders of Jamiro are responsible to the company only for the capital they have invested.
Which of the following statements best supports the separation of ownership and control in publicly traded companies?
Shareholders own stocks but do not run the company.
The board of directors of a public stock company consists of
The board of directors of a public stock company consists of
Which of the following statements best supports the view that GE's ecomagination strategy is in line with the shared value creation framework?
The ecomagination strategy allows GE to produce "green" products while increasing revenue and competitive advantage.
What are poison pills?
They are defensive provisions that kick in should a buyer reach a certain level of share ownership.
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?
TopDrawer's board of directors evaluates the firm's strategic initiatives but does not include any employees of the firm.
Which of the following is true of the board of directors in a public stock company?
Votes at shareholder meetings determine whose representatives are appointed to the board of directors.
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
adverse selection.
Why do shareholders of public companies need to appoint a board of directors to represent their interests?
because of the separation of ownership and control
The _____ is the centerpiece of corporate governance and is composed of inside and outside members.
board of directors
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
can be stopped by implementing performance incentives and strict control mechanisms.
According to the agency theory,
conflicts that arise in corporations should be addressed in the legal realm.
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)
corporate raider.
One of the ways to foster ethical behavior in employees is to
create a control system that encourages desired values.
Adverse selection in a public stock company occurs when
information asymmetry increases the likelihood of selecting inferior alternatives.
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
information asymmetry.
The informational advantage that agents possess over principals is often based on the fact that
insiders are the first to learn about important developments before the information is released to the public.
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?
legal but not ethical
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?
legal personality
Which of the following is an important external corporate-governance mechanism?
market for corporate control
In principal-agent relationships, _____ describes the difficulty of principals to ascertain whether agents have really put forth their best efforts.
moral hazard
Which of the following could most likely have prevented the accounting scandals of the early 2000s and the global financial crisis?
practicing effective corporate governance
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
principal-agent problems.
Which of the following characteristics of a public stock company deals with principals and agents?
separation of legal ownership and management control
Creating economic value for shareholders while also creating social value is known as creating
shared value.
Who appoints the board of directors in a public stock company?
shareholders
According to the perspective of shareholder capitalism,
shareholders in public stock companies have the most legitimate claim on profits.
Which of the following is a major issue at the forefront of CEO compensation in recent years?
the absolute size of the CEO pay package compared with the pay of the average employee
In public stock companies, which of the following expectations of principals is most likely to lead to principal-agent problems?
the expectation that the agent will act in the principal's best interest
The conflict in a principal-agent relationship arises when
the goals of the principals and agents are not aligned with each other.
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
the largest but poorest socioeconomic group can yield significant business opportunities.
Which of the following real-world events would act as the most likely deterrent against adopting a purely stakeholder strategy approach to business?
the nonsustainable debt levels incurred by sovereign governments to fund social programs
In a public stock company, senior executives, such as the CEO, face agency problems when
they delegate authority of strategic business units to general managers.
Outside directors are more likely to watch out for the interests of shareholders of their firm because
they have more independence than inside directors.
Poison pills have become rare because
they retard an effective function of equity markets.
Which of the following is not true of corporate governance in public stock companies?
Corporate governance seeks to create a separation between ownership and control.
Which of the following is an advantage that a private company enjoys over a public company?
Private companies are not required to disclose financial statements.
Which of the following acts in the Goldman Sachs-Galleon Group insider trading scandal is an egregious exploitation of information asymmetry?
Rajat Gupta providing information regarding Warren Buffet's impending multibillion-dollar injection into Goldman Sachs
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
adverse selection.
Which of the following is an important internal corporate-governance mechanism?
board of directors
The day-to-day operations of a publicly traded company are conducted by
its managers and lower-level employees.
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
public companies have defined value creation too narrowly in terms of financial performance, thereby contributing to black swan events.
_____ is illustrated by a situation in which the principal cannot determine the value created by individual members of a team.
Adverse selection
_____ suggests that the firm can be viewed as a nexus of legal contracts (loosely defined) between resource holders.
Agency theory
Which of the following real-world scenarios best exemplifies information asymmetry in a public stock company?
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.
Which of the following is true of business ethics?
Certain 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?
Doing so could yield significant business opportunities that could improve the standard of living of the poor.
The Securities and Exchange Commission (SEC) makes all financial reports filed by public companies available electronically via the _____ database.
EDGAR
Which of the following accurately describes GE's ecomagination initiative?
Ecomagination increases the perceived value it creates for its customers while lowering costs to produce and deliver "green" products and services.
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?
Frank is an outside director on Lofloy's board of directors.
_____ 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.
Inside directors
Hoptin Inc. is a public stock company. Which of the following best exemplifies the legal personality of the company?
Jessi Hoptin, the company's founder, died a few years ago, yet the company is doing well.
What does "limited liability for investors" imply in a public stock company?
Shareholders who provide the risk capital are liable only to the capital specifically invested.
Which of the following is a common result of a hostile takeover of a company?
The new owner sells the company in pieces.
What helps notions such as fairness, honesty, and reciprocity to be codified into law?
The notions are universal norms.
Which of the following scenarios best exemplifies a leveraged buyout of a telecommunications firm, Telbok Inc.?
The owner of another company buys all the outstanding shares of Telbok.
Which of the following is not true about the members of the board of directors in a public stock company?
They are not responsible to shareholders.
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.
moral hazard
Which of the following best explains why a board of directors may grant stock options as part of a compensation package?
to align incentives between shareholders and management
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?
How would the media report her decision to accept the opportunity if it were to become public?
A bank, YPC, offers a customer a personal loan. In which of the following circumstances will this decision most likely be considered unethical?
The bank knows that the customer will be unable to pay the loan if the interest rate rises.
Which of the following statements is true of shareholders in a public stock company?
They are granted a charter of incorporation by the state and legally own company stock.
Which of the following is true of the codes of conduct of an organization?
They detail how the organization expects an employee to behave and to represent the company in business dealings.
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 thatLeila 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
Uber's board of directors should ask Kalanick to step down because it has a greater obligation toward society.
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?
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
creating new regional clusters.
The risk of employee opportunism on behalf of agents in a public stock company is exacerbated by
information asymmetry.
The root cause of the principal-agent problem between senior executives and lower-level employees can be explained by the
informational advantage of the lower-level employees.
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.
inside director; outside director
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
is an inside director of Garfield Motors.
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
is likely to provide the board with valuable inside information.
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?
leveraged buyout
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.
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
on-the-job consumption.
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)
principal-agent problem.
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)
principal.
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)
stock option.
Which of the following is the source of the principal-agent problem in publicly traded companies?
the separation of ownership and control
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
the strong relationship between executive compensation and company performance.
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?
transferability of investor ownership
