Chapter 10
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. a. True b. False
ANSWER: False
A top-level manager's reputation is a dependable predictor of his/her future behavior. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: False
As a rule, shareholders prefer more product diversification than do managers because shareholders wish to reduce risk and maximize wealth. a. True b. False
ANSWER: False
Both top executives and owners of the firm wish to diversify the firm to reduce risk. a. True b. False
ANSWER: False
Executive compensation is considered an external corporate governance mechanism because it is determined in part by market forces. a. True b. False
ANSWER: False
Foreign investors are playing a relatively minor role in the governance of firms in many countries. a. True b. False
ANSWER: False
Generally, board members are classified as insiders, unrelated insiders, outsiders, and unrelated outsiders. a. True b. False
ANSWER: False
In general, when governance mechanisms are strong, managers have free rein in their decisions. a. True b. False
ANSWER: False
In the United States, the members of the board of directors are a firm's key stakeholders and a company's legal owners. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: False
Research evidence suggests that ownership concentration is associated with lower levels of firm diversification, which conforms to the interests of stockholders. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: False
The separation of ownership and control is the most effective means used by firms to prevent managerial opportunism. a. True b. False
ANSWER: False
The three internal corporate governance mechanisms are ownership concentration, board of directors, and the market for corporate control. a. True b. False
ANSWER: False
The way that U.S. corporate boards of directors are presently structured, they have little influence on the unethical behavior of top management. a. True b. False
ANSWER: False
Well-designed stock option-based compensation plans should have the option strike prices substantially lower than the current stock prices. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: True
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. a. True b. False
ANSWER: True
Because top management decisions are usually complex and nonroutine, 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. a. True b. False
ANSWER: True
CEO duality exists when a single individual is both the CEO and the chair of the board. a. True b. False
ANSWER: 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
ANSWER: True
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. a. True b. False
ANSWER: True
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. a. True b. False
ANSWER: True
Corporate governance mechanisms are designed to ensure that top-level managers make strategic decisions that best serve the interests of all stakeholders. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: True
Ethically responsible companies design and use governance mechanisms that will at least minimally satisfy stakeholders' interests. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: True
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. a. True b. False
ANSWER: True
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. a. True b. False
ANSWER: True
If a stakeholder is dissatisfied with a firm, it will withdraw its support and give it to another firm. a. True b. False
ANSWER: True
In a large number of family-owned firms, ownership and managerial control are not separated. a. True b. False
ANSWER: True
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. a. True b. False
ANSWER: True
In recent years, the number of individuals who are large-block shareholders has declined and been replaced by institutional owners. a. True b. False
ANSWER: True
In the United States, the primary goal of a firm is to maximize profits to provide a financial gain to shareholders. a. True b. False
ANSWER: True
In the modern large U.S. corporation, the ownership and managerial control of the firm are separated. a. True b. False
ANSWER: True
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. a. True b. False
ANSWER: True
Large German firms must include employees, union members, and shareholders in the formal governance structure. a. True b. False
ANSWER: True
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. a. True b. False
ANSWER: True
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. a. True b. False
ANSWER: 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 non-management board member activities. a. True b. False
ANSWER: True
Ownership concentration is defined by the number of large-block shareholders and the total percentage of the firm's shares they own. a. True b. False
ANSWER: True
Ownership of many modern corporations is now concentrated in the hands of institutional investors rather than individual stockholders. a. True b. False
ANSWER: True
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. a. True b. False
ANSWER: True
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. a. True b. False
ANSWER: True
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. a. True b. False
ANSWER: True
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. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: True
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. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: True
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. a. True b. False
ANSWER: True
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.
ANSWER: a. align financial institutions' actions with society's interests.
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. a reduction in R&D expenditures.
ANSWER: a. high executive turnover.
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.
ANSWER: a. increased diversification of Sierra Infusion.
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. 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.
ANSWER: b. Amos Ball, Inc. will perform better if a family member is CEO than if an outsider is CEO.
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? a. Capital structure change b. Corporate charter amendment c. Greenmail d. Poison pill
ANSWER: b. Corporate charter amendment
Corporate governance primarily revolves around the relationship between which of the following two parties? a. Shareholders and the board of directors b. Shareholders and managers c. The board of directors and managers d. Owners and customers
ANSWER: b. Shareholders and managers
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? a. To defend against a hostile takeover b. To increase the level of diversification c. To enhance executive compensation d. To minimize managerial risk
ANSWER: b. To increase the level of diversification
As ownership of the corporation is diffused, shareholders' ability to monitor managerial decisions: a. increases. b. decreases. c. remains constant. d. is eliminated.
ANSWER: b. 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: a. used to pursue cross-border acquisitions. b. distributed to them as dividends. c. invested in new research and development. d. used to pay down corporate debt.
ANSWER: b. distributed to them as dividends.
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.
ANSWER: b. firms seek to invest in nations with national governance standards that are acceptable to them.
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.
ANSWER: b. headed by outside directors.
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
ANSWER: b. inside
Ownership concentration is determined by both the number of: a. large-block shareholders and the parties they represent. b. large-block shareholders and the total percentage of shares they own. c. outside directors and the parties they represent. d. outside directors and the total percentage of shares they own.
ANSWER: b. large-block shareholders and the total percentage of shares they own.
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.
ANSWER: b. maximize shareholder wealth.
Because activist pension funds are __________ in nature, they tend to take action when __________. a. reactive, a firm's performance, no matter the current level, could be improved b. reactive, a firm is underperforming c. proactive, a firm's performance is average or above-average d. proactive, a firm is overperforming but undervalued
ANSWER: b. reactive, a firm is underperforming
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.
ANSWER: b. riskier strategies with more focused diversification for the firm.
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? a. Capital structure change b. Corporate charter amendment c. Litigation d. Greenmail
ANSWER: c. Litigation
The separation between firm ownership and management creates a(n) __________ relationship. a. governance b. control c. agency d. dependent
ANSWER: c. agency
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) d. Section 404 creates excessive costs for firms.
ANSWER: c. an increased number of IPOs (initial public offerings)
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.
ANSWER: c. financial institutions, such as mutual funds and pension funds, that control large-block shareholder positions.
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. a. small, less b. small, greater c. large, less d. large, greater
ANSWER: c. large, less
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.
ANSWER: c. managers' risk of job loss, loss of compensation, and/or loss of reputation.
In the United States, a firm's key stakeholder(s) is(are) the: a. government. b. executives. c. shareholders. d. customers.
ANSWER: c. shareholders.
Which of the following statements about corporate governance is false? 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.
ANSWER: d. Corporate governance is best achieved with a board of directors with strong ties to management.
Which of the following is NOT an internal governance mechanism? a. Board of directors b. Ownership concentration c. Executive compensation d. Market for corporate control
ANSWER: d. Market for corporate control
The ownership of major blocks of stock by institutional investors has 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.
ANSWER: d. a direct effect on firm performance.
Corporate governance is all of the following EXCEPT: a. a set of 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. a way to ensure that top managers' interests are aligned with the interests of stockholders. d. a method for resolving conflicts among corporate employees.
ANSWER: d. a method for resolving conflicts among corporate employees.
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 __________. 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
ANSWER: d. 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: a. consumer protection. b. CEO compensation. c. regulation of derivatives. d. retirement accounts.
ANSWER: d. retirement accounts.
Monitoring by shareholders is usually accomplished through: a. management consultants. b. government auditors. c. the firm's top managers. d. the board of directors.
ANSWER: d. the board of directors.
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
ANSWER: d. the opportunity for higher compensation through firm growth, a reduction in managerial employment risk
The primary role of the board of directors is to monitor and control top-level executives to protect owners' interests. a. True b. False
ANSWER: 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. a. True b. False
ANSWER: True
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. a. True b. False
ANSWER: True
The use of executive compensation as a governance mechanism is more challenging to firms implementing international strategies than those strictly operating domestically. a. True b. False
ANSWER: True
Usually, large-block shareholders are considered to be those shareholders with at least __________ percent of the firm's stock. a. 5 b. 25 c. 50 d. 75
ANSWER: a. 5
Recent changes to Japan's corporate governance structure include which of the following? a. The role of banks in monitoring managerial behavior is less significant. b. Deregulation in the financial sector has increased the cost of mounting hostile takeovers. c. Increased regulation has spurred activity in the market for corporate control. d. The part banks play in controlling firm outcomes has become increasingly meaningful.
ANSWER: a. The role of banks in monitoring managerial behavior is less significant.
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. a golden parachute. b. a poison pill. c. greenmail. d. a silver handshake.
ANSWER: a. a golden parachute.
Historically, __________ have been at the center of the German corporate governance system. a. banks b. institutional shareholders c. public pension funds d. government agencies
ANSWER: a. banks
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: a. greenmail. b. a standstill agreement. c. crossing the palm with silver. d. a poison pill.
ANSWER: a. greenmail.
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. a. True b. False
ANSWER: False
Agency costs include incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals. a. True b. False
ANSWER: True
An agency relationship exists when one party delegates decision-making responsibility to a second party for compensation. a. True b. False
ANSWER: True
As globalization grows, adequate corporate governance is becoming an important requirement for doing business with foreign firms and in foreign countries. a. True b. False
ANSWER: True
Attitudes toward corporate governance in Japan are affected by the concepts of obligation, family, and consensus. a. True b. False
ANSWER: True
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. b. ensuring that the strike price value of the options can be lowered if the organizational environment becomes more risky. c. having the stock option plan designed by insiders on the board of directors who are familiar with day-to-day operations of the firm. d. consulting accounting advisors to make sure that the plan transfers wealth to the CEO without immediately appearing on the balance sheet of CyberScope.
ANSWER: a. setting the option strike price substantially higher than the current stock price.
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: a. the strategic decision-making process. b. selecting new CEOs. c. the firm's tax issues. d. governmental relations.
ANSWER: a. the strategic decision-making process.
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? a. Director of food service for IFS b. Board of directors of IFS c. Employees directly involved in the wrongdoing d. Head of contract services for the Marines
ANSWER: b. 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? a. This plan will be very attractive in luring candidates for the CEO position. b. CamCell may have to over-compensate its CEO in order to offset the personal risk a CEO would undertake under this plan. c. Institutional investors disapprove of long-term executive incentive plans and they may sell their blocks of stock in CamCell. d. This type of plan is likely to cause the CEO to underinvest in R&D in order to boost CamCell's long-term profitability.
ANSWER: b. CamCell may have to over-compensate its CEO in order to offset the personal risk a CEO would undertake under this plan.
__________ is an important influence in Japanese corporate governance structures. a. Innovation b. Consensus c. Competition d. Individualism
ANSWER: b. Consensus
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? a. Mr. Abercrombie will have a large market in Japan because the culture highly values consensus decision making. b. Japanese firms will have little interest in Mr. Abercrombie's specialty because these skills are already practiced at a high level. c. German firms will not be interested in Mr. Abercrombie's services because the German system of decision making is based on authority and few conflicts emerge. d. Mr. Abercrombie should find significant need for his services in companies in transitional economies.
ANSWER: b. Japanese firms will have little interest in Mr. Abercrombie's specialty because these skills are already practiced at a high level.
Which of the following statements about corporate governance in China is false? a. The Chinese governance system may be tilting toward the Western model. b. Private firms seek to establish political ties with the government to increase market value and avoid potential conflict between the principals. c. The state still uses direct and/or indirect controls to influence the strategies employed by most firms. d. Firms with higher state ownership tend to have lower market value and more volatility in those values over time.
ANSWER: b. Private firms seek to establish political ties with the government to increase market value and avoid potential conflict between the principals.
Which of the following statements about corporate governance in Germany is false? a. The Vorstand (management board) of a German corporation makes decisions about strategy and management. b. The Vorstand is elected by the firm's employees. c. Employees, union members, and shareholders appoint members to the Aufsichtsrat (the supervisory tier of the board). d. Large institutional investors such as pension funds and insurance companies are relatively insignificant owners of corporate stock.
ANSWER: b. The Vorstand is elected by the firm's employees.
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. reasonably compensating a CEO. b. a weak board of directors. c. the laxity of institutional investors. d. the difference in risk propensity between owners and managers.
ANSWER: b. a weak board of directors
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: a. elect an insider as the lead director. b. appoint another individual as chairperson of the board of directors. c. require Mr. Leagreet to personally certify the firm's financial reports. d. reduce the size of the stock option package provided to Mr. Leagreet.
ANSWER: b. appoint another individual as chairperson of the board of directors.
Managers in the United States receive __________ compensation than managers in the rest of the world. a. equivalent b. higher c. lower d. more variable
ANSWER: b. higher
The market for corporate control serves as a means of governance when: a. the firm is overpriced in the market. b. internal controls have failed. c. the corporation has greatly exceeded performance expectations. d. the top management team's interests and the owners' interests are aligned.
ANSWER: b. internal controls have failed.
The longer the focus of managerial incentive compensation, the greater the __________ top-level managers. a. earnings potential for b. risks borne by c. incentives for d. potential tax burden for
ANSWER: b. risks borne by
Given the demands for greater accountability and improved performance, which of the following is NOT a voluntary change many boards of directors have initiated? a. Moving toward having directors from different backgrounds b. Strengthening the internal management and accounting control systems c. Compensating directors with stock options rather than with fixed remuneration d. Establishing and using formal processes to evaluate the board's performance
ANSWER: c. Compensating directors with stock options rather than with fixed remuneration
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? a. ATP has been the initiator of several hostile takeovers in the last two years. b. The board has been successful in reducing the percentage of CEO pay that is composed of stock options. c. The CEO/chairperson of the board has been suspected of opportunistic behavior. d. The firm is traded on the New York Stock Exchange and must change its corporate governance to comply with the NYSE's new rules.
ANSWER: c. The CEO/chairperson of the board has been suspected of opportunistic behavior.
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: a. usually on the verge of bankruptcy. b. typically underperforming their industry. c. often performing above their industry averages. d. always outperforming their industry.
ANSWER: c. often performing above their industry averages
If the market for corporate control were efficient as a governance device, then only __________ would be targets for takeovers. a. firms with unethical top executives b. firms earning above-average returns c. poorly performing firms d. overvalued firms
ANSWER: c. 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: a. the roles of CEO and chairperson of the board of directors are usually combined. b. large institutional investors control large blocks of stock. c. private shareholders and large institutional investors rarely have large ownership positions in firms. d. of the focus on stewardship-management in German firms rather than the financial performance focus of U.S. firms.
ANSWER: c. private shareholders and large institutional investors rarely have large ownership positions in firms.
One means that is considered to improve the effectiveness of outside directors is: a. mandating that all outside directors be drawn from government or academia rather than industry. b. requiring that outside directors be former executives of the firm. c. requiring outside directors to own significant equity stakes in the firm. d. requiring that outside directors act objectively and have no ownership interest in the firm.
ANSWER: c. requiring outside directors to own significant equity stakes in the firm.
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? a. Requiring that the directors own stock in the company b. Establishing a formal process to evaluate the board's performance c. Electing a lead director d. All of these are correct.
ANSWER: d. All of these are correct.
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? a. Hostile takeover attempts are so common that they do not reflect negatively on the firm's performance. They are more a function of general market conditions. b. The fact that a hostile takeover has occurred is proof that the firm was underperforming. c. Research shows that once a hostile takeover has been defeated, the firm is safe from other hostile takeover attempts for many years. d. The CEO and top executives should not consider their jobs secure.
ANSWER: d. The CEO and top executives should not consider their jobs secure.
Which of the following reasons would NOT explain the difficulty of determining appropriate executive compensation? a. The decisions made by top-level managers are typically complex and nonroutine. b. An executive's decisions often affect firm performance only over the long run. c. A number of factors intervene between top-level management decisions and firm performance (e.g., unpredictable economic, social, or legal changes). d. The compensation committee may not have comprehensive firm performance data.
ANSWER: d. The compensation committee may not have comprehensive firm performance data.
A hostile takeover defense wherein the target firm makes its stock less attractive to a potential acquirer is called: a. greenmail. b. a standstill agreement. c. crossing the palm with silver. d. a poison pill.
ANSWER: d. a poison pill.
The interests of multinational corporations' shareholders may be best served when there is: a. a uniform compensation plan for all corporate executives—both U.S. and foreign. b. executive compensation that is primarily based on long-term performance. c. elevation of foreign executive compensation to U.S. levels. d. a variety of compensation plans for executives of foreign subsidiaries.
ANSWER: d. a variety of compensation plans for executives of foreign subsidiaries.
In Japan, the principal source of the active monitoring of large companies comes from: a. boards of directors. b. stock brokerage companies. c. the government. d. banks.
ANSWER: d. banks.
All of the following statements are true about the use of defense tactics by the target firm during a hostile takeover EXCEPT defense tactics: a. are usually beneficial for the executives of the target firm. b. are opposed by institutional investors. c. vary in their effectiveness as a defense to takeovers. d. make the costs of a takeover lower.
ANSWER: d. make the costs of a takeover lower.
Research suggests that boards of directors perform better if: a. the CEO is also the chairperson of the board of directors. b. the board includes employees as voting members. c. the board is homogenous in composition. d. outside directors own significant equity in the organization.
ANSWER: d. 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: a. bonuses. b. long-term incentives such as stock options. c. salary. d. penalties for inadequate firm performance.
ANSWER: d. penalties for inadequate firm performance.
A Japanese keiretsu is a: a. management structure related to total quality management systems. b. company union, which is a type of governance system. c. bank owing the largest shares of stock in the firm. d. system of cross-shareholding among firms.
ANSWER: d. system of cross-shareholding among firms.
The governance mechanism MOST closely connected with deterring unethical behaviors by holding top management accountable for the corporate culture is: a. ownership concentration. b. the market for corporate control. c. executive compensation systems. d. the board of directors.
ANSWER: d. the board of directors.
