Strategic Management Chapter 10

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.

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

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

True/False: Corporate governance involves oversight in areas where owners, managers, and members of boards of directors may have conflicts of interest.

True

True/False: Corporate governance is a means to establish and maintain harmony between parties (the firm's owners and its top- level managers) whose interests may conflict.

True

True/False: Corporate governance is the set of mechanisms used to manage the relationships among stakeholders and to determine and control the strategic direction and performance of organizations.

True

True/False: Corporate governance mechanisms are designed to ensure that top-level managers make strategic decisions that best serve the interests of all stakeholders.

True

True/False: Critics advocate reforms to ensure that independent outside directors represent a significant majority of the total membership of the board. But outsider-dominated boards may emphasize the use of financial as opposed to strategic controls. The risk of reliance on financial controls is that they may encourage managers to make decisions to maximize their interests and reduce their employment risk.

True

True/False: Ethically responsible companies design and use governance mechanisms that will at least minimally satisfy stakeholders' interests.

True

True/False: Failures of corporate internal controls and inadequate internal control systems allowed unethical executives at such companies as Enron and WorldCom to act in their own self-interest.

True

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

True

True/False: Hedge funds, as part of the market for corporate control, identify a firm that is underperforming and then invest in it with the goal of improving that firm's performance.

True

True/False: If a stakeholder is dissatisfied with a firm, it will withdraw its support and give it to another firm.

True

True/False: In a large number of family-owned firms, ownership and managerial control are not separated.

True

True/False: In modern corporations—especially those in the United States and the United Kingdom—a primary objective of corporate governance is to ensure that the interests of top-level managers are aligned with the interests of shareholders.

True

True/False: In recent years, the number of individuals who are large-block shareholders has declined and been replaced by institutional owners.

True

True/False: In the United States, the primary goal of a firm is to maximize profits to provide a financial gain to shareholders.

True

True/False: In the modern large U.S. corporation, the ownership and managerial control of the firm are separated.

True

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

True

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

True

True/False: Long-term incentives facilitate a board of directors' pay-related decisions designed to avoid potential agency problems by linking managerial compensation to the wealth of common shareholders.

True

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

True

True/False: One of the changes to enhance the effectiveness of the board of directors is the creation of a "lead director" role that has strong powers with regard to the board agenda and oversight of non-management board member activities.

True

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

True

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

True

True/False: Recent global emphasis on corporate governance stems mainly from the apparent failure of corporate governance mechanisms to adequately monitor and control top-level managers' decisions.

True

True/False: Research suggests that institutional activism may not have a strong direct effect on firm performance, but it may indirectly influence a targeted firm's strategic decisions, including those concerned with social issues.

True

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

True

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

True

True/False: Stock option repricing, where the strike price value of the option has been lowered from its original position, sometimes happens when firm performance is poor.

True

Institutional owners are:

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

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

5

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.

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.

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

False

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

False

True/False: Amelia Smith is the sole owner of the successful restaurant chain, Amelia's Café. Ms. Smith has taken a no-interest loan from the company in order to build a luxurious seaside house for herself in Carmel, California. This constitutes a classic agency problem.

False

True/False: As a rule, shareholders prefer more product diversification than do managers because shareholders wish to reduce risk and maximize wealth.

False

True/False: Both top executives and owners of the firm wish to diversify the firm to reduce risk.

False

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

False

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

False

True/False: Generally, board members are classified as insiders, unrelated insiders, outsiders, and unrelated outsiders.

False

True/False: In general, when governance mechanisms are strong, managers have free rein in their decisions.

False

True/False: In the United States, the members of the board of directors are a firm's key stakeholders and a company's legal owners.

False

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

False

True/False: MTW MetalWorks plans to go public in the next two years. In order to be listed on the New York Stock Exchange, the firm will need to restructure its present board of directors, which is made up of a majority outside independent directors, to a board of directors that is dominated by insiders and related outsiders.

False

True/False: Managers in firms that have been subjects of hostile takeovers usually find that their value to the new firm has been enhanced because of their in-depth insider knowledge.

False

True/False: More intense application of governance mechanisms such as mandated by Sarbanes-Oxley and Dodd-Frank may cause firms to take on fewer risky projects and thus increase potential shareholder wealth.

False

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

False

True/False: Pat and Terry are top-level managers at Descitt Corp. When LVG Enterprises made an offer to purchase Descitt, Pat and Terry felt that their jobs were in jeopardy. Now that the Descitt board has rejected the offer, Pat and Terry view this as an expression of faith in their leadership and can be confident that their positions at the firm are secure.

False

True/False: Ray and Gina own shares of stock in a number of different companies. None of their holdings are very large. Because they make their own investment decisions, they are not as dependent on the board of directors to represent their interests as the large-block shareholders are.

False

True/False: Research evidence suggests that ownership concentration is associated with lower levels of firm diversification, which conforms to the interests of stockholders.

False

True/False: The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions related to consumer protection, systemic risk oversight, and capital requirements for banks, but not for executive compensation.

False

True/False: The increased use of the market for corporate control has decreased the sophistication and variety of managerial defense tactics that are used in takeovers.

False

True/False: The separation of ownership and control is the most effective means used by firms to prevent managerial opportunism.

False

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

False

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

False

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

False

True/False: When the option strike prices in an executive stock option-based compensation plan have been lowered, it is usually a defense to a hostile takeover.

False

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

True/False: CEO duality exists when a single individual is both the CEO and the chair of the board.

True

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.

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

True/False: Agency costs include incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals.

True

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

True

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

True

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

True

True/False: Awareness by top managers of the existence of external investors in the form of individuals (e.g., Carl Icahn) and groups (e.g., hedge funds) often positively influences them to align their interests with the firm's shareholders.

True

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

True

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

True

True/False: The Dodd-Frank Wall Street Reform and Consumer Protection Act is the most sweeping set of financial and regulatory reforms in the United States since the Great Depression.

True

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

True

True/False: The market for corporate control may not be as efficient as a governance device as theory suggests because takeover targets are not always low performers with weak governance.

True

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

True

True/False: The separation of the positions of CEO and chairperson of the board of directors reduces the power of the CEO over firm governance practices.

True

True/False: The top management of RavenCrest, Inc. has significant stock options in RavenCrest. They are therefore more likely to gain in making an agreement to be acquired, especially if they have golden parachutes.

True

True/False: The use of executive compensation as a governance mechanism is more challenging to firms implementing international strategies than those strictly operating domestically.

True

True/False: Xion Industries is a private firm, but it experiences both direct and indirect control from the government to influence the strategies it uses. In addition, it finds it advantageous to maintain political ties with the government in order to gain access to resources. Of the United States, Japan, China, and Germany, it is most likely that Xion is based in China.

True

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

agency

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

align financial institutions' actions with society's interests.

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

an increased number of IPOs (initial public offerings)

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.

Historically, __________ have been at the center of the German corporate governance system.

banks

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.

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.

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.

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.

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

One means that is considered to improve the effectiveness of outside directors is:

requiring outside directors to own significant equity stakes in the firm.

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

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:

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

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.

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.