SM Test-Bank Chapter 10 Multiple Choice

The New York Stock Exchange requires that the audit committee be:

headed by outside directors.

A virtually exclusive reliance on financial controls may occur when outsider-dominated boards exist. This may lead to all of the following EXCEPT:

high executive turnover.

Managers in the United States receive __________ compensation than managers in the rest of the world.

higher

The top management team at Sierra Infusion is concerned about the declining performance of firms in their industry. The team members are becoming concerned about the security of their jobs at Sierra Infusion. At a meeting over dinner, the top management team agrees to go to the board of directors with a proposal for:

increased diversification of Sierra Infusion

. Generally, a board member who is a source of information about a firm's day-to-day activities is classified as a(n) __________ director.

inside

The market for corporate control serves as a means of governance when:

internal controls have failed.

The market for corporate control may not be as efficient as previously thought as recent findings suggest that those firms targeted for takeover by active corporate raiders are

often performing above their industry averages.

Research suggests that boards of directors perform better if:

outside directors own significant equity in the organization.

Executive compensation is a governance mechanism that seeks to align managers' and owners' interests through all of the following EXCEPT:

penalties for inadequate firm performance.

If the market for corporate control were efficient as a governance device, then only __________ would be targets for takeovers.

poorly performing firms

German executives are not dedicated to the maximization of shareholder value to the degree that is the case for executives in the United Kingdom and the United States largely because:

private shareholders and large institutional investors rarely have large ownership positions in firms.

Because activist pension funds are __________ in nature, they tend to take action when __________.

reactive; a firm is underperforming

A major conflict of interest between top executives and owners is that top executives wish to diversify the firm in order to __________, whereas owners wish to diversify the firm in order to __________.

reduce their employment risk; increase the company's value

All of the following are areas covered by the Dodd-Frank Wall Street Reform and Consumer Protection Act EXCEPT:

retirement accounts.

Compared to managers, shareholders prefer:

riskier strategies with more focused diversification for the firm.

The longer the focus of managerial incentive compensation, the greater the __________ top-level managers.

risks borne by

In the United States, a firm's key stakeholder(s) is(are) the:

shareholders.

A Japanese keiretsu is a:

system of cross-shareholding among firms.

James Abercrombie has a thriving consulting firm specializing in training boards of directors in decision-making skills. Mr. Abercrombie has had striking success in reducing conflict and hostility among directors and allowing boards to develop more cohesiveness. Mr. Abercrombie is considering expanding his consulting practice overseas. Which of the following statements is most likely to be true?

Japanese firms will have little interest in Mr. Abercrombie's specialty because these skills are already practiced at a high level.

KorniCo. is considering possible strategies to defend against a hostile takeover. They have narrowed it down to four options. Because of pressure from shareholders, they need to adopt a strategy that is shown to have a positive effect on shareholder wealth. Based on that criterion, which of the following should they choose?

Litigation

Which of the following is NOT an internal governance mechanism?

Market for corporate control

Which of the following statements about corporate governance in China is false?

Private firms seek to establish political ties with the government to increase market value and avoid potential conflict between the principals.

Corporate governance primarily revolves around the relationship between which of the following two parties?

Shareholders and managers

Recent changes to Japan's corporate governance structure include which of the following?

The role of banks in monitoring managerial behavior is less significant.

Why would the top-level managers at Nutzandboltz, a hardware company, decide to invest free cash flow in product lines such as clothing or toys?

To increase the level of diversification

The CEO of Skyco, a publicly traded company that has been earning below-average returns, has been publicly criticized by shareholders for persuading the board of directors to give her interest-free loans, for having the company purchase and furnish a lavish apartment in Paris for her personal use on her twice-yearly trips there, and for excessive stock options. The CEO's behavior may be an indication of:

a weak board of directors.

The board of directors of CyberScope, Inc., is designing a stock option plan for its CEO that will motivate the CEO to increase the market value of the firm. Consequently, the board is:

a. setting the option strike price substantially higher than the current stock price.

Usually, large-block shareholders are considered to be those shareholders with at least __________ percent of the firm's stock.

5

All of the following are consequences of the Sarbanes-Oxley Act EXCEPT:

an increased number of IPOs (initial public offerings) are expected.

Simon Leagreet, the chairperson and CEO of L-EVA Industries, Inc., has long been the major power at L-EVA. A majority of the directors are concerned that, while Mr. Leagreet has been responsible for the firm's earning above-average returns, he has been displaying a tendency toward personal extravagance at the firm's expense. In order to limit Mr. Leagreet's power, the board of directors plans to:

appoint another individual as chairperson of the board of directors.

International Food Services (IFS) has a contract with the Marines to supply meals for its troops in Afghanistan and other foreign assignments. As a means of increasing profits, IFS has used substandard ingredients in these meals and has consistently lied about this practice during quality investigations by the Marines. Which of the following is ultimately responsible for the corporate climate that resulted in this wrongdoing?

Board of directors of IFS

The board of directors of CamCell, Inc., wishes to design a CEO compensation plan that will align the personal interests of the CEO with the interests of the shareholders in long-term firm performance. The board wishes the CEO to take more short-term risks in order to achieve potentially higher long-term returns. Consequently, the board has decided on an incentive plan that involves payout based on the firm's performance five years in the future. CamCell is presently searching for a new CEO. Which of the following statements is true?

CamCell may have to over-compensate its CEO in order to offset the personal risk a CEO would undertake under this plan

Given the demands for greater accountability and improved performance, which of the following is NOT a voluntary change many boards of directors have initiated?

Compensating directors with stock options rather than with fixed remuneration

__________ is an important influence in Japanese corporate governance structures.

Consensus

LeederTech is facing a hostile takeover. Its focus as a defense strategy has been to ensure some continuity. It has decided to pursue a strategy that will prevent an acquirer from replacing the entire board of directors immediately, even though this tends to have very low success and a negative or negligible effect on shareholder wealth. What strategy did LeederTech select?

Corporate charter amendment

Which of the following statements about corporate governance is false?

Corporate governance is best achieved with a board of directors with strong ties to management.

The CEO and chairman of the board of directors of Alta Corp. is dismayed by a lack of effort and insights the members provide during board meetings. The directors are all outsiders, are experienced, and run their own successful firms. The CEO/chair genuinely seeks their greater involvement. Which of the following would you recommend?

All of these are correct.

Amos Ball, Inc., is a printing company in Iowa that has been family owned and managed for three generations. Which of the following statements is MOST likely to be true?

Amos Ball, Inc. will perform better if a family member is CEO than if an outsider is CEO.

Agricultural Chemicals, Inc., was the target of a hostile takeover six months ago. The CEO and the top executives successfully fended off the takeover and are concentrating on strategies to improve the performance of the firm. Which of the following statements is MOST likely to be true?

The CEO and top executives should not consider their jobs secure.

Several members of the board of directors of American Textile Products (ATP) have proposed creating the position of lead director. Which of the following circumstances would MOST likely have initiated this proposal?

The CEO/chairperson of the board has been suspected of opportunistic behavior.

Which of the following statements about corporate governance in Germany is false?

The Vorstand is elected by the firm's employees.

Which of the following reasons would NOT explain the difficulty of determining appropriate executive compensation?

The compensation committee may not have comprehensive firm performance data.

. Broadly, the Dodd-Frank Wall Street Reform and Consumer Protection Act seeks to:

align financial institutions' actions with society's interests.

The ownership of major blocks of stock by institutional investors has resulted in all of the following EXCEPT:

a direct effect on firm performance.

Ambrose Bierce, the CEO of DictionAry, has been paid a lump sum amounting to three years' salary because DictionAry has been bought in a hostile takeover by its main competitor. Ambrose received:

a golden parachute.

Corporate governance is all of the following EXCEPT:

a method for resolving conflicts among corporate employees.

A hostile takeover defense wherein the target firm makes its stock less attractive to a potential acquirer is called:

a poison pill.

The interests of multinational corporations' shareholders may be best served when there is:

a variety of compensation plans for executives of foreign subsidiaries.

The separation between firm ownership and management creates a(n) __________ relationship.

agency

In Japan, the principal source of the active monitoring of large companies comes from:

banks

As ownership of the corporation is diffused, shareholders' ability to monitor managerial decisions

decreases.

At a recent stockholders meeting for Ignate Inc., a group of stockholders expressed disagreement with the way that the managers were using free cash flow. Because they wanted to be able to control how the cash is invested, the stockholders lobbied that the free cash flow should be:

distributed to them as dividends.

Institutional owners are:

financial institutions, such as mutual funds and pension funds, that control large-block shareholder positions.

Corporate governance is important to nations because:

firms seek to invest in nations with national governance standards that are acceptable to them.

The repurchase of the target firm's shares of stock that were obtained by the acquiring firm at a premium in exchange for an agreement that the acquirer will no longer target the company for takeover is called:

greenmail.

Ownership concentration is determined by both the number of:

large-block shareholders and the total percentage of shares they own.

Prints4U is a small printing firm in Minneapolis, MN. As is typical for a firm of this size, the managers own a __________ percentage of the firm. As a result, there is __________ separation between ownership and managerial control.

large; less

All of the following statements are true about the use of defense tactics by the target firm during a hostile takeover EXCEPT defense tactics:

make the costs of a takeover lower.

Managerial employment risk is the:

managers' risk of job loss, loss of compensation, and/or loss of reputation.

In the United States, the fundamental goal of business is to:

maximize shareholder wealth.

Monitoring by shareholders is usually accomplished through

the board of directors.

The governance mechanism MOST closely connected with deterring unethical behaviors by holding top management accountable for the corporate culture is:

the board of directors.

Product diversification provides two benefits to managers that do not accrue to shareholders: __________ and __________.

the opportunity for higher compensation through firm growth; a reduction in managerial employment risk

There has been an increased need for effective collaboration between board members and top-level managers as boards of directors have become more involved in:

the strategic decision-making process.