Chapter 10 Management

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

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, and capital requirements for banks, but not for executive compensation.

False

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

False

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 the firm's shareholders.

True

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

True

Recent global emphasis on corporate governance stems mainly from the apparent 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 it may indirectly influence a targeted firm's strategic decisions, including those concerned with social issues.

True

The market for corporate control is composed of individuals and firms that buy ownership positions in or purchase all of potentially undervalued corporations typically for the purpose of forming new divisions in established companies or merging two previously separate firms.

True

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.

True

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

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

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

False

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

False

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

False

Generally, board members are 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

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

False

MTW MetalWorks plans to go public in the next two 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

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

More than three-fourths of the members of the PeteSys board of directors are also part of the firm's top management team. Because of their inside knowledge, this should lead to strong monitoring and control systems for managerial decisions in the firm

False

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.

False

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.

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

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

False

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

False

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

Agency costs include incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals

True

An agency relationship exists when one party delegates decision-making responsibility to a second party for compensation.

True

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

True

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

True

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

True

Because top management decisions are usually complex and nonroutine, direct supervision (even by the firm's board of directors) is likely to be ineffective as a means of judging the quality of their decisions.

True

CEO duality exists when a single individual is both the CEO and the chair of the board.

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 and maintain 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 relationships among stakeholders and to determine and control the strategic direction and performance of organizations.

True

Corporate governance mechanisms are designed to ensure that top-level managers make strategic decisions that best serve the interests of all 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

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

Firms in China that have higher state ownership have been shown to have more volatility and lower market value, in part because government-mandated social goals take precedence over shareholder returns.

True

Hedge funds, as part of the market for corporate control, identify a firm that is underperforming and then invest 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 the 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 has declined and been replaced by institutional owners.

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

True

KorniCo is determined to defend against a hostile takeover, no matter what. If the company wants to choose the most effective defense it should adopt the poison pill strategy, which will make its stock less attractive to the potential acquirer.

True

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

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

Most believe that the the Sarbanes-Oxley Act in 2002 has had positive results in terms of protecting the interests of shareholders as well as other stakeholders.

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 non-management board member activities.

True

Ownership concentration is defined by the number of large-block shareholders and the total percentage of the firm's shares they own.

True

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

True

Severance packages are generally opposed, partly because they have a low level of success as a defense strategy. However, those who want to encourage top-level managers to accept a takeover bid that will best serve shareholders' interest would tend to favor this option.

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 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 primary role of the board of directors is to monitor and control top-level executives to protect owners' interests.

True

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

The top management of RavenCrest, Inc. has 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