MSM 6650 Chapter 12
Which one of the following statements below can best be linked to the Nobel laureate Milton Friedman?
The social responsibility of a business is to increase its profits.
In terms of agency theory, which of the following is an agency problem?
adverse selection
Following the rise of institutional investors, the use of poison pills to avoid hostile takeover has ______.
become rarer
One of the key characteristics of a leveraged buyout (LBO) is that it _______.
changes the ownership structure of a company from public to private
What do stakeholders want to above all else?
fair treatment
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
Which of the following is one of the problems that corporate governance seeks to address?
principal-agent problem
The interests of inside directors on the board of directors typically align with those of ______.
senior management
The relationship between CEO pay and job performance has been shown to be _____
weak
Additional functions of a board of directors beyond general strategic oversight include ______. (Check all that apply.)
- assessing and mitigating risk - ensuring that the firm's accounting practices and reports are accurate - selecting, evaluating, and compensating the CEO
The ratio of CEO to average employee pay in the United States is about ______.
300 to 1
Which of the following is a recommended guideline for the composition of a board of directors to implement corporate governance?
Close to two-thirds of the board of directors should consist of outside directors.
________ is a mechanism to direct and control an enterprise and attempts to address the principal-agent problem, which can occur any time an agent performs activities on behalf of a principal.
Corporate governance
Which of the following is not true concerning corporate governance?
Corporate governance exists only in public organizations.
The primary purpose of the board of directors is ______
general strategic oversight and guidance
Which of the following are critical aspects of maintaining good relationships between a firm and its stakeholders?
- fair - transparency
Which of the following best exemplifies information asymmetry at Lizer Tech Inc., a publicly traded software development firm?
The board of directors at Lizer Tech makes significant structural changes to the organization and issues a press release to notify the shareholders.
Which of the following is true of public stock companies?
There exists an implicit contract based on trust between society and the public stock company.
The shared value creation framework is a tool intended to help businesses ___
benefit all stakeholders, not just shareholders
The code of professional conduct based on societal norms and expectations is known as ______.
business ethics
A leveraged buyout (LBO)
changes the ownership structure of a company from public to private.
Which of the following occurs when agents are better informed than principals?
information asymmetry
Which of the following are important components of fostering ethical behavior in employees?
- board members setting clear ethical expectations - strategic goals that are achievable with legal means - executive behavior that is in sync with the organization's vision and values
What are the two significant issues regarding the CEO pay debate? (Check all that apply.)
- the relationship between firm performance and CEO pay - the size of the CEO compensation in relation to average employee pay
Which of the following descriptions best exemplifies adverse selection?
A manager cannot ascertain the contributions of individual team members in team production.
Which of the following real-world examples best exemplifies a Shared Value creation framework?
GE's ecomagination strategy that focuses on providing cleaner and efficient sources of energy, while generating billions in revenues
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.
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
Corporate governance is a system of _____
checks and balances
According to agency theory, which of the following managerial functions can be used to avoid adverse selection and moral hazard? (Check all that apply.)
control organization
The mechanism used to guide a company toward meeting its strategic goals within the bounds of the law is known as ______.
corporate governance
According to agency theory,
corporations are viewed as a set of legal contracts between different parties.
In order to reconcile economic and social needs within the shared value creation network, managers need to focus on ______. (Check all that apply.)
creating new regional clusters and business centers making products affordable for the poorest socioeconomic groups in order to improve standards of living expanding value chains to include NGOs and other organizations committed to social goals
The idea of corporate social responsibility (CSR) suggests that a firm's obligations should ______.
exceed the traditional imperative to increase profits
Social consequences of business activities, including pollution, energy loss, and dangerous accidents, are known as __
externalities
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
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
Travis owns shares of Lobster Krown Inc., a food and beverages company. The company's financial situation takes a turn for the worse and ends up in severe debt. Despite owning shares of Lobster Krown, Travis is not responsible for bringing more money into the company to get it out of its debt. Which characteristic of public stock companies does this scenario best exemplify?
limited liability for investors
The main goal of a poison pill is to ______.
minimize the threat of a hostile takeover
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
A board of directors is elected to represent the interests of ______.
shareholders
Michael Porter is in favor of the Shared Value creation framework because he believes that it
will not only allow companies to gain and sustain a competitive advantage, but also reshape capitalism and its relationship to society.
Under agency theory, a manager should seek to align ______ between principals and agents to minimize opportunism.
incentives
The risk of employee opportunism, on behalf of agents, is exacerbated by the concept of
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
A fiduciary responsibility is a(n) ______.
legal duty to act in another party's interests
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
Christopher works for Ocean Media Inc., a large corporation. His work requires him to travel extensively and, as a result, he spends much time working remotely. Taking advantage of the situation, Christopher often works on personal projects instead of company projects. Ocean Media has difficulty checking on Christopher's work because he has no supervision in many of the places where he travels. This scenario exemplifies a(n)
moral hazard.
Employees who work in organizations that emphasize ethical behavior are ______.
more likely to act ethically.
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
In __________, the stockholders are the legal owners of the company who delegate decision-making authority to professional managers.
public stock companies
Financial statements by public companies must ______. (Check all that apply.)
- be audited by certified public accountants - adhere to generally accepted accounting principles (GAAP)
When facing an ethical 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 are examples of moral hazard? (Check all that apply.)
A company dumps pollution into a local lake that will be cleaned using taxpayer money. Banks make very risky loans with the knowledge that the government will bail them out if necessary. A CEO with a multi-million-dollar severance agreement performs poorly knowing he will be well compensated even if he is laid off.
Which of the following is one of the implications of information asymmetry between principals and agents?
Agents can pass on the information to select principals who can trade stocks based on this information.
Which of the following statements are correct regarding the interests of principals and agents? (Check all that apply.)
Agents may be more interested in personal goals, such as maximizing their compensation or gaining power. Principals want to maximize shareholder returns.
BestTech Inc. is a publicly traded company that specializes in manufacturing consumer electronics. Which of the following best exemplifies the implementation of a Shared Value creation framework at BestTech Inc.?
BestTech uses recycled materials to create its commercially successful products.
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.
The ideas of corporate social responsibility and stakeholder strategy are particularly prevalent in ______.
Germany
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.
Why did the local Metro Transit Authority (MTA) order Uber to cease and desist?
MTA argued that Uber was operating a taxi service without proper licensing.
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
What, according to Greg Smith, was the cause for the change in ethical climate within Goldman Sachs?
The company went public and began looking at clients and itself as counter parties to a transaction.
How is the characteristic of separation of legal ownership and management control disadvantageous to publicly traded companies?
The managers delegated to make decisions on behalf of shareholders might pursue their personal interests.
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.
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
Which type of company is considered a unicorn?
a private start-up company valued at more than $1 billion
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
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
The idea that a corporation is simply a collection of legal contracts is known as ___
agency theory
In public stock companies, inside directors
are appointed by shareholders to provide the board with necessary company information.
High-profile accounting scandals and the global financial crisis are examples of ______.
companies and industries that did not conform to business ethics
The shared value creation framework encourages managers to focus on which of the following needs? (Check all that apply.)
economic social
Which of the following is an example of an application of agency theory?
employment contracts
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 conforms to the traditional notion of shareholder capitalism
True or false: Any action taken by a manager that is within the bounds of the law is, by definition, an ethical action.
false
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
The right to buy a company's stock at a predetermined price sometime in the future is known as a(n) ______.
stock option
Who sets the tone for the ethical climate within an organization?
strategic leaders
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
An external governance mechanism that makes a poorly managed company vulnerable to takeover by outside investors is known as ______.
the market for corporate control
Private start-up companies valued at over $1 billion, such as some of those in the tech sector, are called ______.
unicorns
One of the major differences between inside directors and outside directors of a company is that outside directors are more likely to
watch out for the interests of the shareholders of the company.
What are the four characteristics of a public stock company that make it an attractive corporate form? (Check all that apply.)
~transferability of investor interests ~legal personality ~separation of ownership and control ~limited liability for investors
