Chapter 10
A board composed primarily of outside directors will have better insights as to the firms intended strategic initiatives, the reasons for the initiatives, and the outcomes expected from them than will inside directors
False
A top-level manager's reputation is a dependable predictor of his/her future behavior.
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
As a rule, shareholders prefer more product diversification than do managers because shareholders wish to reduce risk and maximize wealth.
False
Because top management decisions are usually complex and nonroutine, determining the quality of executive performance is beyond the power of boards of directors.
False
Both top executives and owners of the firm wish to diversify the firm to reduce risk.
False
DDD MetalWorks plans to go public in the next 2 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
Executive compensation is considered an external corporate governance mechanism because it determined in part by market forces.
False
For top-level managers, board acceptance of the acquiring firm's offer usually leads to job loss as the acquiring firms wants new leadership. If the offer is refused, however, the job loss risk is minimal.
False
Foreign investors are playing a relatively minor role in the governance of firms in many countries.
False
Generally, the board of directors can be classified as insiders, unrelated insiders, outsiders, and unrelated outsiders.
False
In general, when governance mechanisms are strong, managers have free rein in their decisions.
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
Individual shareholders with small ownership percentages are less dependent on the board of directors to represent their interests than are large block shareholders.
False
Institutional owners, despite their size, are usually unable to discipline ineffective top managers and cannot influence a firm's choice of strategies and overall strategic direction.
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
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
Research evidence suggests that ownership concentration is associated with lower levels of firm diversification, which conforms to the interests of stockholders.
False
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions related to consumer protection, systemic risk oversight, capital requirements for banks, but not for executive compensation.
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
The separation of ownership and control is the most effective means used by firms to prevent managerial opportunism.
False
The three internal corporate governance mechanisms are ownership concentration, board of directors, and the market for corporate control.
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
Well-designed stock option-based compensation plans should have the option strike prices substantially lower than the current stock prices.
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
A powerful CEO would oppose the appointment of a lead director on the board of directors.
True
Agency costs include incentives for executives, monitoring, enforcement costs, and any individual financial losses incurred by principals.
True
An advantage of severance packages is that they may encourage top-level managers to accept takeover bids that are attractive to shareholders.
True
An agency relationship exists when one or more persons (the principal or principals) hire another person or persons (the agent or agents) as decision-making specialists to perform a service.
True
As globalization grows, adequate corporate governance is becoming an important requirement for doing business with a foreign firms and in foreign countries.
True
Attitudes toward corporate governance in Japan are affected by the concepts of obligation, family, and consensus.
True
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 shareholders.
True
Because of recent ineffective performance, boards of directors are experiencing increasing pressure from shareholders, lawmakers, and regulators to be more effective in preventing managers from acting in their own interest.
True
Boards with many members from the firm's top management team tend to have weak monitoring and control systems for managerial decisions.
True
Corporate governance involves oversight in areas where owners, managers, and members of boards of directors may have conflicts of interest. a. True b. False
True
Corporate governance is a means to establish harmony between parties (the firm's owners and its top-level managers) whose interests may conflict.
True
Corporate governance is the set of mechanisms used to manage the relationship among stakeholders and to determine and control the strategic direction and performance of an organization.
True
Corporate governance mechanisms are designed to ensure that top managers make strategic decisions that best serve the interests of the entire group of stakeholders.
True
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
Ethically responsible companies design and use governance mechanisms that will at least minimally satisfy stakeholders' interests.
True
Executive compensation is a governance mechanism that seeks to align the interests of managers and owners through salaries, bonuses, and long-term incentive compensation such as stock awards and options.
True
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
Hedge funds, as part of the market for corporate control, identifies a firm that is underperforming and then invests in it with the goal of improving that firm's performance.
True
If a stakeholder is dissatisfied with a firm, it will withdraw its support and give it to another firm.
True
In a large number of family owned firms, ownership and managerial control are not separated.
True
In modern corporations—especially those in the United States and 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
In recent years, the number of individuals who are large-block shareholders have declined and been replaced by institutional owners such as mutual funds and pension funds.
True
In the United States, the primary goal of a firm is to maximize profits to provide a financial gain to shareholders.
True
In the modern U.S. corporation, the ownership and managerial control of the firm are separated.
True
Large German firms must include employees, union members, and shareholders in the formal governance structure.
True
Large-block shareholders typically own at least 5 percent of a corporation's issued shares.
True
Long-term incentives facilitates the firm's efforts through the board of directors' pay-related decisions to avoid potential agency problems by linking managerial compensation to the wealth of common shareholders.
True
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 nonmanagement board member activities.
True
Ownership of many modern corporations is now concentrated in the hands of institutional investors rather than individual stockholders.
True
Recent emphasis on corporate governance stems mainly from the failure of corporate governance mechanisms to adequately monitor and control top-level managers' decisions.
True
Research suggests that institutional activism may not have a strong direct effect on firm performance but may indirectly influence the targeted firm's strategic decisions, including those concerned with international diversification and innovation.
True
Scandals at Enron, WorldCom, and HealthSouth illustrate the negative effects of poor ethical behavior on a firm's efforts to satisfy stakeholders.
True
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
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
The market for corporate control is composed of individuals and firms that buy ownership positions or take over potentially undervalued corporations and make changes to those corporations, including the replacement of the top managers.
True
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
The most effective defense against a hostile takeover is the poison pill strategy.
True
The performance of individual board members and entire boards are being evaluated more formally and with greater intensity than in years past.
True
The primary role of the board of directors is to monitor and control top-level executives to protect owners' interests.
True
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
The top management of RavenCrest, Inc. have 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
The use of executive compensation as a governance mechanism is more challenging to firms implementing international strategies than those strictly operating domestically.
True
While the implementation of the Sarbanes-Oxley Act in 2002 has been controversial to some, most believe that it has had positive results in terms of protecting stakeholders and certain stockholder interests.
True
A virtually exclusive reliance on financial controls may occur when outsider-dominated boards exist. This may lead to all of the following EXCEPT a. high executive turnover. b. increased diversification of the firm. c. excessive management compensation. d. reduction in R&D expenditure.
a
An agency relationship exists when one party delegates a. decision-making responsibility to a second party. b. financial responsibility to employees. c. strategy implementation actions to functional managers. d. ownership of a company to a second party.
a
Broadly, the Dodd-Frank Wall Street Reform and Consumer Protection Act seeks to a. align financial institutions' actions with society's interests. b. increase the number of foreign firms listing on U.S. stock exchanges. c. require CEOs to attest to the accuracy of their companies' financial reports. d. increase consumer protection in pharmaceutical products.
a
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 a. increased diversification of Sierra Infusion. b. the addition of outside directors to the board. c. increased shareholder participation in decision making. d. greater concentration on Sierra's core industry.
a
Usually, large-block shareholders are considered to be those shareholders with at least ____ percent of the firm's stock.
a
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? a. Agency costs at Amos Ball are high. b. If research findings are valid, Amos Ball, Inc., will perform better if a family member is CEO than if an outsider is CEO. c. At Amos Ball, the opportunity for managerial opportunism is high. d. The functions of risk-bearing and decision making are separate at Amos Ball.
b
As ownership of the corporation is diffused, shareholders' ability to monitor managerial decisions a. increases. b. decreases. c. remains constant. d. is eliminated.
b
Compared to managers, shareholders prefer a. safer strategies with greater diversification for the firm. b. riskier strategies with more focused diversification for the firm. c. safer strategies with more focused diversification for the firm. d. riskier strategies with greater diversification for the firm.
b
Corporate governance is important to nations because a. shareholders want large stock returns. b. firms seek to invest in nations with national governance standards that are acceptable to them. c. company boards have lobbied for strong governance. d. the United States requires that other nations adopt its governance practices.
b
Corporate governance revolves around the relationship between which two parties? a. shareholders and the board of directors b. shareholders and managers c. the board of directors and managers d. None of the these options are correct.
b
Generally, a board member who is a source of information about a firm's day-to-day activities is classified as a(n) ______ director. a. lead independent b. inside c. related d. encumbered
b
In contrast to managers' desires, shareholders usually prefer that free cash flows be a. used to diversify the firm. b. returned to them as dividends. c. used to reduce corporate debt. d. re-invested in additional corporate assets.
b
In the United States, the fundamental goal of business is to a. ensure customer satisfaction. b. maximize shareholder wealth. c. provide job security. d. generate profits.
b
Managers may decide to invest________in products that are not associated with the firm's current lines of business to increase the firm's level of diversification and decrease their employment risk. a. unsubstantial profits b. free cash flows c. marginal profits d. frozen assets
b
Ownership concentration is determined by both a. the number of stockholders and the parties they represent. b. the number of stockholders and total percentage of shares they own. c. the number of outside directors and the parties they represent. d. the number of outside directors and total percentage of shares they own.
b
Research suggests that the activism of institutional investors such as TIAA-CREF and CalPERS a. increases shareholder value significantly. b. may not have a direct effect on firm performance. c. is so aggressive that boards of directors have become overly cautious. d. has weakened the effect of other governance mechanisms.
b
The New York Stock Exchange requires that the audit committee be a. available to comment to external analysts. b. headed by outside directors. c. liable for any illegal actions by the top management team. d. made up of CPAs with auditing experience.
b
Agency costs reflect all of the following EXCEPT _____ costs. a. monitoring b. enforcement c. opportunity d. incentive
c
All of the following are consequences of the Sarbanes-Oxley Act EXCEPT a. a decrease in foreign firms listing on U.S. stock exchanges. b. internal auditing scrutiny has improved and there is greater trust in financial reporting. c. an increased number of IPOs (initial public offerings) are expected. d. Section 404 creates excessive costs for firms.
c
Complete the following: In small firms, managers often own a _______ percentage of the firm, which means there is ______ separation between ownership and managerial control. a. small; small b. small; large c. large; small d. large; large
c
In the United States, a firm's key stakeholder(s) is(are) the a. government. b. executives. c. shareholders. d. customers.
c
Institutional owners are a. shareholders in the large institutional firms listed on the New York Stock Exchange. b. banks and other lending institutions that have provided major financing to the firm. c. financial institutions such as mutual funds and pension funds that control large-block shareholder positions. d. prevented by the Sarbanes-Oxley Act from owning more than 50 percent of the stock of any one firm.
c
Managerial employment risk is the a. risk that managers will behave opportunistically. b. risk undertaken by managers to earn stock options. c. managers' risk of job loss, loss of compensation, and/or loss of reputation. d. risk managers will not find a new top management position if they should be dismissed.
c
The separation between firm ownership and management creates a(n) relationship. a. governance b. control c. agency d. dependent
c
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 to _______ . a. generate free cash flows; reduce the risk of total firm failure b. increase the price of the firm's stock; increase the dividends paid out from free cash flows c. reduce the risk of total firm failure; reduce their total portfolio risk d. reduce their employment risk; increase the company's value
d
All of the following are areas covered by the Dodd-Frank Wall Street Reform and Consumer Protection Act EXCEPT a. consumer protection. b. CEO compensation. c. regulation of derivatives. d. retirement accounts.
d
Corporate governance is all of the following EXCEPT a. mechanisms used to determine and control the strategic direction and performance of organizations. b. a means to establish and maintain harmony between owners and top managers whose interests may conflict. c. ensuring that top managers' interests are aligned with the interests of stockholders. d. resolve conflicts among corporate employees.
d
Monitoring by shareholders is usually accomplished through a. management consultants. b. government auditors. c. the firm's top managers. d. the board of directors.
d
Product diversification provides two benefits to managers that do not accrue to shareholders: ______ and _____ . a. greater experience in a wider range of industries; lessening of managerial employment risk b. the manager frequently invests in the acquired firm, which allows him or her extensive profits; the manager can frequently buy excess assets divested by the acquired firm c. the manager's supervisory needs are lowered; the manager is allowed greater time to oversee a wider range of activities d. the opportunity for higher compensation through firm growth; a reduction in managerial employment risk
d
The ownership of major blocks of stock by institutional investors have resulted in all of the following EXCEPT a. making CEOs more accountable for their performance. b. challenges to the decisions of boards. c. focusing attention on ineffective boards of directors. d. a direct effect on firm performance.
d
Which of the following is NOT an internal governance mechanism? a. the board of directors b. ownership concentration c. executive compensation d. the market for corporate control
d
Which of the following is a FALSE statement about corporate governance? a. Governance is used to establish order between parties whose interests may be in conflict. b. Corporate governance mechanisms sometimes fail to monitor and control top managers' decisions. c. Corporate governance mechanisms can be in conflict with one another. d. Corporate governance is best achieved with a board of directors with strong ties to management.
d
