Chapter 10 - Corporate Governance

Ambrose Bierce, the CEO of DictionAry, has been paid a lump sum amounting to three years' salary because DictionAry has been bought in a hostile takeover by its main competitor. Ambrose received a. a golden parachute. b. a poison pill. c. greenmail. d. a silver handshake.

a

How can activist investors influence a firm's corporate social responsibility (CSR)? a. By appointing directors to the board b. By setting boundaries for ethical behavior c. By communicating ethics-based expectations to top-level managers d. By holding top-level managers accountable for ethical behaviors

a

The repurchase of the target firm's shares of stock that were obtained by the acquiring firm at a premium in exchange for an agreement that the acquirer will no longer target the company for takeover is called a. greenmail. b. a standstill agreement. c. crossing the palm with silver. d. a poison pill.

a

The top management team at Sierra Infusion is concerned about the declining performance of firms in their industry. The team members are becoming concerned about the security of their jobs at Sierra Infusion. At a meeting over dinner, the top management team agrees to go to the board of directors with a proposal for a. increased diversification of Sierra Infusion. b. the addition of outside directors to the board. c. increased shareholder participation in decision making. d. greater concentration on Sierra's core industry.

a

What is a potential challenge in corporate governance in China due to higher state ownership? a. Lower market value and higher risk of default for firms b. Alignment of government-mandated social goals with shareholder returns c. Greater emphasis on maximizing shareholder wealth d. Integration of Chinese governance systems with the Western model

a

Amelia Smith is the sole owner of the successful restaurant chain, Amelia's Café. Ms. Smith has taken a no-interest loan from the company in order to build a luxurious seaside house for herself in Carmel, California. This constitutes a classic agency problem. a. True b. False

b

As ownership of the corporation is diffused, shareholders' ability to monitor managerial decisions a. increases. b. decreases. c. remains constant. d. is eliminated.

b

At a recent stockholder's meeting for Ignate Inc., a group of stockholders expressed disagreement with the way that the managers were using free cash flow. Because they wanted to be able to control how the cash is invested, the stockholders lobbied that the free cash flow should be a. used to pursue cross-border acquisitions. b. distributed to them as dividends. c. invested in new research and development. d. used to pay down corporate debt.

b

Corporate governance primarily revolves around the relationship between which of the following two parties? a. Shareholders and the board of directors b. Shareholders and managers c. The board of directors and managers d. Owners and customers

b

How does the market for corporate control function as a governance mechanism? a. By ensuring ownership concentration b. By replacing ineffective top-level management teams c. By determining executive compensation d. By supervising director pay

b

In 2016, Wells Fargo faced a significant scandal related to unauthorized customer account openings. This incident demonstrated a misalignment of interests between the company's managers and its shareholders. In general, compared to managers, shareholders prefer a. safer strategies with greater diversification for the firm. b. riskier strategies with more focused diversification for the firm. c. safer strategies with more focused diversification for the firm. d. riskier strategies with greater diversification for the firm.

b

In which type of firms is there typically less separation between ownership and managerial control? a. Public corporations b. Family-owned firms c. Not-for-profit firms d. Outsider-led firms

b

LeederTech is facing a hostile takeover. Its focus as a defense strategy has been to ensure some continuity. It has decided to pursue a strategy that will prevent an acquirer from replacing the entire board of directors immediately, even though this tends to have very low success and a negative or negligible effect on shareholder wealth. What strategy did LeederTech select? a. Capital structure change b. Corporate charter amendment c. Greenmail d. Poison pill

b

Managers in the United States receive which level of compensation relative to managers in the rest of the world? a. Equivalent b. Higher c. Lower d. More variable

b

Marvel, known for its iconic superhero characters such as Spider-Man and Iron Man, was a publicly traded company prior to the acquisition by Disney. Marvel had been experiencing financial difficulties and struggled to fully capitalize on its intellectual property. However, the acquisition by Disney provided a means for governance and corporate control that helped revitalize Marvel's operations and unlock its potential. When does the market for corporate control serve as a means of governance? a. When the firm is overpriced in the market b. When internal controls have failed c. When the corporation has greatly exceeded performance expectations d. When the top management team's interests and the owners' interests are aligned

b

Ownership concentration is determined by both the number of a. large-block shareholders and the parties they represent. b. large-block shareholders and the total percentage of shares they own. c. outside directors and the parties they represent. d. outside directors and the total percentage of shares they own.

b

Simon Leagreet, the chairperson and CEO of L-EVA Industries, Inc., has long been the major power at L-EVA. A majority of the directors are concerned that, while Mr. Leagreet has been responsible for the firm's earning above-average returns, he has been displaying a tendency toward personal extravagance at the firm's expense. In order to limit Mr. Leagreet's power, the board of directors plans to a. elect an insider as the lead director. b. appoint another individual as chairperson of the board of directors. c. require Mr. Leagreet to personally certify the firm's financial reports. d. reduce the size of the stock option package provided to Mr. Leagreet.

b

The longer the focus of managerial incentive compensation, the greater the chance top-level managers will gain a. an increased earnings potential. b. increased risk. c. incentives. d. a potential tax burden.

b

What is a characteristic of corporate governance in China? a. Influence of sovereign wealth funds on governance mechanisms b. Two-tiered board system with a supervisory board and independent directors c. Increasing privatization and development of equity markets d. Dominance of private equity owners over state-owned enterprises

b

What is one reason for linking top-level managers' compensation to the firm's financial performance? a. To ensure long-term decision-making b. To simplify the evaluation of their decisions c. To prioritize short-term results over long-term goals d. To minimize the effects of changes in the external environment

b

Which of the following statements about corporate governance in China is false? a. The Chinese governance system may be tilting toward the Western model. b . Private firms seek to establish political ties with the government to increase market value and avoid potential conflict between the principals. c. The state still uses direct and/or indirect controls to influence the strategies employed by most firms. d . Firms with higher state ownership tend to have lower market value and more volatility in those values over time.

b

Which of the following statements about corporate governance in Germany is false? a. The Vorstand (management board) of a German corporation makes decisions about strategy and management. b . The Vorstand is elected by the firm's employees. c. Employees, union members, and shareholders appoint members to the Aufsichtsrat (the supervisory tier of the board). d . Large institutional investors such as pension funds and insurance companies are relatively insignificant owners of corporate stock.

b

All of the following are consequences of the Sarbanes-Oxley Act EXCEPT: a. a decrease in foreign firms listing on U.S. stock exchanges. b. internal auditing scrutiny has improved, and there is greater trust in financial reporting. c. an increased number of IPOs (initial public offerings). d. Section 404 creates excessive costs for firms.

c

Elon Musk's ownership stake in Tesla is substantial, which aligns his interests with those of other shareholders and creates a situation where the board of directors has a significant ownership stake in the company. One means that is considered to improve the effectiveness of outside directors is a. mandating that all outside directors be drawn from government or academia rather than industry. b. requiring that outside directors be former executives of the firm. c. requiring outside directors to own significant equity stakes in the firm. d. requiring that outside directors act objectively and have no ownership interest in the firm.

c

How has corporate governance in Japan been changing in recent years? a. Decreased reliance on banks for financing and monitoring b. Increased emphasis on market-based financial and governance structure c. Rise in the number of independent board members d. Shift from consensus-based decision-making to dictatorial CEOs

c

KorniCo. is considering possible strategies to defend against a hostile takeover. They have narrowed it down to four options. Because of pressure from shareholders, they need to adopt a strategy that is shown to have a positive effect on shareholder wealth. Based on that criterion, which of the following should they choose? a. Capital structure change b. Corporate charter amendment c. Litigation d. Greenmail

c

Several members of the board of directors of American Textile Products (ATP) have proposed creating the position of lead director. Which of the following circumstances would MOST likely have initiated this proposal? a. ATP has been the initiator of several hostile takeovers in the last two years. b . The board has been successful in reducing the percentage of CEO pay that is composed of stock options. c. The CEO/chairperson of the board has been suspected of opportunistic behavior. d . The firm is traded on the New York Stock Exchange and must change its corporate governance to comply with the NYSE's new rules.

c

The market for corporate control may not be as efficient as previously thought as recent findings suggest that those firms targeted for takeover by active corporate raiders are a. usually on the verge of bankruptcy. b. typically underperforming their industry. c. often performing above their industry averages. d. always outperforming their industry.

c

What historical trend led to the separation of ownership and control in most large corporations? a. Increasing competition among entrepreneurs b. Shifting control from professional managers to founders c. Managerial revolution and the rise of professional managers d. Dispersion of ownership among family members

c

What is a characteristic of corporate governance in Germany? a. Dominance of commercial banks in monitoring and control b. Extensive cross-shareholdings among firms c. Two-tiered board structure for firms with more than 2,000 employees d. Emphasis on maximizing shareholder wealth

c

What is one advantage of having a family member as the CEO of a family-owned firm? a. Better access to outside capital b. Improved governance mechanisms c. Higher performance in stable industries d. Increased dispersion of ownership

c

Agricultural Chemicals, Inc., was the target of a hostile takeover six months ago. The CEO and the top executives successfully fended off the takeover and are concentrating on strategies to improve the performance of the firm. Which of the following statements is MOST likely to be true? a. Hostile takeover attempts are so common that they do not reflect negatively on the firm's performance. They are more a function of general market conditions. b . The fact that a hostile takeover has occurred is proof that the firm was underperforming. c. Research shows that once a hostile takeover has been defeated, the firm is safe from other hostile takeover attempts for many years. d . The CEO and top executives should not consider their jobs secure.

d

All of the following are areas covered by the Dodd-Frank Wall Street Reform and Consumer Protection Act EXCEPT: a. consumer protection. b. CEO compensation. c. regulation of derivatives. d. retirement accounts.

d

All of the following are roles that the board of directors play in deterring unethical behaviors by top-level managers EXCEPT: a. setting boundaries for ethical behavior. b. communicating ethics-based expectations. c. holding top-level managers accountable for ethical behaviors. d. incentivizing ethical behavior with bonuses.

d

All of the following statements are true about the use of defense tactics by the target firm during a hostile takeover EXCEPT defense tactics a. are usually beneficial for the executives of the target firm. b. are opposed by institutional investors. c. vary in their effectiveness as a defense to takeovers. d. make the costs of a takeover lower.

d

Corporate governance is all of the following EXCEPT: a. a set of mechanisms used to determine and control the strategic direction and performance of organizations. b . a means to establish and maintain harmony between owners and top managers whose interests may conflict. c. a way to ensure that top managers' interests are aligned with the interests of stockholders. d . a method for resolving conflicts among corporate employees.

d

How can the presence of diverse backgrounds in not-for-profit directors affect a firm's corporate social responsibility (CSR)? a. It immediately improves CSR performance. b. It has no immediate effect on CSR performance. c. It negatively impacts CSR performance. d. It positively influences CSR performance after 3 years

d

In Japan, the principal source of the active monitoring of large companies comes from a. boards of directors. b. stock brokerage companies. c. the government. d. banks.

d

The CEO and chairman of the board of directors of Alta Corp. is dismayed by a lack of effort and insights the members provide during board meetings. The directors are all outsiders, are experienced, and run their own successful firms. The CEO/chair genuinely seeks their greater involvement. Which of the following would you recommend? a. Requiring that the directors own stock in the company b. Establishing a formal process to evaluate the board's performance c. Electing a lead director d. All of these are correct.

d

The governance mechanism MOST closely connected with deterring unethical behaviors by holding top management accountable for the corporate culture is a. ownership concentration. b. the market for corporate control. c. executive compensation systems. d. the board of directors.

d

The interests of multinational corporations' shareholders may be best served when there is a. a uniform compensation plan for all corporate executives—both U.S. and foreign. b. executive compensation that is primarily based on long-term performance. c. elevation of foreign executive compensation to U.S. levels. d. a variety of compensation plans for executives of foreign subsidiaries.

d

The ownership of major blocks of stock by institutional investors has resulted in all of the following EXCEPT: a. making CEOs more accountable for their performance. b. challenges to the decisions of boards. c. focusing attention on ineffective boards of directors. d. a direct effect on firm performance.

d

What are the primary reasons for the recent global emphasis on corporate governance? a. To maximize shareholder profits and CEO pay b. To prevent activist investors' influence c. To create a competitive advantage for individual firms d. To address failures in monitoring and controlling top-level managers' decisions

d

Why is corporate governance considered important in modern corporations? a. To maximize CEO pay b. To maintain harmony between owners and managers c. To establish ownership concentration d. To align top-level managers' interests with stakeholders' interests

d

Recent changes to Japan's corporate governance structure include which of the following? a. The role of banks in monitoring managerial behavior is less significant. b. Deregulation in the financial sector has increased the cost of mounting hostile takeovers. c. Increased regulation has spurred activity in the market for corporate control. d. The part banks play in controlling firm outcomes has become increasingly meaningful.

a

The board of directors of CyberScope, Inc., is designing a stock option plan for its CEO that will motivate the CEO to increase the market value of the firm. Consequently, the board is a. setting the option strike price substantially higher than the current stock price. b . ensuring that the strike price value of the options can be lowered if the organizational environment becomes more risky. c. having the stock option plan designed by insiders on the board of directors who are familiar with day-to-day operations of the firm. d . consulting accounting advisors to make sure that the plan transfers wealth to the CEO without immediately appearing on the balance sheet of CyberScope.

a

What is an important role of outsiders in family-owned firms as they grow? a. Protecting minority owners' rights b. Maintaining family control c. Enhancing family members' skills d. Facilitating family decisionmaking

a

What is corporate governance primarily concerned with? a. Ensuring effective decision-making b. Maximizing shareholder profits c. Establishing harmony between stakeholders d. Monitoring external governance mechanisms

a

What is the primary reason for separating ownership (risk bearing) and managerial control (decision making)? a. To maximize returns for the firm's owners b. To minimize the influence of minority owners c. To concentrate ownership power in the hands of managers d. To ensure complete alignment between owners and managers

a

Which internal corporate governance mechanism is associated with higher levels of corporate social responsibility (CSR)? a. Board gender diversity b. Independent audit committee c. Board independence d. Presence of not-for-profit directors

a

Why do shareholders maintain a diversified portfolio of investments? a. To reduce their overall risk b. To gain control over multiple firms c. To maximize managerial control d. To concentrate their ownership power

a

Why is it important for corporate governance mechanisms to encourage and support ethical and socially responsible behavior? a. To satisfy stakeholders' needs b. To maximize shareholder wealth c. To maintain ownership concentration d. To minimize executive compensation

a

Xion Industries is a private firm, but it experiences both direct and indirect control from the government to influence the strategies it uses. In addition, it finds it advantageous to maintain political ties with the government in order to gain access to resources. Of the United States, Japan, China, and Germany, it is most likely that Xion is based in China. a. True b. False

a

GE expanded its operations into sectors such as healthcare, renewable energy, aviation, and finance. By diversifying its product offerings, GE aimed to capitalize on new growth opportunities and reduce reliance on any single market or industry. This strategy enabled the company to mitigate risks associated with economic downturns or fluctuations in specific sectors. Product diversification provides which two benefits to managers that do not accrue to shareholders? a. Greater experience in a wider range of industries and lessening of managerial employment risk b. The opportunity for higher compensation through firm growth and a reduction inmanagerial employment risk c. The manager's supervisory needs are lowered and the manager is allowed greater time to oversee a wider range of activities

b

International Food Services (IFS) has a contract with the Marines to supply meals for its troops during their foreign assignments. As a means of increasing profits, IFS has used substandard ingredients in these meals and has consistently lied about this practice during quality investigations by the Marines. Which of the following is ultimately responsible for the corporate climate that resulted in this wrongdoing? a. Director of food service for IFS b. Board of directors of IFS c. Employees directly involved in the wrongdoing d. Head of contract services for the Marines

b

James Abercrombie has a thriving consulting firm specializing in training boards of directors in decision-making skills. Mr. Abercrombie has had striking success in reducing conflict and hostility among directors and allowing boards to develop more cohesiveness. Mr. Abercrombie is considering expanding his consulting practice overseas. Which of the following statements is most likely to be true? a.Mr. Abercrombie will have a large market in Japan because the culture highly values consensus decision making. b . Japanese firms will have little interest in Mr. Abercrombie's specialty because these skills are already practiced at a high level. c. German firms will not be interested in Mr. Abercrombie's services because the German system of decision making is based on authority and few conflicts emerge. d . Mr. Abercrombie should find significant need for his services in companies in transitional economies.

b

Pat and Terry are top-level managers at Descitt Corp. When LVG Enterprises made an offer to purchase Descitt, Pat and Terry felt that their jobs were in jeopardy. Now that the Descitt board has rejected the offer, Pat and Terry view this as an expression of faith in their leadership and can be confident that their positions at the firm are secure. a. True b. False

b

Ray and Gina own shares of stock in a number of different companies. None of their holdings are very large. Because they make their own investment decisions, they are not as dependent on the board of directors to represent their interests as the large-block shareholders are. a. True b. False

b

The CEO of Skyco, a publicly traded company that has been earning below-average returns, has been publicly criticized by shareholders for persuading the board of directors to give her interest-free loans, for having the company purchase and furnish a lavish apartment in Paris for her personal use on her twice-yearly trips there, and for excessive stock options. The CEO's behavior may be an indication of a. reasonably compensating a CEO. b. a weak board of directors. c. the laxity of institutional investors. d. the difference in risk propensity between owners and managers.

b

The board of directors of CamCell, Inc., wishes to design a CEO compensation plan that will align the personal interests of the CEO with the interests of the shareholders in long-term firm performance. The board wishes the CEO to take more short-term risks in order to achieve potentially higher long-term returns. Consequently, the board has decided on an incentive plan that involves payout based on the firm's performance five years in the future. CamCell is presently searching for a new CEO. Which of the following statements is true? a. This plan will be very attractive in luring candidates for the CEO position. b . CamCell may have to over-compensate its CEO in order to offset the personal risk a CEO would undertake under this plan. c. Institutional investors disapprove of long-term executive incentive plans, and they may sell their blocks of stock in CamCell.

b

What is the relationship between board independence and corporate misconduct, according to research? a. Board independence is generally associated with higher levels of corporate misconduct. b . Board independence is generally associated with lower levels of corporate misconduct. c. The relationship between board independence and corporate misconduct varies depending on how independence is defined. d . Board independence has no significant impact on corporate misconduct.

b

Why do long-term incentive plans, such as stock options and stock awards, play a significant role in top-level managers' compensation? a. To ensure uniformity in compensation plans across subsidiaries b. To align managerial compensation with the wealth of common shareholders c. To reduce agency problems caused by poor corporate governance d. To address the disparity in managerial pay between regions of the world

b

Why might a firm be limited if owners simultaneously manage it and make strategic decisions? a. Owners lack the necessary decision-making skills b. Managers are not specialized in risk-bearing c. The firm's governance mechanisms are ineffective d. Strategic decisions are unrelated to risk considerations

b

Why would the top-level managers at Nutzandboltz, a hardware company, decide to invest free cash flow in product lines such as clothing or toys? a. To defend against a hostile takeover b. To increase the level of diversification c. To enhance executive compensation d. To minimize managerial risk

b

German executives are not dedicated to the maximization of shareholder value to the degree that is the case for executives in the United Kingdom and the United States largely because a. the roles of CEO and chairperson of the board of directors are usually combined. b . large institutional investors control large blocks of stock. c. private shareholders and large institutional investors rarely have large ownership positions in firms. d . of the focus on stewardship-management in German firms rather than the financial performance focus of U.S. firms.

c

What is one potential consequence of poor ethical behavior by a firm's top-level managers? a. Increased shareholder wealth b. Enhanced stakeholder cooperation c. Withdrawal of support from dissatisfied stakeholders d. Higher levels of corporate misconduct

c

What type of firms tend to make the best strategic decisions? a. Family-owned firms with complete control b. Outsider-led firms with minimal family influence c. Family-owned firms with significant family equity d. Public corporations with dispersed ownership

c

Which of the following is an example of an external governance mechanism? a. Ownership concentration b. Executive compensation c. Regulators d. Board of directors

c

Why do family-controlled firms often need to seek outside capital? a. To maximize family wealth b. To increase managerial control c. To facilitate growth and expansion d. To reduce the family's ownership stake

c

A Japanese keiretsu is a a. management structure related to total quality management systems. b. company union, which is a type of governance system. c. bank owing the largest shares of stock in the firm. d. system of cross-shareholding among firms.

d

A hostile takeover defense wherein the target firm makes its stock less attractive to a potential acquirer is called a. greenmail. b. a standstill agreement. c. crossing the palm with silver. d. a poison pill.

d

Apple's CEO, Tim Cook, receives a significant portion of his compensation in the form of stock awards tied to the company's performance. These stock awards are subject to specific performance criteria, such as the company's financial targets and stock price performance. Executive compensation is a governance mechanism that seeks to align managers' and owners' interests through all of the following EXCEPT: a. bonuses. b. long-term incentives such as stock options. c. salary. d. penalties for inadequate firm performance.

d

Which of the following is NOT an internal governance mechanism? a. Board of directors b. Ownership concentration c. Executive compensation d. Market for corporate control

d

Which of the following is an example of an internal governance mechanism? a. Regulators b. Creditors c. Market for corporate control d. Board of directors

d

Which of the following reasons would NOT explain the difficulty of determining appropriate executive compensation? a. The decisions made by top-level managers are typically complex and nonroutine. b . An executive's decisions often affect firm performance only over the long run. c. A number of factors intervene between top-level management decisions and firm performance (e.g., unpredictable economic, social, or legal changes). d . The compensation committee may not have comprehensive firm performance data.

d