Chapter 10

Agricultural Chemicals, Inc., was the target of a hostile takeover 6 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 is most likely to be TRUE?

The CEO and top executives should not consider their jobs secure.

Several members of the Board of Directors of American Textile Products (ATP) have proposed creating the position of lead director. What circumstances would most likely have initiated this proposal?

The CEO/chairperson of the Board has been suspected of opportunistic behavior.

Which of the following is FALSE about corporate governance in China?

The state still uses direct and/or indirect controls to influence the strategies employed by most firms.

When the option strike prices in an executive stock option-based compensation plan have been lowered it is usually a defense to a hostile takeover.

false

Institutional owners are:

financial institutions such as mutual funds and pension funds that control large-block shareholder positions

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:

often performing above their industry averages.

Broadly, the Dodd-Frank Wall Street Reform and Consumer Protection Act seeks to:

(A) align financial institutions' actions with society's interests.

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?

(B) CamCell may have to over-compensate its CEO in order to offset the personal risk a CEO would undertake under this plan

The CEO and Chairman of the Board of Directors Alta Corp. is dismayed by a lack of effort and insights his directors provide during Board meetings. The directors are all outsiders, experienced, and run their own successful firms. The CEO/chair genuinely seeks their greater involvement. What would you recommend?

1.Requiring that the directors own stock in the company. 2. Establishing a formal process to evaluate the Board's performance. 3. Electing a lead director.

Usually, large-block shareholders are considered to be those shareholders with at least ____ percent of the firm's stock.

5

An agency relationship exists when one party delegates:

A) decision-making responsibility to a second party.

Given the demands for greater accountability and improved performance, which of the following is NOT a voluntary change many Boards of Directors have initiated?

Compensating directors with stock options rather than with fixed remuneration

Which of the following is TRUE of trends in Japan's corporate governance structure?

Compensation of CEOs in both private and public companies is being tied more closely to observable performance goals.

Which of the following is a FALSE statement about corporate governance?

Corporate governance is best achieved with a Board of Directors with strong ties to management.

Amos Ball, Inc., is a printing company in Iowa that has been family owned and managed for three generations. Which of the following statements is most likely to be TRUE?

If research findings are valid, Amos Ball, Inc., will perform better if a family member is CEO than if an outsider is CEO.

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?

Japanese firms will have little interest in Mr. Abercrombie's specialty because these skills are already practiced at a high level.

Which of the following statements is about corporate governance in Germany is FALSE?

The Vorstand is elected by the firm's employees

Which of the following reasons would NOT explain the difficulty of determining appropriate executive compensation?

The compensation committee may not have comprehensive firm performance data.

The ownership of major blocks of stock by institutional investors have resulted in all of the following EXCEPT:

a direct effect on a firms performance

Ambrose Bierce, the CEO of DictionAry, has been paid a lump sum amounting to 3 years' salary because DictionAry has been bought in a hostile takeover by its main competitor. Ambrose received:

a golden parachute

A hostile takeover defense wherein the target firm makes its stock less attractive to a potential acquirer is called:

a poison pill

Japanese keiretsu are:

a system of cross-shareholding among firms.

The interests of multinational corporations' shareholders may be best served when there is:

a variety of compensation plans for executives of foreign subsidiaries.

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 indication of:

a weak board of directors

The three internal corporate governance mechanisms are ownership concentration, Board of Directors, and the market for corporate control.

false

The separation between firm ownership and management creates a(n) ____ relationship.

agency

All of the following are consequences of the Sarbanes-Oxley Act EXCEPT:

an increased number of IPOs (initial public offerings) are expected.

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:

appoint another individual as chairperson of the Board of Directors.

The way that U.S. corporate Boards of Directors are presently structured, they have little influence on the unethical behavior of top management.

false

Historically, ____ have been at the center of German corporate governance structure.

banks

In Japan, the principal source of the active monitoring of large companies comes from:

banks

____ is an important influence in Japanese corporate governance structures.

concensus

Well-designed stock option-based compensation plans should have the option strike prices substantially lower than the current stock prices

false

As ownership of the corporation is diffused, shareholders' ability to monitor managerial decisions:

decreases

All of the following statements are TRUE about the use of defense tactics by the target firm during a hostile takeover EXCEPT:

defense tactics make the costs of a takeover lower

. Foreign investors are playing a relatively minor role in the governance of firms in many countries.

false

A Board composed primarily of outside directors will have better insights as to the firms intended strategic initiatives, the reasons for the initiatives, and the outcomes expected from them than will inside directors.

false

A top-level manager's reputation is a dependable predictor of his/her future behavior.

false

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.

false

As a rule, shareholders prefer more product diversification than do managers because shareholders wish to reduce risk and maximize wealth

false

Because top management decisions are usually complex and nonroutine, determining the quality of executive performance is beyond the power of Boards of Directors.

false

Both top executives and owners of the firm wish to diversify the firm to reduce risk.

false

DDD MetalWorks plans to go public in the next 2 years. In order to be listed on the New York Stock Exchange, the firm will need to restructure its present Board of Directors, which is made up of a majority outside independent directors to a Board of Directors that is dominated by insiders and related outsiders.

false

Executive compensation is considered an external corporate governance mechanism because it determined in part by market forces.

false

For top-level managers, Board acceptance of the acquiring firm's offer usually leads to job loss because the acquiring firm wants new leadership. If the offer is refused, however, the job loss risk is minimal

false

Generally, the Board of Directors can be classified as insiders, unrelated insiders, outsiders, and unrelated outsiders

false

In general, when governance mechanisms are strong, managers have free rein in their decisions.

false

In the United States, the members of the Board of Directors are a firm's key stakeholders and a company's legal owners.

false

Individual shareholders with small ownership percentages are less dependent on the Board of Directors to represent their interests than are large block shareholders.

false

Institutional owners, despite their size, are usually unable to discipline ineffective top managers and cannot influence a firm's choice of strategies and overall strategic direction.

false

Managers in firms that have been subjects of hostile takeovers usually find that their value to the new firm has been enhanced because of their in-depth insider knowledge.

false

More intense application of governance mechanisms such as mandated by Sarbanes Oxley and Dodd-Frank may cause firms to take on fewer risky projects and thus increase potential shareholder wealth.

false

Research evidence suggests that ownership concentration is associated with lower levels of firm diversification, which conforms to the interests of stockholders.

false

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions related to consumer protection, systemic risk oversight, capital requirements for banks, but not for executive compensation.

false

The increased use of the market for corporate control has decreased the sophistication and variety of managerial defense tactics that are used in takeovers.

false

The separation of ownership and control is the most effective means used by firms to prevent managerial opportunism.

false

Corporate governance is important to nations because:

firms seek to invest in nations with national governance standards that are acceptable to them.

Managers may decide to invest ____ in products that are not associated with the firm's current lines of business to increase the firm's level of diversification and decrease their employment risk.

free cash flows

The repurchase at a premium of the target firm's shares that were acquired by the aggressor firm in a hostile takeover in exchange for an agreement that the aggressor will no longer target the company for takeover is called:

greenmail

The New York Stock Exchange requires that the audit committee be:

headed by outside directors

A virtually exclusive reliance on financial controls may occur when outsider-dominated Boards exist. This may lead to all of the following EXCEPT

high executive turnover

Managers in the United States receive ____ compensation than managers in the rest of the world

higher

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:

increase diversification of sierra infusion

Generally, a Board member who is a source of information about a firm's day-to-day activities is classified as a(n) ____ director.

inside

The market for corporate control serves as a means of governance when:

internal controls have failed

The primary role of the Board of Directors is to monitor and control top-level executives to protect owners' interests.

true

Complete the following: In small firms, managers often own a ____ percentage of the firm, which means there is ____ separation between ownership and managerial control.

large;small

Managerial employment risk is the:

managers' risk of job loss, loss of compensation, and/or loss of reputation.

In the United States, the fundamental goal of business is to:

maximize shareholder wealth

Research suggests that the activism of institutional investors such as TIAA-CREF and CalPERS:

may not have a direct effect on firm performance.

The separation of the positions of CEO and chairperson of the Board of Directors reduces the power of the CEO over firm governance practices.

true

Agency costs reflect all of the following EXCEPT ____ costs.

opportunity

Research suggests that Boards of Directors perform better if:

outside directors own significant equity in the organization.

Executive compensation is a governance mechanism that seeks to align managers' and owners' interests through all of the following EXCEPT:

penalties for inadequate firm performance.

If the market for corporate control were efficient as a governance device, then only ____ would be targets for takeovers.

poorly performing firms

German executives are not dedicated to the maximization of shareholder value to the degree that is the case for executives in the UK and United States largely because:

private shareholders and large institutional investors rarely have large ownership positions in firms.

A major conflict of interest between top executives and owners, is that top executives wish to diversify the firm in order to ____, whereas owners wish to diversify the firm to ____.

reduce their employment risk; increase the company's value

One means that is considered to improve the effectiveness of outside directors is:

requiring outside directors to own significant equity stakes in the firm.

Corporate governance is all of the following EXCEPT:

resolve conflicts among corporate employees

All of the following are areas covered by the Dodd-Frank Wall Street Reform and Consumer Protection Act EXCEPT:

retirement accounts.

In contrast to managers' desires, shareholders usually prefer that free cash flows be:

returned to them as dividends

Compared to managers, shareholders prefer:

riskier strategies with more focused diversification for the firm

The longer the focus of managerial incentive compensation, the greater the ____ top-level managers.

risks borne by

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:

setting the option strike price substantially higher than the current stock price.

In the United States, a firm's key stakeholder(s) is(are) the:

shareholders

Corporate governance revolves around the relationship between which two parties?

shareholders and managers

Monitoring by shareholders is usually accomplished through:

the board of directors

The governance mechanism most closely connected with deterring unethical behaviors by holding top management accountable for the corporate culture is:

the board of directors

International Food Services (IFS) has a contract with the Marines to supply meals for its troops in Afghanistan and other 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. Who is ultimately responsible for the corporate climate that resulted in this wrongdoing?

the board of directors of IFS

Which of the following is NOT an internal governance mechanism?

the market for corporate control

Ownership concentration is determined by both:

the number of stockholders and total percentage of shares they own

Product diversification provides two benefits to managers that do not accrue to shareholders: ____ and ____.

the opportunity for higher compensation through firm growth; a reduction in managerial employment risk

Boards of Directors are now becoming more involved in:

the strategic decision making process

A powerful CEO would oppose the appointment of a lead director on the Board of Directors.

true

Agency costs include incentives for executives, monitoring, enforcement costs, and any individual financial losses incurred by principals.

true

An advantage of severance packages is that they may encourage top-level managers to accept takeover bids that are attractive to shareholders.

true

An agency relationship exists when one or more persons (the principal or principals) hire another person or persons (the agent or agents) as decision-making specialists to perform a service.

true

As globalization grows, adequate corporate governance is becoming an important requirement for doing business with a foreign firms and in foreign countries.

true

Attitudes toward corporate governance in Japan are affected by the concepts of obligation, family, and consensus.

true

Awareness by top managers of the existence of external investors in the form of individuals (e.g., Carl Icahn) and groups (e.g., hedge funds) often positively influences them to align their interests with shareholders.

true

Because of recent ineffective performance, Boards of Directors are experiencing increasing pressure from shareholders, lawmakers, and regulators to be more effective in preventing managers from acting in their own interest.

true

Boards with many members from the firm's top management team tend to have weak monitoring and control systems for managerial decisions.

true

Corporate governance involves oversight in areas where owners, managers, and members of Boards of Directors may have conflicts of interest.

true

Corporate governance is a means to establish harmony between parties (the firm's owners and its top-level managers) whose interests may conflict.

true

Corporate governance is the set of mechanisms used to manage the relationship among stakeholders and to determine and control the strategic direction and performance of an organization.

true

Corporate governance mechanisms are designed to ensure that top managers make strategic decisions that best serve the interests of the entire group of stakeholders.

true

Critics advocate reforms to ensure that independent outside directors represent a significant majority of the total membership of the Board. But outsider-dominated Boards may emphasize the use of financial as opposed to strategic controls. The risk of reliance on financial controls is that they may encourage managers to make decisions to maximize their interests and reduce their employment risk.

true

Ethically responsible companies design and use governance mechanisms that will at least minimally satisfy stakeholders' interests.

true

Executive compensation is a governance mechanism that seeks to align the interests of managers and owners through salaries, bonuses, and long-term incentive compensation such as stock awards and options.

true

Failures of corporate internal controls and inadequate internal control systems allowed unethical executives at such companies as Enron and WorldCom to act in their own self-interest.

true

Hedge funds, as part of the market for corporate control, identifies a firm that is underperforming and then invests in it with the goal of improving that firm's performance.

true

If a stakeholder is dissatisfied with a firm, it will withdraw its support and give it to another firm.

true

In a large number of family owned firms, ownership and managerial control are not separated.

true

In modern corporations-especially those in the United States and United Kingdom-a primary objective of corporate governance is to ensure that the interests of top-level managers are aligned with the interests of shareholders.

true

In recent years, the number of individuals who are large-block shareholders have declined and been replaced by institutional owners such as mutual funds and pension funds.

true

In the United States, the primary goal of a firm is to maximize profits to provide a financial gain to shareholders.

true

In the modern U.S. corporation, the ownership and managerial control of the firm are separated.

true

Large German firms must include employees, union members, and shareholders in the formal governance structure.

true

Large-block shareholders typically own at least 5 percent of a corporation's issued shares.

true

Long-term incentives facilitate a Board of Directors' pay-related decisions designed to avoid potential agency problems by linking managerial compensation to the wealth of common shareholders.

true

One of the changes to enhance the effectiveness of the Board of Directors is the creation of a "lead director" role that has strong powers with regard to the Board agenda and oversight of nonmanagement Board member activities.

true

Ownership of many modern corporations is now concentrated in the hands of institutional investors rather than individual stockholders.

true

Recent emphasis on corporate governance stems mainly from the failure of corporate governance mechanisms to adequately monitor and control top-level managers' decisions.

true

Research suggests that institutional activism may not have a strong direct effect on firm performance but may indirectly influence the targeted firm's strategic decisions, including those concerned with international diversification and innovation.

true

Scandals at Enron, WorldCom, and HealthSouth illustrate the negative effects of poor ethical behavior on a firm's efforts to satisfy stakeholders.

true

Stock option repricing where the strike price value of the option has been lowered from its original position sometimes happens when firm performance is poor.

true

The Dodd-Frank Wall Street Reform and Consumer Protection Act is the most sweeping set of financial and regulatory reforms in the United States since the Great Depression.

true

The market for corporate control is composed of individuals and firms that buy ownership positions or take over potentially undervalued corporations and make changes to those corporations, including the replacement of the top managers.

true

The market for corporate control may not be as efficient as a governance device as theory suggests because takeover targets are not always low performers with weak governance.

true

The most effective defense against a hostile takeover is the poison pill strategy

true

The performance of individual Board members and entire Boards are being evaluated more formally and with greater intensity than in years past.

true

The top management of RavenCrest, Inc. have significant stock options in RavenCrest. They are therefore more likely to gain in making an agreement to be acquired, especially if they have golden parachutes

true

The use of executive compensation as a governance mechanism is more challenging to firms implementing international strategies than those strictly operating domestically.

true

While the implementation of the Sarbanes-Oxley Act in 2002 has been controversial to some, most believe that it has had positive results in terms of protecting stakeholders and certain stockholder interests.

true