MGT 3830 Exam 2 Ch. 12

) In a public stock company, senior executives, such as the CEO, face agency problems when A) they delegate authority of strategic business units to general managers. B) they decide to get involved in the day-to-day operations of a company. C) the board of directors possesses more information about the company than they do. D) the firm designs work tasks, incentives, and employments that minimize opportunism.

A

Marika received a tip from a close friend who is an executive manager of a publicly traded company called MicroGreen Inc. The manager received some inside information about how to trade MicroGreen stock to get a huge profit. He shared this information with Marika. This scenario is an example of A) information asymmetry. B) adverse selection. C) stakeholder strategy. D) shared value creation.

A

The root cause of the principal-agent problem between senior executives and lower-level employees can be explained by the A) informational advantage of the lower-level employees. B) higher number of lower-level employees than senior executives. C) knowledge of employees regarding day-to-day tasks. D) operational expertise of lower-level employees in concentrated areas of a particular field.

A

Which of the following is true of business ethics? A) Certain notions such as fairness, honesty, and reciprocity are universal norms. B) Business ethics is an agreed-upon code of conduct in business, based on laws. C) The perception of what is ethical and what is not is similar across different cultures. D) Business ethics needs to be codified into law in order to be followed.

A

Which of the following is true of the codes of conduct of an organization? A) They detail how the organization expects an employee to behave and to represent the company in business dealings. B) They are a reiteration of the laws pertaining to business dealings in a corporate environment. C) They are a guide to determine what is lawful and what is unlawful. D) They help the board of directors and the CEO implement shareholder capitalism.

A

According to the perspective of shareholder capitalism, shareholders in public stock companies A) are restricted from buying shares of two competing companies. B) have the most legitimate claim on profits. C) have significant decision-making power. D) have unlimited financial liability.

B

One way to foster ethical behavior in employees is to A) avoid codifying organizational culture. B) create a control system that encourages desired values. C) view clients as counter parties to transactions. D) align the vision statement of the organization with its informal culture.

B

Which of the following statements is true of shareholders in a public stock company? A) They directly supervise and coordinate the manufacture of products and delivery of services. B) They are granted a charter of incorporation by the state and legally own company stock. C) They are the centerpiece of corporate governance. D) They are appointed by a board of directors to oversee the company's management.

B

Why is board independence critical to effectively fulfilling a board's governance responsibilities?

Board independence is critical to effectively fulfilling a board's governance responsibilities. Given that board members are directly responsible to shareholders, they have an incentive to ensure that the shareholders' interests are pursued. If not, they can experience a loss in reputation or can be removed outright. More and more directors are also exposed to legal repercussions should they fail in their fiduciary responsibility. To perform their strategic oversight tasks, board members apply strategic management theories and concepts, as well as more specialized tools such as those originating in finance and accounting

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. A) adverse selection B) stakeholder strategy C) moral hazard D) shared value creation

C

Because of poor management, the stock price of Orange Dolphin Inc. falls and many investors sell their shares. Soon Orange Dolphin becomes the target of a hostile takeover, during which Hans buys enough shares to exert control over the firm. In this scenario, Hans performs the role of a(n) A) inside director. B) outside director. C) corporate raider. D) corporate consultant.

C

The MBA oath first developed at Harvard Business School and now signed by students at over 300 business schools is modeled after A) Level-5 leadership. B) the Sarbanes-Oxley pledge. C) the Hippocratic oath in medicine. D) the Goldman Sachs code.

C

The informational advantage that agents possess over principals is often based on the fact that A) the information is extremely secure and protected from exposure to anyone outside the company. B) public stock companies are characterized by information symmetry. C) insiders are the first to learn about important developments before the information is released to the public. D) agents are legally permitted to freely trade the information in exchange for benefits, unlike principals.

C

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? A) investors B) outside directors C) inside directors D) auditors

C

Which of the following characteristics of a public stock company deals with principals and agents? A) limited liability of investors B) transferability of investor ownership C) separation of legal ownership and management control D) legal personality

C

Which of the following could most likely have prevented the accounting scandals of the early 2000s and the global financial crisis? A) adopting a narrow shareholder perspective B) separating economic interests and social needs C) practicing effective corporate governance D) adopting the principles of shareholder capitalism

C

Angelica is the CEO of Sandhaven Ltd., a publicly traded company. The shareholders want Angelica on the board of directors despite her recent appointment as the CEO. This decision of the shareholders is most likely because Angelica is A) a board member of a major client. B) more likely than other board members to take care of the stockholders. C) also the CEO of other companies. D) likely to provide the board with valuable inside information.

D

In public stock companies, which of the following expectations of principals is most likely to lead to principal-agent problems? A) the expectation that the agent will follow the country's laws and regulations B) the expectation that the agent will go above and beyond the call of duty C) the expectation that the agent will reconnect economic and social needs D) the expectation that the agent will act in the principal's best interest

D

Landon is a senior manager for the firm Anderssen Inc. Because of his experience, he has been appointed to the board of EEC Inc., even though he doesn't work for this firm. He also serves on the boards of several other companies. Landon is a(n) ________ for Anderssen and a(n) ________ for EEC. A) CEO; COO B) COO; CEO C) outside director; inside director D) inside director; outside director

D

Rajat Gupta's role in providing inside information to Galleon Group for the benefit of Galleon Group's stockholders and himself is an example of A) shareholder capitalism. B) adverse selection. C) shared value creation. D) moral hazard.

D

Sirhan is president of a medium-sized bank. What can he do to lessen the chances of employees or board members taking part in insider trading? A) Forbid managers and executives from having access to private information. B) Forbid board members from having access to private information. C) Work with analysts and customer-facing employees to root out information asymmetry. D) Create a strict code of ethics and explain that inside traders will be fired.

D

The name for an agreed-upon code of conduct in business, based on societal norms, is A) fiduciary responsibilities. B) poison pills. C) strategic business points. D) business ethics.

D

What are poison pills? A) Shareholders use them to prevent the founder of a company from taking the company private through a leveraged buyout. B) They are unspecified conditions in the contract between stakeholders in an organization. C) Companies use them in a bid to perform a hostile takeover of competing firms. D) They are defensive provisions that kick in should a buyer reach a certain level of share ownership.

D

Which of the following perspectives best supports the shared value creation framework? A) Markets are more often than not defined by societal needs rather than economic needs. B) Failing to create value for society almost always reflects on the bottom line. C) A firm's competitive advantage depends on pitting economic and societal needs in a trade-off. D) Externalities such as pollution, wasted energy, and costly accidents actually create internal costs.

D

Yelena, the CEO of Andron Inc., reports to the board of directors appointed by the shareholders of Andron. Based on shareholder suggestions, the board ties Yelena's compensation to the performance of Andron. Due to this pressure, Yelena 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 Yelena's compensation to firm performance is to overcome A) shareholder capitalism scenario. B) inside director-outside director conflict. C) fiduciary responsibility oversight. D) principal-agent problem.

D

Describe moral hazard in the context of the principal-agent relationship. Use an example

In the principal-agent relationship, moral hazard describes the difficulty of the principal to ascertain whether the agent has really put forth a best effort. In this situation, the agent is able to do the work but may decide not to do so. For example, a company scientist at a biotechnology company may decide to work on his own research project, hoping to eventually start his own firm, rather than on the project he was assigned

Describe the role of inside directors as part of a company's board of directors

Inside directors are generally part of the company's senior management team, such as the chief financial officer (CFO) and the chief operating officer (COO). They are appointed by shareholders to provide the board with necessary information pertaining to the company's internal workings and performance. Without this valuable inside information, the board would not be able to effectively monitor the firm. As senior executives, however, inside board members' interests tend to align with management and the CEO rather than the shareholders.

How can a manager decide whether a decision is ethical?

Since business decisions are not made in a vacuum but are embedded within a societal context that expects ethical behavior, managers can improve their decision making by also considering: • When facing an ethical dilemma, a manager can ask whether the intended course of action falls within the acceptable norms of professional behavior as outlined in the organization's code of conduct and defined by the profession at large. • The manager should imagine whether he or she would feel comfortable explaining and defending the decision in public. How would the media report the business decision if it were to become public? How would the company's stakeholders feel about it?

What helps notions such as fairness, honesty, and reciprocity to be codified into law? A) The notions are synonymous with law. B) The notions differ to some degree in different cultures around the globe. C) The notions are universal norms. D) The notions are characteristics inherited by each person irrespective of the culture.

c

Describe the arguments for and against the CEO of a company serving as the chair of the board of directors

: In roughly one-half of U.S. public firms, the CEO of the company also serves as chair of the board of directors. This practice of duality—holding both the role of CEO and chairperson of the board—has been declining somewhat in recent years. Arguments can be made both for and against splitting the roles of CEO and chairman of the board. On the one hand, the CEO has invaluable inside information that can help in chairing the board effectively. On the other hand, the chairperson may influence the board unduly through setting the meeting agendas or suggesting board appointees who are friendly toward the CEO. The recent trend toward separation of CEO/chair duality is likely to continue. Because one of the key roles of the board is to monitor and evaluate the CEO's performance, there is clearly a conflict of interest when the CEO actually chairs the board.

) Shareholders of public companies need to appoint a board of directors to represent their interests because A) of the separation of ownership and control. B) employees of a company cannot be shareholders. C) the board of directors itself is made up of shareholders. D) the shareholders want tighter control over day-to-day operations of a company.

A

A bank, CQC, offers a customer a personal loan. In which of the following circumstances will this decision most likely be considered unethical? A) The bank knows that the customer will be unable to pay the loan if the interest rate rises. B) The bank is not aware of the investments made by the customer. C) The bank has the financial statements of the customer, but it is not aware of each source of income. D) The bank is depending on the customer to pay back the loan before term completion.

A

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? A) legal but not ethical B) ethical but not legal C) legal and ethical D) neither legal nor ethical

A

According to the agency theory, A) conflicts that arise in corporations should be addressed in the legal realm. B) corporations are more than a set of contracts between parties. C) companies should focus on generating profits for stockholders. D) principals and agents have interchangeable roles.

A

Adverse selection in a public stock company occurs when A) information asymmetry increases the likelihood of selecting inferior alternatives. B) a firm's work tasks, incentives, and employment contracts minimize opportunism by agents. C) a principal is not aware of the context from which information from an agent is derived. D) an agent manipulates information to benefit stockholders.

A

Arnold 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? A) Businesses can use their resources to create profit as long as they do so within the rules of the game. B) Firms must go beyond their economic responsibility and act in socially responsible ways. C) Firms should define value creation broadly in terms of environmental impact. D) Businesses should engage in open and free competition without deception or fraud, only as long as their competitors do so.

A

Ben is a manager at Unique Accessories Inc. and is friends with the company's CEO. This privilege gives Ben the information that Unique Accessories is in the midst of talks to take over a leading rival. Ben buys stocks of Unique Accessories with the expectation that its stocks will appreciate. But the deal falls through, and the stocks of Unique Accessories depreciate in the following months. Are Ben's actions unethical? Why or why not? A) Yes. It is unethical to trade stocks based on insider information, irrespective of the final outcome. B) Yes. It is illegal and unethical for Ben to possess any kind of insider information. C) No. Ben did not ask the CEO to disclose such information to him. D) No. Ben did not make any profits from trading stocks using this information.

A

Delores recently became a board member of a firm that has a history of reckless actions by senior employees. Which task would be appropriate for Delores to undertake to help safeguard the company's financial health? A) Request and review a copy of the firm's risk assessment plan, if such a plan exists. B) Take part in the annual reviews of employees in the financial department. C) Draft and circulate a statement that the firm's board members serve at the pleasure of the CEO. D) Determine how to postpone or evade the firm's compliance with local, regional, and national regulations.

A

Ethics is A) not synonymous with law. B) impossible to codify into law. C) universal and cannot differ between cultures. D) the minimum acceptable standard in business practice.

A

Sanjaya 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? A) Observe executives at the company, and see whether they model ethical behavior and demand it of others. B) Research the results of the ethics violations. If the perpetrators were fired or jailed, then the rest of the company is sound. C) Check the company's mission statement to make sure that it guarantees respect and integrity. D) Ignore the alleged ethics violations because there is no one standard of ethical behavior.

A

Which of the following could be used as an example of why a stakeholder strategy approach to business has shortcomings? A) the nonsustainable debt levels incurred by sovereign governments to fund social programs B) the financial crisis in Europe brought about by money lenders seeking to make quick money C) the collapse of the economy in the United States brought about by the housing crisis D) the rise of GDP in countries that do not believe in Milton Friedman's philosophy

A

Which of the following descriptions best exemplifies adverse selection? A) A manager cannot ascertain the contributions of individual team members in team production. B) A research scientist uses the organization's resources to conduct personal research. C) An employee spends time on social networking sites during work hours. D) An interview candidate lists his qualifications in chronological order.

A

Which of the following is a common result of a hostile takeover of a company? A) The new owner sells the company in pieces. B) The new owner keeps the company intact. C) The new owner keeps the board of directors of the company the same. D) The new owner enhances the reputations of the company's management.

A

Which of the following is true of the board of directors in a public stock company? A) Votes at shareholder meetings determine whose representatives are appointed to the board of directors. B) Because shareholders generally have uniform interests, the composition of the board is generally a unanimous decision. C) The board of directors acts as a facilitator to convey interests of the stockholders to the management without any real authority. D) The functions of the board of directors are limited to ensuring the hiring and firing of CEOs.

A

Which of the following real-world scenarios best exemplifies information asymmetry in a public stock company? A) 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. B) GE knew that it could create a profitable venture out of producing green products, so it rolled out the Ecomagination strategy. C) Mark Hurd, CEO of HP, was unaware of the sexual harassment allegations, and the board's demand for him to resign caught him by surprise. D) Goldman Sachs followed through with the Abacus deal despite knowing its shortcomings.

A

Which of the following scenarios best exemplifies a leveraged buyout of a microchip manufacturer, Rigoletto Inc.? A) The owner of another company buys all the outstanding shares of Rigoletto in order to take it private. B) A private equity firm, Stormcloud Inc., buys a large number of shares of Rigoletto in order to publicly trade it under a new name. C) Rigoletto sells all its shares and declares bankruptcy. D) Rigoletto buys back a large amount of its own shares from the stock market.

A

Why does Michael Porter recommend expanding the customer base of an organization in terms of the shared value creation framework? A) Doing so could yield significant business opportunities that could improve the standard of living of the poor. B) Doing so is the best way to ensure that shareholders have the most legitimate claim on profits made by the organization. C) Doing so could be the only way to meet stockholder expectations in a highly competitive market. D) Doing so will help to prevent the inclusion of more nontraditional partners into internal firm value chains.

A

Discuss the agency problem of adverse selection

Adverse selection occurs when information asymmetry increases the likelihood of selecting inferior alternatives. In principal-agent relationships, for example, adverse selection describes a situation in which an agent misrepresents his or her ability to do the job. Such misrepresentation is common during the recruiting process. Once hired, the principal may not be able to accurately assess whether the agent can do the work for which he or she is being paid.

Discuss the implications for the strategist in the context of corporate governance and sustained competitive advantage

An important implication for the strategist is the recognition that effective corporate governance and solid business ethics are critical to gaining and sustaining competitive advantage. A variety of corporate governance mechanisms can be effective in addressing the principal-agent problem. These mechanisms tend to focus on monitoring, controlling, and providing incentives, and they must be complemented by a strong code of conduct and strategic leaders who act with integrity. The strategist must help employees to "walk the talk"; leading by ethical example often has a stronger effect on employee behavior than words alone. The strategist needs to look beyond shareholders and apply a stakeholder perspective to ensure long-term survival and success of the firm. A firm that does not respond to stakeholders beyond stockholders in a way that keeps them committed to its vision will not be successful. Stakeholders want fair treatment even if not all of their demands can be met. A minimum of fairness and transparency is critical to maintaining good relationships within the network of stakeholders the firm is embedded in. Finally, the large number of glaring ethical lapses over the last decade or so makes it clear that ethical values and a code of conduct are key to the continued professionalization of management.

According to Michael Porter, which of the following is a problem with many publicly traded companies? A) Shareholders of publicly traded companies do not have a legitimate claim on profits. B) They have defined value creation too narrowly in terms of financial performance. C) There is no transferability of stock ownership in publicly traded companies. D) Publicly traded companies have no legal standing and are not responsible for their debts.

B

Andrew 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? A) Andrew needs to focus on the company's earnings because that is what shareholders care about. B) He should find out whether the majority of his shareholders want long-term steady growth or short-term spikes in the stock price. C) He should discourage pension funds from investing because they are interested in safety at the expense of growth. D) He should make the company stock available only to hedge funds so he will have the freedom to take risks as the firm expands.

B

At Agile Ltd., a cross-functional team is formed to work on a project for a new client. The team consists of Charles and four other members. At most of the team's presentations to senior management, Charles takes the lead and discusses project specifics with the management, while others chip in with additional information. At the completion of the project, Charles is recommended for promotion, while the other team members receive little recognition for their hard work. The reality is that Charles did very little actual work but spent some time compiling the project report based on different documents submitted by the others. This scenario at Agile Ltd. is a typical consequence of A) moral hazard. B) adverse selection. C) shared value creation. D) corporate governance.

B

Barrett is the ethics officer at Exton Corp., a publicly traded company. She wants to make sure that on-the-job consumption at Exton stays within legal and ethical bounds. Which action should she and the Exton board of directors take? A) Forbid high-cost items such as executive office decoration, but permit lavish parties and celebrations because they are essential for morale. B) Set strict limits on what executives can spend on office redecoration or work-related celebrations. C) Do nothing. On-the-job consumption is a necessary part of hiring and retaining key executives. D) Permit on-the-job consumption but cancel executive bonuses.

B

CPA Inc. is a publicly traded company. The stockholders of this company delegate the authority to make decisions for the company to a CEO named Joaquin. The stockholders expect Joaquin to make decisions that will benefit the company. However, Joaquin begins to find ways to maximize his total compensation, which hinders CPA's performance. This scenario reflects A) value creation problems. B) principal-agent problems. C) inside director-outside director problems. D) adverse selection problems.

B

How did Uber conflict with Carnegie Mellon University's National Robotics Engineering Center (NREC)? A) Uber promised a large donation to NREC but then reneged on the offer when NREC would not provide Uber with researchers. B) Uber poached entire NREC research teams with signing bonuses, twice the salaries, and stock options, thereby threatening the future of NREC. C) Uber allegedly stole ideas from the NREC research team and then claimed that these ideas were generated by their own researchers. D) Uber bribed NREC officials to give permission for building an extension to the NREC facility that focuses solely on Uber research.

B

Jaronda founded Diamond Communications Inc. in 1993. Ten years later, the company went public. Despite Jaronda'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? A) transferability of investor ownership B) legal personality C) limited liability for investors D) separation of legal ownership and management control

B

Megan is a graduate student pursuing a course in business. Presented with the case of a company's unethical behavior, Megan 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, Megan is most likely to conclude that company's board of directors A) should not ask the CEO to step down because doing so would cause a profit dip that would affect its shareholders. B) should ask the CEO to step down because it has a greater obligation toward society. C) should not ask the CEO to step down because he was responsible for an almost 90 percent appreciation of the company's stock. D) should ask the CEO to step down because agents, unlike principals, are disposable.

B

Nate 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 Nate based on his stated credentials without verifying them. Two days into the job, Nate's team lead realizes that Nate does not know much of what he claimed to know during the interview. This scenario best exemplifies A) moral hazard. B) adverse selection. C) shared value creation. D) corporate governance.

B

Starling 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 that public companies A) often do not keep economic needs and societal needs separate from each other, thereby contributing to low value creation. B) have defined value creation too narrowly in terms of financial performance, thereby contributing to black swan events. C) do not focus enough on increasing firm profits, thereby contributing to low value creation. D) have defined value creation too narrowly and as a result have ignored political lobbying, thereby contributing to black swan events.

B

The board of directors of a public stock company consists of A) managers appointed by the owners of a company to run its day-to-day operations. B) individuals who formally represent the firm's shareholders and oversee the work of executives. C) the legal owners of a publicly traded company that was purchased in a leveraged buyout. D) employees of a company who belong to the senior management and directly report to the CEO of the firm.

B

Three months ago, Darren became a board member at Runswell, a publicly traded company. Two weeks ago, the board members discovered that Runswell'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 Darren and the other board members hold the CEO? A) They should hold her to the same ethical standards that they would expect of any Runswell employee—no more, no less. B) They must hold her to the highest ethical standards because the leaders of publicly traded companies must withstand intense public scrutiny. C) If the board members are able to determine that the CEO is not a "bad apple," then they should give her their full support. D) The board members must wait until the lawsuit results in a settlement or a guilty verdict.

B

What is the result of managers' pursuit of strategies that define value creation too narrowly in public stock companies? A) It gives the managers greater control of the performance of the organization in the long term. B) It reduces the trust of shareholders in the organization as a vehicle for value creation. C) It helps companies increase firm profits by creating shared value. D) It enables companies to create social value by addressing society's needs but prevents them from creating economic value for shareholders.

B

Which of the following is an implication for the strategist in the context of corporate governance and a company's success? A) Very few corporate-governance mechanisms can be effective in addressing the principal-agent problem. B) Effective corporate governance and solid business ethics are critical to gaining and sustaining competitive advantage. C) Leading by ethical example often has a lesser effect on employee behavior than words do. D) A firm that restricts its responsiveness to stockholders (and no other stakeholders) and keeps them committed to its vision will be successful.

B

Which of the following is the source of the principal-agent problem in publicly traded companies? A) the law of legal personality B) the separation of ownership and control C) limited liability for investors D) transferability of investor ownership

B

Bernard is a board member at Lopez Electronics Inc. He is also a senior executive of the firm. The board is chaired by Ernest Jones, the CEO of Stanley Motors. According to this scenario, Bernard A) cannot serve on the board of any other organization. B) is more likely than Ernest to take care of stockholder interests. C) is an inside director of Lopez Electronics. D) can use information from board meetings to trade stocks of Lopez Electronics.

C

Elvira 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? A) What are the chances that her decision to accept the opportunity will be made public? B) How much profit would be made if she decided to accept the opportunity? C) How would the media report her decision to accept the opportunity if it were to become public? D) How long lasting would the competitive advantage be if she decided to accept the opportunity?

C

GameGo is a publicly traded manufacturer of home electronics. Based on what you have read, which of these actions would be wisest for GameGo's board of directors to take to be sure that the company's new CEO is as motivated as possible? A) Encourage the CEO to take all of her compensations in stock options, which will motivate her to keep the stock price high. B) Offer the largest bonus possible to prevent the CEO from leaving to go a rival firm. C) Link the CEO's pay to her performance, but avoid high-powered incentives that may cause reckless behavior. D) Encourage her to emulate Warren Buffett and to take a lower salary than she might command elsewhere.

C

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? A) A CEO is likely to be more responsible because he or she is setting his or her own performance targets. B) The CEO might be able to influence the board through setting the meeting agendas. C) The CEO possesses invaluable inside information that can help him or her chair the board effectively. D) Any CEO will suggest board appointees who are friendly toward him or her.

C

Ignacio Inc. is a public stock company. Which of the following statements about the company best illustrates the fact that its investors have limited liability? A) Employees of Ignacio are legally permitted to invest their capital in the company's stock. B) Employees of Ignacio are also the owners of the company. C) Shareholders of Ignacio are responsible to the company only to the capital they have invested. D) Shareholders of Ignacio are not permitted to trade their company stock at the New York Stock Exchange (NYSE).

C

Which of the following best explains why a board of directors may grant stock options as part of a compensation package? A) to reduce the transferability of stocks between stockholders B) to bring about a separation of CEO/chair duality C) to align incentives between shareholders and management D) to change the liability of shareholders from limited to unlimited

C

Which of the following best supports the fact that Goldman Sachs was unethical in the Abacus deal? A) It was given a "triple A" rating for Abacus even though Abacus should have gotten a low rating. B) It made no effort to ascertain the stability of the real estate market, even though it had the resources and time to do so. C) It knew that Paulson & Co. had bundled high-risk mortgages into the collateralized debt obligation. D) It lost $100 million in the Abacus fiasco and endured negative treatment in the media.

C

Which of the following is a major issue at the forefront of CEO compensation in recent years? A) a comparison of the performance of the organization before and after the CEO's tenure B) the performance of the CEO as an employee versus the performance as a board member C) the absolute size of the CEO pay package compared with the pay of the average employee D) a comparison of the compensation of senior management hired during and before the CEO's tenure

C

Angie owns and runs Archana, a private start-up company with a current value of $1.3 billion. Archana is interested in going public to fund future growth. Which action should Angie take before Archana's initial public offering? A) Angie should come up with a business plan for what Archana will do once it is no longer publicly traded. B) She and senior managers should write down their code of ethics. C) Angie should not embark on an IPO until Archana's value is higher. D) She should investigate Archana's existing or potential problems with ethics or the law, if such problems exist.

D

Bellhaven Inc. has a board of directors that consists of seven members. Which of the following is most likely an accurate statement about Bellhaven's board of directors? A) Bellhaven's board of directors ensures the firm's compliance with laws and regulations but does not conduct risk assessments. B) Bellhaven's board of directors provides guidance for the firm's CEO but does not monitor the firm's corporate actions. C) Bellhaven's board of directors oversees the firm's succession plan but does not evaluate the firm's CEO. D) Bellhaven's board of directors has a minority number of inside directors and it evaluates the firm's strategic initiatives.

D

David and Fred are customer care employees at JPN Care. In between calls, David and Fred spend time on Facebook and YouTube. The relaxed guidelines at JPN 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 A) is neither unlawful nor unethical; hence, David and Fred cannot be reprimanded. B) typically exemplifies the agency problem of adverse selection. C) demonstrates the dangers of information asymmetry. D) can be stopped by implementing performance incentives and strict control mechanisms.

D

Eyenima Inc. is a public stock company. Which of the following best exemplifies the legal personality of the company? A) Frieda, a shareholder, can legally sell shares of Eyenima in the stock market. B) Tabitha is a shareholder of Eyenima but does not have any managerial duties. C) Edward, an employee at Eyenima, is not responsible for any losses that Eyenima incurs. D) Bjorn Eyenima, the company's founder, died a few years ago, yet the company is doing well.

D

Gary owns shares in a company called Archibald Industries Inc. The company's financial performance has been declining over the past few months, and the value of its stock has been decreasing. Gary wants to proactively cut his losses and therefore sells his shares. Anneke, a trading enthusiast, buys shares in Archibald 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? A) separation of legal ownership and management control B) legal personality C) limited liability for investors D) transferability of investor ownership

D

Gino is the CEO of a financial services firm. What action should Gino take to be sure the firm avoids moral hazards? A) He should closely monitor the behavior and performance of new employees to be certain that they have the skills they claimed to have in interviews. B) Gino must increase hiring and develop influential relationships with government officials so that his firm will be considered "too big to fail." C) He must create a plan in which government agencies or a consortium of other financial services firms will assume any future debts of the company. D) Gino should define undue risk-taking, institute strict auditing of loans, and make it clear that the company will fire employees who lend recklessly.

D

Grameen Bank in Bangladesh was founded to provide microcredit to impoverished farmers who wanted to start their own entrepreneurial ventures that would help themselves climb out of poverty. This best exemplifies Michael Porter's suggestion that A) managers need to keep economic needs and societal needs disconnected from each other. B) a firm should expand its internal value chain to include nontraditional partners. C) businesses should focus on creating regional clusters such as Silicon Valley in the U.S. D) the largest but poorest socioeconomic group can yield significant business opportunities.

D

Sorenson LLC, 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 Sorenson's board to achieve board independence? A) 1 B) 3 C) 5 D) 7

D

Stella accepts a job as vice president for human resources at a technology startup. She discovers that the startup 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 Stella take regarding this plan? A) Interview new candidates extensively to avoid adverse selection. B) Expand the plan by allowing teams to make hiring decisions and eventually firing decisions as well. C) Make sure the plan goes into place only after the company has corrected information asymmetry. D) Cancel the plan because under it, opportunistic employees will do little or no work.

D

Which of the following statements best supports the view that GE's Ecomagination strategy is in line with the shared value creation framework? A) The Ecomagination strategy is the brainchild of the founder of the company. B) The Ecomagination strategy helps GE spend more on research and development than other similar companies. C) The Ecomagination strategy generated $3 billion in revenues for GE during 2012. D) The Ecomagination strategy allows GE to produce "green" products while increasing revenue and competitive advantage.

D

) 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.

F

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.

F

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

F

Jeannette was a manager at Fabco. Instead of working full-time on Fabco's projects, she used Fabco'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.

F

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

F

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

F

How does the market for corporate control work? Provide at least one example. The example can be from your reading in this class, your reading in other classes, or your own experience.

If a company is poorly managed, its performance suffers and its stock price falls as more and more investors sell their shares. Once shares fall to a low enough level, the firm may become the target of a hostile takeover when new bidders believe they can fix the internal problems that are causing the performance decline. For example, Kraft completed a hostile takeover of Cadbury. Besides competitors, so-called corporate raiders (e.g., Carl Icahn and T. Boone Pickens) or private equity firms and hedge funds (e.g., The Blackstone Group and Soros Fund Management) may buy enough shares to exert control over a company.

What usually happens if a hostile takeover attempt is successful?

If a hostile takeover attempt is successful, the new owner frequently replaces the old management and board of directors in order to manage the company in a way that creates more value for shareholders. In some instances, the new owner will break up the company and sell off its pieces. In either case, since a firm's existing management faces the threat of losing their jobs and their reputations as effective executives if the firm sustains a competitive disadvantage, the market for corporate control is a credible governance mechanism.

How does a leveraged buyout affect a public company?

In a leveraged buyout (LBO), a single investor or group of investors buys, with the help of borrowed money (leveraged against the company's assets), the outstanding shares of a publicly traded company in order to take it private. In short, an LBO changes the ownership structure of a company from public to private. The expectation is often that the private owners will restructure the company and eventually take it public again through an initial public offering (IPO).

Law and ethics are not synonymous. Elaborate on this statement with the help of an example.

Law and ethics are not synonymous. This distinction is important. Staying within the law is a minimum acceptable standard. A note of caution is therefore in order, though: A manager's actions can be completely legal, but ethically questionable. For example, consider the actions of mortgage-loan officers who—being incentivized by commissions—persuaded 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. Such actions may be legal, but they are unethical, especially if there are indications that the borrower might be unable to repay the mortgage once the interest rate moves up.

Describe moral hazard with an example

Moral hazard describes a situation in which information asymmetry increases the incentive of one party to take undue risks or shirk other responsibilities because the costs incur to the other party. For example, allowing banks to commit undue risk taking in lending is an example of moral hazard.

) How does Nobel laureate Milton Friedman's view of the firm's social obligations tie in with shareholder capitalism?

Nobel laureate Milton Friedman stated his view of the firm's social obligations: "There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." This notion is often captured by the term shareholder capitalism. According to this perspective, shareholders—the providers of the necessary risk capital and the legal owners of public companies—have the most legitimate claim on profits.

Describe the role of outside directors as part of a company's board of directors

Outside directors, unlike inside directors, are not employees of the firm. They frequently are senior executives from other firms or full-time professionals, who are appointed to a board and who serve on several boards simultaneously. Given their independence, they are more likely to watch out for the interests of shareholders.

What is the connection between Rajat Gupta and insider trading?

Rajat Gupta, a former McKinsey chief executive who served on Goldman Sachs' board, provided Raj Rajaratnam with important insider tips. Often within seconds after a Goldman Sachs board meeting ended, Gupta called Rajaratnam. In one of these phone calls, Gupta revealed the impending multibillion-dollar liquidity injection by Warren Buffett into Goldman Sachs during the midst of the global financial crisis. This information allowed the Galleon Group to buy Goldman Sachs shares before the official announcement about Buffett's investment was made, profiting from the subsequent stock appreciation. In another call, Gupta informed Rajaratnam that the investment bank would miss earnings estimates. Based on this insider information, the Galleon Group was able to sell its holdings in Goldman Sachs' stock prior to the announcement, avoiding a multimillion dollar loss.

How do principal-agent problems cascade down the hierarchy in an organization? Describe an example of principal-agent problems. The example can be from your reading in this class, your reading outside of class, or your own experience

Senior executives, such as the CEO, face agency problems when they delegate authority of strategic business units to general managers. Employees who perform the actual operational labor are agents who work on behalf of the managers. Such front-line employees often enjoy an informational advantage over management. They may tell their supervisor that it took longer to complete a project or serve a customer than it actually did, for example. Some employees may be tempted to use such informational advantage for their own self-interest. An example of the principal-agent problem allegedly happened when Anthony Levandowski set up his own autonomous-vehicle company, Otto, while working at Waymo. 

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

T

Dinesh 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 to buy or sell stocks and does not tell others to buy or sell stocks.

T

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.

T

Linda 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. Linda is an example of an outside director.

T

How does the separation of ownership and control in public stock companies present a problem? Provide an example of this problem from your reading in this class, your reading outside of class, or your own experience.

The separation of ownership and control is one of the major advantages of the public stock companies. This benefit, however, is also the source of the principal-agent problem. In publicly traded companies, the stockholders are the legal owners of the company, but they delegate decision-making authority to professional managers. The conflict arises if the agents pursue their own personal interests, which can be at odds with the principals' goals. For their part, agents may be more interested in maximizing their total compensation, including benefits, job security, status, and power. An example of the problems related to the separation of ownership and control in public stock companies is Raj Rajaratnam's insider trading, which resulted in his being sentenced to 11 years in prison.

How does GE exemplify the creation of a shared value creation framework?

The shared value creation framework proposes that managers maintain a dual focus on shareholder value creation and value creation for society. GE, for example, has strengthened its competitiveness by creating a profitable business with its "green" Ecomagination initiative. Ecomagination is GE's strategic initiative to provide cleaner and more efficient sources of energy, provide abundant sources of clean water anywhere in the world, and reduce emissions. Through applying strategic innovation, GE is providing solutions for some tough environmental challenges, while driving company growth at the same time. Ecomagination solutions and products allow GE to increase the perceived value it creates for its customers while lowering costs to produce and deliver the "green" products and services. Ecomagination allows GE to solve the trade-off between increasing value creation and lower costs at the same time. This in turn enhances GE's economic value creation and its competitive advantage. Moreover, Ecomagination products and services also create value for society in terms of reducing emissions and lowering energy consumption, among other benefits.

What is the benefit of granting stock options as part of a compensation package in a public stock company?

To align incentives between shareholders and management, the board may grant stock options as part of the compensation package. This incentive mechanism gives the recipient the right to buy a company's stock at a predetermined price sometime in the future. If the company's share price rises above the negotiated strike price, which is often the price on the day when compensation is negotiated, the executive stands to reap significant gains.

How can top management foster ethical behavior in employees? Provide an example that you have read about or that comes from your own experience

To foster ethical behavior in employees, top management must create an organizational structure, culture, and control system that values and encourages desired behavior. Furthermore, a company's formal and informal cultures must be aligned, and executive behavior must be in sync with the formally stated vision and values. Employees will quickly see through any duplicity. Actions by executives speak louder than words in vision statements. The companies that I have worked for have fostered ethical behavior by making it clear what the firm expects from employees in terms of time off, break time, Internet use, and reimbursement of business expenses.