Strat 5700 ch 8

A board of directors typically consists of

10 to 15 individuals drawn from a firm's top management group and from individuals outside the firm

) In 1970, institutions owned ________ percent of the equity traded in the United States and by 2002 they owned ________ percent of the equity traded in the United States.

32;62

In 2005, what percentage of the equity traded in the United States was owned by institutional investors?

59%

The divided loyalties that divisional staff managers have between corporate staff managers and functional managers is potentially the most problematic in ________ staff functions.

Accounting

The ________ is the subcommittee of the board of directors that is responsible for ensuring the accuracy of accounting and financial statements

Audit committee

Which component of the M-form structure evaluates the firm's decision making to ensure that it is consistent with the interests of equity holders?

Board of directors

Which role in the office of the president is responsible for strategy implementation?

Chief operation officer

The primary responsibility of the ________ is to provide information about the firm's external and internal environments to the firm's senior executive.

Corporate staff

Rather than having profit-and-loss responsibilities, ________ are assigned a budget and manage their operations to that budget

Cost Centers

) In a multidivisional structure, each business that the firm engages in is managed through a

Division

________ have full profit-and-loss responsibility and typically have multiple functional managers reporting to them.

Division general managers

) In 1970, institutions owned 62 percent of the equity traded in the United States; by 1990, institutions owned 48 percent of this equity and by 2002, they owned only 32 percent of this equity.

False

) In a diversified firm, market prices are set by a firm's corporate management to accomplish corporate objectives while transfer prices are determined by the market forces of supply and demand

False

) In principle, only the CEO and the president report to the board of directors while other senior managers report only to the CEO.

False

) It is unusual for a diversified firm to change its transfer-pricing mechanisms every few years in an attempt to find the "right" transfer-pricing mechanism

False

A board of directors typically consists of 15 to 30 indiciduals drawn from a firm's top management group

False

All firms that use the multidivisional structure use the same criteria for defining the boundaries of profit-and-loss centers.

False

An important study on executive compensation found that differences in CEO cash compensation is not very responsive to differences in firm performance even if a substantial percentage of the CEO's compensation came in the form of stock and stock options in the firm

False

Each division in an M-form organization typically adopts a matrix structure and the division general manager takes on the role of senior project executive

False

Economic measures of divisional performance in a diversified firm compare a division's performance with a firm's cost of capital and these measures increase the potential for gaming, which is generally minimized by accounting measures.

False

If a well-managed diversified firm uses both accounting and economic measures, it will be able to unambiguously evaluate divisional performance.

False

In an M-form organization the role of the board of directors is to formulate corporate strategies consistent with equity holders' interests and to assure strategy implementation.

False

In an M-form organization, the chief executive officer is solely responsible for strategy implementation.

False

In an agency relationship the party delegating the decision-making authority is cllaed the agent

False

Only accounting measures of performance can be used in accurately measuring the performance of divisions within a diversified firm.

False

Research on outside members of boards of directors tends to show that outside directors, as compared to insiders, tend to focus less on monitoring a firm's economic performance than on other measures of firm performance

False

The most common organization structure for implementing a corporate diversification strategy is the U-form

False

The title chairman of the board often, but not always, identifies the firm's senior executive.

False

To the extent that a firm exploits real economies of scope in implementing a diversification strategy, it will be able to unambiguously evaluate the performance of individual division in that firm.

False

The ________ is a subcommittee of the board of directors that maintains the relationship between the firm and external capital markets.

Finance committee

Which of the following statements regarding institutional investors is accurate?

High levels of institutional ownership lead firms to sell strategically unrelated businesses

The most common organizational structure for implementing a corporate diversification strategy is the ________ structure

M-form

When compared to the strategy implementation responsibilities of senior executives in U-form organizations, when implementing strategy, division general managers in M-form organizations

Must cooperate with other divisions to exploit corporate econies of scope.

Which of the following statements regarding outside members of boards of directors is accurate?

Outside directors, as compared to insiders, tend to focus more on monitoring a firm's economic performance than on other measures of firm performance and are more likely than insider members to dismiss CEOs following poor performance.

In an agency relationship, the party that delegates decision-making authority to another individual is known as the

Principal

The divisions of an M-form organization are true

Profit-and-loss centers

The two responsibilities of the senior executive in an M-form organization are

Strategy formulation and strategy implementation.

The M-form structure is designed to create checks and balances for managers that increase the probability that a diversified firm will be managed in ways consistent with

The Interests of its equity holders

Supervision of the board of directors in its monitoring role is the responsibility of

The chairman of the board

) In choosing which transfer pricing system to use, a firm should be less concerned about finding the "right" transfer-pricing mechanism and be more concerned about choosing a transfer-pricing policy that creates the fewest management problems

True

) In the multidivisional structure, each business that the firm engages in is managed through a division

True

Another Name for the M-form is the multidivisional structure.

True

By adjusting for a division's earning and accounting for the cost of investing in a division, economic value added is a much more accurate estimate of a division's economic performance than are traditional accounting measures of performance.

True

Corporate spin-offs are different from asset divestitures.

True

Divisions in an M-form organization should be large enough to represent identifiable business entities but small enough so that a division general manager can manage each one effectively.

True

Economic methods of divisional performance in a diversified firm build on accounting methods but adjust those methods to incorporate short-term investments that may generate long-term benefits.

True

In zero-based budgeting, each project has to stand on its own merits each year by being included among the important projects that a firm can afford to fund and no project receives funding for the future simply because it received funding in the past.

True

Institutional owners are usually pension funds, mutual funds, insurance companies, or other groups of investors that have joined together to manage their investments

True

Intermediate products or services are those products or services that are produced in one division of a diversified firm that are used as inputs by another division.

True

One common agency problem occurs when managers decide to take some of a firm's capital and invest it in managerial perquisites that do not add economic value to the firm but that do directly benefit those managers.

True

One of the strengths of using a hurdle rate to measure the performance of divisions in a diversified firm is that if the corporation has a single hurdle rate, there is little ambiguity about the performance objectives of divisions

True

The M-form structure is designed to create checks and balances for managers that increase the probability that a diversified firm will be managed in ways consistent with the interests of its equity holders.

True

The divisions in an M-form organization are true profit-and-loss centers

True

The most popular economically oriented measure of division performance in a diversified firm is economic value added

True

The senior executive in an M-form organization has two responsibilities: strategy formulation and strategy implementation

True

To the extent that a board of directors begins to operate a business on a day-to-day basis, it goes beyond its capabilities

True

Traditionally, the compensation of corporate managers in a diversified firm has been only loosely connected to the firm's economic performance.

True

Transfer prices should equal opportunity cost.

True

Whenever one party to an exchange delegates decision-making authority to a second party, an agency relationship has been created between these parties.

True

In an M-form organization, the management of day-to-day operations is delegated to

divisional general managers and functional managers who report to division general managers

Two Common agency problems include

managers investing some of a firm's capital in managerial perquisites that do not add economic value to a firm and managerial risk aversion

The senior executive (the president or CEO) in an M-form organization has two responsibilities:

strategy formulation and strategy implementation

In examining the question of whether the roles of CEO and chairman should be combined, empirical research on this question suggests

that combining these roles is positively correlated with firm performance when the firm operates in slow-growth and simple competitive environments