4490 Chapter 12
The ratio of CEO to average employee pay in the United States is about ______.
300 to 1
The subprime mortgage crisis of the early 2000s is an example of ______.
poor corporate governance
The relationship between CEO pay and job performance has been shown to be ______.
weak
In a public stock company, the centerpiece of corporate governance is the ______.
board of directors
The ideas of corporate social responsibility and stakeholder strategy are particularly prevalent in ______.
Germany
In ______, a single investor or group of investors buys, with the help of borrowed money, the outstanding shares of a publicly traded company and assumes control of it.
a leveraged buyout
The idea that a corporation is simply a collection of legal contracts is known as ______.
agency theory
Which of the following are critical aspects of maintaining good relationships between a firm and its stakeholders? fairness a leading market share profitability transparency
fairness transparency
The main goal of a poison pill is to ______.
minimize the threat of a hostile takeover
A situation in which one party has an incentive to shirk their responsibility because the costs will fall to the other party is known as ______.
moral hazard
The interests of inside directors on the board of directors typically align with those of ______.
senior management
Private start-up companies valued at over $1 billion, such as some of those in the tech sector, are called ______.
unicorns
True or false: Any action taken by a manager that is within the bounds of the law is, by definition, an ethical action.
False
Under the shared value creation framework, which of the following strategic actions would fail to connect economic and societal needs?
Focusing exclusively on maximizing returns for shareholders.
Svanhildur's company is committed to corporate social responsibility but also understands that growth and profit are imperative for survival. What should Svanhildur's company do to achieve this balance?
It should use the shared value creation framework.
Which of the following statements are correct regarding the interests of principals and agents? (Check all that apply.) Principals want to maximize shareholder returns. Principals want to maximize agents' total compensation including benefits, status, and power. Principals want to maximize corporate social responsibility initiatives. Agents may be more interested in personal goals, such as maximizing their compensation or gaining power.
Principals want to maximize shareholder returns. Agents may be more interested in personal goals, such as maximizing their compensation or gaining power.
Which of the following is a federal regulatory agency whose task it is to oversee stock trading and enforce federal securities laws?
Securities and Exchange Commission
Which of the following statements about stock options is true?
The recipient is given the right to purchase stock at a predetermined price sometime in the future.
Pavel works for a successful pharmaceutical company. Despite several years of unprecedented growth, the company wants to boost profits even more. It has taken steps to drastically raise the prices of its most widely distributed medications, which are difficult to imitate. Research into employee ethical decision-making capacity indicates that Pavel will ______.
act in a manner that reflects his company's organizational culture
Financial statements by public companies must ______. (Check all that apply.) adhere to generally accepted accounting principles (GAAP) divulge insider information and trade secrets be audited by certified public accountants meet shareholder expectations
adhere to generally accepted accounting principles (GAAP) be audited by certified public accountants
In team-based environments, the principal may have difficulty determining individual contributions by members. This can create a situation in which an opportunistic employee does little work but takes credit. This is known as ______.
adverse selection
The hiring of a job seeker who claims to have extensive computer programming experience when his knowledge of the subject is minimal would be an example of ______.
adverse selection
Following the rise of institutional investors, the use of poison pills to avoid hostile takeover has ______.
become rarer
The shared value creation framework is a tool intended to help businesses ______.
benefit all stakeholders, not just shareholders
One of the key characteristics of a leveraged buyout (LBO) is that it _______.
changes the ownership structure of a company from public to private
High-profile accounting scandals and the global financial crisis are examples of ______.
companies and industries that did not conform to business ethics
The mechanism used to guide a company toward meeting its strategic goals within the bounds of the law is known as ______.
corporate governance
The shared value creation framework encourages managers to focus on which of the following needs? (Check all that apply.) spiritual emotional economic social
economic social
According to agency theory, which of the following managerial functions can be used to avoid adverse selection and moral hazard? (Check all that apply.) discipline inspiration organization control
organization control
An external governance mechanism that makes a poorly managed company vulnerable to takeover by outside investors is known as ______.
the market for corporate control
What are the two significant issues regarding the CEO pay debate? (Check all that apply.) the relationship between firm performance and CEO pay the legal and political ramifications of CEO pay the history of CEO pay in the manufacturing industry the size of the CEO compensation in relation to average employee pay
the relationship between firm performance and CEO pay the size of the CEO compensation in relation to average employee pay
Employees who work in organizations that emphasize ethical behavior are ______.
more likely to act ethically.
A board of directors is elected to represent the interests of ______.
shareholders
Narrowly defining public stock companies in terms of financial performance can lead to ______.
black swan events
The code of professional conduct based on societal norms and expectations is known as ______.
business ethics
What do stakeholders want above all else?
fair treatment
Who sets the tone for the ethical climate within an organization?
strategic leaders
Which of the following is a major drawback of public stock companies, according to Michael Porter and others?
They prioritize financial performance over all else.
Economist Michael Porter and many others argue that the value of public stock companies is too narrowly defined in terms of ______, leading to scandals and economic crises.
financial performance
Incentives that are too high-powered, such as an outsized bonus, may cause individuals to ______.
focus too much attention on the incentive and not enough on strategic activities
The primary purpose of the board of directors is ______.
general strategic oversight and guidance
If a company is poorly managed, its stock price may fall low enough for the firm to become a target for a(n) ______.
hostile takeover
What are the four characteristics of a public stock company that make it an attractive corporate form? (Check all that apply.) limited liability for investors legal personality separation of ownership and control funded mostly by friends and family transferability of investor interests private ownership
limited liability for investors legal personality separation of ownership and control transferability of investor interests
Additional functions of a board of directors beyond general strategic oversight include ______. (Check all that apply.) day-to-day operational management selecting, evaluating, and compensating the CEO conducting background checks on all potential employees ensuring that the firm's accounting practices and reports are accurate assessing and mitigating risk
selecting, evaluating, and compensating the CEO ensuring that the firm's accounting practices and reports are accurate assessing and mitigating risk
An executive can legally earn a significant profit from stock options if ______.
the firm performs well and the actual price per share exceeds the negotiated strike price
Which of the following are examples of moral hazard? (Check all that apply.) A company dumps pollution into a local lake that will be cleaned using taxpayer money. A CEO with a multi-million-dollar severance agreement performs poorly knowing he will be well compensated even if he is laid off. A processed food manufacturer distributes frozen vegetables tainted with e. coli. Banks make very risky loans with the knowledge that the government will bail them out if necessary.
A company dumps pollution into a local lake that will be cleaned using taxpayer money. A CEO with a multi-million-dollar severance agreement performs poorly knowing he will be well compensated even if he is laid off. Banks make very risky loans with the knowledge that the government will bail them out if necessary.
Which type of company is considered a unicorn?
a private start-up company valued at more than $1 billion
When facing an ethical dilemma, a manager should ______. (Check all that apply.) keep his or her actions hidden under the cover of inside information consult local laws and municipal codes determine whether he or she could comfortably defend the action to the public consider whether the action in question conforms to the firm's code of conduct and industry practices
dilemma, a manager should ______. (Check all that apply.) determine whether he or she could comfortably defend the action to the public consider whether the action in question conforms to the firm's code of conduct and industry practices
Which of the following is an example of an application of agency theory?
employment contracts
The idea of corporate social responsibility (CSR) suggests that a firm's obligations should ______.
exceed the traditional imperative to increase profits
Which of the following are important components of fostering ethical behavior in employees? executive behavior that is in sync with the organization's vision and values board members setting clear ethical expectations a value system that prioritizes profits above all else strategic goals that are achievable with legal means
executive behavior that is in sync with the organization's vision and values board members setting clear ethical expectations strategic goals that are achievable with legal means
Social consequences of business activities, including pollution, energy loss, and dangerous accidents, are known as ______.
externalities
Optics Incorporated, a publicly traded eyewear business, places profits ahead of all other performance metrics. This practice ______. (Check all that apply.) fails to take into account the idea of corporate social responsibility benefits all of society, not just shareholders is a good example of corporate social responsibility conforms to the traditional notion of shareholder capitalism
fails to take into account the idea of corporate social responsibility conforms to the traditional notion of shareholder capitalism
Under agency theory, a manager should seek to align ______ between principals and agents to minimize opportunism.
incentives
Which of the following occurs when agents are better informed than principals?
information asymmetry
Managers who act upon secret company information for personal gain, such as by trading stocks based on the knowledge of future initiatives, are guilty of ______.
insider trading
In regard to the public stock company, limited liability means that ______.
investors are not responsible for any debts incurred by the company and are only at risk of losing the invested capital
In order to reconcile economic and social needs within the shared value creation network, managers need to focus on ______. (Check all that apply.) collapsing the supplier-buyer relationship to maximize profitability erecting barriers to entry for new firms in the industry making products affordable for the poorest socioeconomic groups in order to improve standards of living creating new regional clusters and business centers expanding value chains to include NGOs and other organizations committed to social goals
making products affordable for the poorest socioeconomic groups in order to improve standards of living creating new regional clusters and business centers expanding value chains to include NGOs and other organizations committed to social goals
In comparison to other countries, the United States ranks ______ in terms of its acceptance of Milton Friedman's philosophy that "the social responsibility of business is to increase its profits."
near the middle
The primary difference between outside and inside members of the board of directors is that ______.
outside directors are not employees of the firms, whereas inside directors are
Corporate governance addresses the ______ problem, which underscores the risk of delegating responsibility and control to individuals who may not have the firm's best interests in mind.
principal-agent