Chapter 12

Some argue that the global financial crisis of 2008 was worsened because large fortune 500 companies did not practice effective

Corporate governance.

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.

Tommy is the CEO of a private start-up firm that is valued at just over $1.2 billion dollars. His firm can be classified as being a

unicorn

What helps notions such as fairness, honesty, and reciprocity to be codified into law?

the notions are universal norms

Ethics is

not synonymous with law

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.

sample2

sample2

Which of the following is true of business ethics?

Certain notions such as fairness, honesty, and reciprocity are universal norms.

A detergent manufacturer decides to clean up the waterways it uses even though no federal, state, or local laws require the firm to do this. The firm's managers believe that the cleanup will improve the company's image and benefit the environment. This scenario is an example of shareholder capitalism.

False

Jim is the CEO of a financial services firm. What action should Jim take to be sure the firm avoids moral hazards?

Jim should define undue risk-taking, institute strict auditing of loans, and make it clear that the company will fire employee who lend recklessly.

Which of the following characteristics of a public stock company deals with principals and agents?

separation of legal ownership and management

What are poison pills

They are defensive provisions that kick in should a buyer reach a certain level of share ownership.

The name for an agreed-upon code of conduct in business, based on societal norms, is

business ethics

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

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 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.

According to Michael Porter, which of the following is a problem with many publicly traded companies?

They have defined value creation too narrowly in terms of

Three months ago, Colin became a board member at Hooli, a publicly traded company. Two weeks ago, the board members discovered that Hooli's CEO is facing a lawsuit from a family member who accuses the CEO of theft. Based on what you have read, to what ethical standard should Colin and the other board members hold the CEO?

They must hold her to the highest ethical standards because the leaders of publicly traded companies must withstand intense public scrutiny.

Maritza is trying to understand the relationship between what is legal and what is ethical. Tiffany explains that both of these terms are often synonymous in business. Your response is

Tiffany is incorrect; a manager's actions can be legal but ethically questionable.

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

Corporate codes of conduct go beyond what the law requires, imposing higher standards of honesty and fairness

True

Gary is a senior manager at a large, publicly traded corporation. He has access to insider information about the company profits, losses, mergers, and acquisitions. It is legally and ethically acceptable for him to have this information as long as he does not use it buy or sell stocks and does not tell others to buy or sell stocks.

True

If a privately held company has a history of legal and ethical problems, those problems can prevent a successful initial public offering (IPO) from taking place.

True

Ruth owns and runs her own firm. She also serves on the boards of several companies. Although she does not work for these companies, she attends board meetings, analyzes information, and tries to act in the best interests of their shareholders. Ruth is an example of an outside director.

True

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.

Paul is a manager at Macmillan Toys Inc. and is friends with the company's CEO. This privilege gives Paul the information that Macmillan Toys is in the midst of talks to take over a leading rival. Paul buys stocks of Macmillan Toys with the expectation that its stocks will appreciate. But the deal falls through, and the stocks of Macmillan Toys depreciate in the following months. Are Paul's actions unethical. Why or why not?

Yes. It is unethical to trade stocks based on insider information, irrespective of the final outcome

Laura owns and runs Cyberdyne Systems Corp., a private start-up company with a current value of $1.3 billion. Cyberdyne Systems Corp.is interested in going public to fund future growth. Which action should Laura take before Cyberdyne Systems Corp.'s initial public offering?

She should investigate Cyberdyne Systems Corp.'s existing or potential problems with ethics or the law, if such problems exist.

________ is the term that describes the difficulty of the principal to ascertain whether the agent has really put forth a best effort

Moral hazard

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.

Bailey Building and Loan Association, a publicly traded company, has ten members on its board. Of the ten members, six members are employees of the company— including 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 Bailey Building and Loan Associatin's board independence?

7

Which of the following descriptions best exemplifies adverse selection?

A manager cannot ascertain the contributions of individual team members in team production

Axe Capital is a public stock company. Which of the following best exemplifies the legal personality of the company?

Axel, the company's founder, died a few years ago, yet the company is doing well

James is a firm believer in Milton Friedman's view of a firm's social obligations. With which of the following statements is Arnold most likely to agree?

Businesses can use their resources to create profit and as long as they do so within the rules of the game.

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 sold its holdings in Goldman Sachs' stocks prior to the announcement of missed earnings estimates.

Alexi was a manager at Inquiry Inc. Instead of working full-time on Inquiry's projects, she used Inquiry's tools, employees, computers, and other resources to work on a research project that she hopes might help her start her own firm. This is an example of adverse selection.

False

Corporate governance needs to address the issue of adverse selection, which describes the difficult for the principal to know whether the agent has really put forth his/hers best efforts.

False

Executive compensation is an important element of corporate governance. Research has found that the rate of executive pay to average employee pay has been relatively stable over the last couple of decadess

False

It can be difficult for shareholders of publicly traded companies to determine how much money those companies are making or losing because these companies use different accounting firms, and each accounting firm follows different rules.

False

It is up to shareholders to make certain that the financial statements that their firms release are correct and not misleading.

False

One of the most challenging aspects of principal— agent problems is that firms have almost no defenses against them.

False

Research indicates that most corporate ethics problems are caused by a few "bad apples" rather than an unethical culture.

False

Globex Inc. has a board of directors that consists of seven members. Which of the following is most likely an accurate statement about Globex's board of directors?

Globe'x board of directors has a minority number of inside directors and it evaluates the firm's strategic initiatives

Greg is the president of a technology firm that has recently gone public. What action, if any, should Andrew take to build the confidence of his new shareholders?

He should find out whether the majority of his shareholders want long-term steady growth or short-term spikes in the stock price.

Kate 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?

________ are the board members who are part of the 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

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

Aperture Science is a publicly traded manufacturer of home electronics. Based on what you have read, which of these actions would be wisest for Aperture Science's board of possible directors to take to be sure that the company's new CEO is a motivated as possible?

Link the CEO's pay to her performance but avoid high-powered incentives that may cause reckless behavior.

Sean was recently hired at an up-and-coming firm that has a history of ethics violations. Which action is best for him to take if he wants to determine whether the firm is now acting ethically?

Observe executives at the company, and see whether they model ethical behavior and demand it of others.

Carla recently became a board member of a firm that has a history of reckless actions by senior employees. Which task would be appropriate for Carla to undertake to help safeguard the company's financial health?

Request and review a copy of the firm's risk assessment plan, if such a plan exists

Micaela is the ethics officer at Oceanic Airlines, a publicly traded company. She wants to make sure that on-the-job consumption at Oceanic Airlines stays within legal and ethical bounds. Which action should she and the Oceanic Airlines board of directors take?

Set strict limits on what executives can spend on office redecoration or work-related celebrations.

Stark Industries 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 Stark Industries are responsible to the company only to the capital they have invested.

General Electric's board has only one inside director, John Flannery, 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?

The CEO possesses invaluable inside information

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.

A bank, Seaside, 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 best supports the fact that Dieselgate was unethical when entering the U.S. market?

The engineers installed "defeat devices" that altered the concentration of harmful emissions when EPA regulators tested the vehicles.

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 int he principals best interest

Which of the following is a common result of a hostile takeover of a company?

The new owner sells the company in pieces.

Which of the following scenarios best exemplifies a leveraged buyout of a microchip manufacturer, Sirius Cybernetics Corp.?

The owner of another company buys all the outstanding shares of Sirius Cybernetics Corp.in order to take it private.

To help increase and maintain ethical values for future managers, a group of Harvard Business School students developed

a voluntary MBA oath that explicitly recognizes the role of business in society and its responsibilities beyond shareholders

At Gregarious Simulation Systems, a cross-functional team is formed to work on a project for a new client. The team consists of David and four other members. At most of the team's presentations to senior management, David takes the lead and discusses project specifics with the management, while others chip in with additional information. At the completion of the project, David is recommended for promotion, while the other team members receive little recognition for their hard work. The reality is that David did very little actual work but spent some time compiling the project report based on different documents submitted by the others. This scenario at Gregarious Simulation Systems is a typical consequence of

adverse selection

Domenick 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 Domenick based on his stated credentials without verifying them. Two days into the job, Domenick's team lead realizes that Domenick does not know much of what he claimed to know during the interview. This scenario best exemplifies.

adverse selection

Janet hires Vanessa to perform a critical task in her organization. However, Vanessa has misrepresented her knowledge, skills and abilities and Janet has no way of knowing whether Vanessa can indeed perform well. This is an example of

adverse selection

onathan is interested in building the centerpiece of his firm's corporate governance, and so hires a ________ that is made up of individuals from both inside and outside the firm.

board of directors

Tom and James are customer care employees at Omni Consumer Products. In between calls, Tom and James spend time on Facebook and YouTube. The relaxed guidelines at Omni Consumer Products 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

Vanessa accepts a job as vice president for human resources at a paper manufacturing start-up. She discovers that the start-up believes that teamwork is so important that it plans to award all raises and bonuses by splitting them equally within a team rather than presenting them to individual employees. What action should Vanessa take regarding this plan?

cancel the plan because under it, opportunistic employees will do little or no work.

According to the agency theory,

conflicts that arise in corporations should be addressed in the legal realm.

Because of poor management, the stock price of Rearden Steel Inc. falls and many investors sell their shares. Soon Rearden Steel becomes the target of a hostile takeover, during which Dildred buys enough shares to exert control over the firm. In this scenario, Dildred performs the role of a(n)

corporate raider

One way to foster ethical behavior in employees is to

create a control system that encourages desired values.

Jordan is president of a medium-sized bank. What can he do to lessen the chance of employees or board members taking part in insider trading?

create a strict code of ethics and explain that inside traders will be fired

Frank is a newly elected board member of XYZ Inc., a publicly traded stock. As a newly elected board member, Frank has a(n) ________, which is a legal duty to act solely in another party's interests.

fiduciary responsibility

PolyCon Inc. is a public stock company that provides natural gas for businesses. Although this company generates a large profit, management's focus on reducing costs caused the maintenance budget to be trimmed. Its pipelines have at times leaked, which created significant environmental problems. As a result, the company's value creation has suffered. This scenario supports Michael Porter's warning the public companies.

have defined value creation too narrowly in terms of financial performance, thereby contributing to black swan events.

According to the perspective of shareholder capitalism, shareholders in public stock companies

have the most legitimate claim on profits

Stephen is a mid-level manager for a high-tech start- up. He's just been asked by his boss to perform an activity that may be unethical. To improve his ethical decision making, Stephen should

imagine whether he would feel comfortableexplaining and defending the decision in public.

The board of directors of a public stock company consists of

individuals who formally represents the firm's shareholders and oversee the work of executives

Martha received a tip from a close friend who is an executive manager of a publicly traded company called TelAmeriCorp Inc. The manager received some inside information about how to trade TelAmeriCorp stock to get a huge profit. He shared this information with Martha. This scenario is an example of

information asymmetry

Adverse selection in a public stock company occurs when

information asymmetry increases the likelihood of selecting inferior alternatives

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

Jerry is a senior manager for the Paper Street Soap Company. Because of his experience, he has been appointed to the board of Clean Inc., even though he doesn't work for this firm. He also serves on the boards of several other companies. Jerry is a(n)________ for Paper Street Soap company and a(n) ___ for Clean Inc.

inside director; outside director

What do we call 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

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

Larry is a board member at Entertainment 720Inc. He is also a senior executive of the firm. The board is chaired by Denise Carrows, the CEO of Umbrella Corp. According to this scenario, Larry

is an inside directors of Entertainment 720

Tom is a loan officer that persuades Jerry to sign up for an exotic mortgage that turns out to be very expensive for him and probably not the best financial choice. This is an example of an action that

is legal but ethically questionable.

William founded Iron Bank of Braavos in 1993. Ten years later, the company went public. Despite William'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

Ghada is the CEO of Black Mesa Inc., a publicly traded company. The shareholders want Ghada on the board of directors despite her recent appointment as the CEO. This decision of the shareholders is most likely because Ghada is

likely to provide the board with valuable inside information

Josie wants to invest in the stock market but is afraid of losing more money than what she invests. Josie need not worry because of

limited liability for investors.

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 principal-agent problem.

moral hazard

Gordon's role in providing inside information to Pearson Specter Litt for the benefit of Pearson Specter Litt's stockholders and himself is an example of

moral hazard

Shareholders of public companies need to appoint a board of directors to represent their interests because

of the separation of ownership and control shareholders.

Jack is a board member of firm A but is not an employee of firm A; Jack is a senior executive from firm B. Jack can best be described as a(n)

outside director

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

Amanda, the CEO of Weyland YutaniInc., reports to the board of directors appointed by the shareholders of Weyland Yutani. Based on shareholder suggestions, the board ties Amanda's compensation to the performance of Weyland Yutani. Due to this pressure, Amanda begins devoting extra time to projects and undertakes other activities to ensure that she has job security and that she receives adequate compensation. The reasons why the board ties Amanda's compensation to firm performance is to overcome.

principal-agent problem

Stratton Oakmont Inc. is a publicly traded company. The stockholders of this company delegate the authority to make decisions for the company to a CEO named Terry. The stockholders expect Terry to make decisions that will benefit the company. However, Terry begins to find ways to scenario reflect maximize this total compensation, which hinders Stratton Oakmont Inc.'s performance. This scenario reflects

principal-agent problems

Mary owns Kind Corporation and wants to maintain a dual focus on creating shareholder value while at the same time increasing value for society as a whole. Mary is following the

shared value creation framework.

All of the following are examples of external- governance mechanisms except

shareholders

Shelia is a graduate student pursuing a course in business. Presented with the case of a company's unethical behavior, Shelia wonders if the company's board of directors should ask the CEO to step down. Having a strong belief in Michael Porter's idea of value creation, Shelia is most likely to conclude that company's board of directors

should ask the CEO to step down because it has greater obligation toward society.

The MBA oath first developed at Harvard Business School and now signed by students at over 300 business schools is modeled after

the Hipporcratic oath in medicine

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

Grameen Bank in Bangladesh was founded to provide microcredit to impoverished farmers who wanted to start their own entrepreneurial ventures that would help them 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 could be used as an example of why a stakeholder strategy approach to business has shortcomings?

the nonsustainable debt levels incurred by housing crisis sovereign governments to fund social programs

Which of the following is the source of the principal- agent problem in publicly traded companies?

the separation of ownership and control

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.

ohnathan owns shares in a company called Delos Inc. The company's financial performance has been declining over the past few months, and the value of its stock has been decreasing. Johnathan wants to proactively cut his losses and therefore sells his shares. Mary, a trading enthusiast, buys shares in Delos Inc. Industries because she 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