MGT 444: Final Exam Sample

Arguments against downsizing -Utilitarian critique

-Legitimate expectations (implicit agreement) -Fairness (merit) -Stakeholder Theory -CSR

Arguments in favor of downsizing

-Shareholder value principle -Survival of the company -Utilitarian justification

justifications for csr

-moral (normative) -sustainability -license to operate -reputation -pursuing shared value

Justifications for shareholder value principle

1. Maximizing shareholder value maximizes the value of the whole firm 2. Stakeholder management distorts entrepreneurial risk-taking incentives 3. Having more than one objective function is a recipe for confusion 4. Non-shareholding stakeholders can become shareholders, but the reverse is not easy 5. The law fills the judicial void for stakeholders

Classified Board

A board on which directors serve for specified terms, usually three years, with only a fraction of them up for reelection at any one time. Also called staggered board.

Which of the following is a correct statement about B Corps?

A nonprofit organization called B Lab assesses companies to certify B Corps that meet B Lab's standard of social and environmental performance [see Tabuchi's New York Times article and Kapner's Wall Street Journal article. Becoming a B Corp is different from state laws, including those in Delaware, that can award companies status as "public benefit corporations."]

According to Lori Ryan, Ann Buchholtz, and Robert Kolb in their article "New Directors in Corporate Governance and Finance: Implications for Business Ethics Research," what does "proxy access" mean?

A proxy access is a shareholder empowerment action that would give investors the right to place competing nominees for director seats on companies' official proxies

CEO duality

A situation in which an individual holds both the CEO and chair of the board title

Which of the following statements is correct?

According to the article "Toshiba Accounting Scandal Highlights Issues in Corporate Governance," the accounting scandal at the Japanese electronics conglomerate reflects poor transparency and ineffective monitoring by the board of directors

According to Anant Sundaram and Andrew Inkpen in their article "The Corporate Objective Revisited," why does stakeholder management distort entrepreneurial risk-taking incentives? Write your answer inside the box below.

As residual claimants, shareholders can diversify their investment portfolios and are therefore willing to take more entrepreneurial risks to maximize the profit of the firm, for example by pursing high-growth investment opportunities. By contrast, because managers' human capital and financial capital are often tied up in the firm's assets, managers are more risk averse than shareholders. Managing on behalf of fixed claimants, i.e., stakeholder management, exacerbates the incentive for entrepreneurial risk aversion because fixed claimants

Justification for whistleblowing: The Complicity Theory

C1. What you will reveal derives from your work for an organization C2. You are a voluntary member of that organization C3. You believe that the organization, though legitimate, is engaged in serious moral wrongdoing C4. You believe that your work for that organization will contribute (more or less directly) to the wrong if (but not only if) you do not publicly reveal what you know C5. You are justified in beliefs C3 and C4; and C6. beliefs C3 and C4 are true.

golden parachutes

Clauses written into executive contracts that provide special payments to key executives who might lose their position or be otherwise disadvantaged if another company took control of the organization through a merger or acquisition

According to Margaret Blair in her book "Ownership and Control," what best describes the concept that refers to the whole set of legal, cultural, and institutional arrangements that determine what publicly traded corporations can do, who controls them, how that control is exercised, and how the risks and returns from the activities they undertake are allocated.

Corporate Governance

public benefit corporations

Corporation formed primarily for charitable purposes

Stakeholder theory (3 justifications)

Descriptive justification mainly comes down to researchers pointing to a trend of management tendencies to adopt a stakeholder approach or not Instrumental Justification is the gap that the descriptive justification leaves between the facts and the reasons behind them is attempted explained by the instrumental approach. The instrumental approach strives to connect stakeholder theory with superior financial performance. Normative justification is their main argument for stakeholder theory being fundamentally normative is that the alternative, shareholder capitalism, is morally unacceptable. The arguments for the normative justification are based on ethics, morality, utilitarianism, corporate social responsibility etc.

At Facebook, each share owned by Mark Zuckerberg (co-founder, CEO, and chairman of Facebook Inc.) has 10 votes per share, but other shareholders who bought stock in the IPO have one vote per share. What is the term that best describes this arrangement?

Dual-class share structure

Which of the following is not considered a main duty of a board of directors at a publicly traded corporation in the United States?

File a shareholder resolution to separate the CEO position from the chairperson position of the board

According to Margaret Blair in her book Ownership and Control, how has equity ownership of large publicly traded corporations in the United States changed during the past several decades after the publication of Adolf Berle and Gardiner Means' landmark study in 1932? In the box below, briefly state the main feature of what Blair called "Revised Berle-Means Model" which highlights the change in equity ownership of large corporations.

In the past few decades, large financial institutions (such as pension funds, mutual funds, and insurance companies) have collectively increased equity ownership of large publicly traded corporations in the United States. [Optional: This contrasted the pattern of corporate ownership reported in Berle and Means' 1932 study, which noted that by the end of the 1920s the dispersion of share ownership of large corporations was so great that the managements of these companies were deemed to be in control themselves and not truly answerable to any particular owners.]

Which of the following statements correctly summarizes James Walsh's critique of Steven Kaplan's article "Are U.S. CEOs overpaid," where Kaplan argued that the typical U.S. CEOs are not overpaid and that it is possible that the CEOs are even underpaid?

Kaplan focused exclusively on other highly paid professionals as reference points while ignoring more relevant and legitimate reference points such as ordinary workers

fixed claimants

Non-shareholding stakeholders are paid the fixed amount as specified in the agreements or contracts; lenders are paid nothing more than principal and balance as specified in the lending terms; employees are paid the fixed amount of wages and salaries as specified in the employment agreement

According to Thomas Donaldson and Lee Preston in their article "The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications," what is a normative justification of stakeholder management?

Normative justification establishes that stakeholder management is the right thing to do because the interests of all stakeholders are of intrinsic value. That is, each group of stakeholders merits consideration for its own sake and not merely because of its ability to further the interests of some other group, such as the shareholders

Plurality vs. majority

Plurality voting cares about which choice received the most votes. Majority voting requires a choice to get over 50% of the votes. Run-off voting systems and alternative vote will always have a majority winner because if they don't have one initially, they eliminate candidates until they have a majority winner. Plurality example is the U.S. presidential elections in which the winner isn't required too and frequently doesn't win over 50% of the nations votes. Australia's congress is an example of a majority voting system.

Which of the following correctly describes how poison pill works?

Poison pills make a takeover prohibitively less attractive to an acquirer by making the shares of the target company worth less after a takeover

What are the tactics that companies use as a defense against hostile takeovers?

Poison pills, golden parachutes, classified boards

In December 2014, the U.S. Securities and Exchange Commission (SEC) issued a decision that allowed Whole Foods Market Inc. to exclude a non-binding shareholder proposal that would make it easier for investors to nominate directors to be elected at the company's annual shareholder meetings because the company was offering a similar corporate-governance change. Such proposals are known as

Proxy access

What is a poison pill? How does it work?

Rights offering made to existing shareholders, allow existing shareholders to buy stock at very low price, used to avoid a takeover, increased shares may dilute ownership % of firm taking over, discourages hostile takeover

Justification for whistleblowing: The Standard Theory

S1. The organization will do serious and considerable harm to the public S2. The whistleblower has identified the threat, reported it to her supervisor, and concluded that the superior will do nothing effective S3. The whistleblower has exhausted other internal procedures within the organization S4. The whistleblower has evidence S5. The whistleblower believes that revealing the threat will prevent the harm (see text for complete theory)

Which of the following does not correctly state Anant Sundaram and Andrew Inkpen's argument in their article "The Corporate Objective Revisited"?

Shareholder value principle has been predominant in the United States throughout the history of American corporations

residual claimants

Shareholders are paid after all other parties are paid; they get nothing if the company use all the money paying everyone else, and they get all the remaining profits if the business is profitable enough to pay everyone else and have some leftovers.

Which one of the following is not among the prevailing justifications for corporate social responsibility (CSR), according to Michael Porter and Mark Kramer in their article "Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility"?

Shareholders have greater ability to explicitly contract with the firm and thereby have the backing of the judicial system

The company that owned the Chicago Cubs baseball team and operated its Wrigley Field stadium refused to approve installation of lights and night baseball because Phillip Wrigley, a chewing gum company executive and the owner/manager of the stadium, believed that night baseball might have a negative impact on the surrounding neighborhood. The court held for Wrigley notwithstanding lower attendance and financial losses. The court's decision most closely reflects:

Stakeholder management theory

Explain the core argument of agency theory, as introduced and discussed in several readings (such as Blair (1995), Ryan, Buchholtz, and Kolb (2010), Shin (2013), Sundaram and Inkpen (2004), and Goranova and Ryan (2014)). Make sure to clarify who are considered "principals" and "agents" in a typical corporate governance setting in the United States. Write your answer inside the box below.

The argument of agency theory is that the separation of ownership and control creates a conflict of interest and a misalignment of incentives because agents prefer to shirk, maximize their own self-interest, and do not always act in the best interest of principals. In corporate governance settings, owners (shareholders) are the principals and managers (such as CEO and executive managers) are the agents.

According to Taekjin Shin's article "The Shareholder Value Principle: The Governance and Control of Corporations in the United States," which of the following factors did not contribute to the rise of the shareholder value principle as a predominant business principle in the United States?

The increased dispersion of corporate ownership by individual investors in the 1980s

The Friedman doctrine

The only social responsibility of business is to increase profits, as long as the company stays within the rules of the law

Say on pay

This term refers to the right of shareholders to have a direct vote regarding executive compensation

What is a dual-class share structure? What are the pros and cons?

Two separate stocks, one with more voting power. Pros: More power stays concentrated Cons: Less power to regular stockholders, more power to the investors and CEO's

Paradox Three: The paradox of failure

Whistleblowers have not had much success in actually preventing harm.

Paradox Two: The paradox of missing harm

Whistleblowers often act in conditions when they cannot prevent harm. They often report on harm after-the-fact.

Paradox One: The paradox of burden

Whistleblowers usually face great risks because of their actions. The conditions of the standard theory cannot provide enough justification for an agent to take up such risk.

This question is based on a testimony made by John Castellani (President of Business Roundtable, an organization representing CEOs of major U.S. corporations) given before the U.S. House of Representatives Committee on Financial Services (see Appendix A at the end of this exam). Do you agree or disagree with Mr. Castellani's view about proxy access? Defend your position using concepts, terms, or theories that you learned in this course. Write your answer inside the box below.

You can develop your argument either in support of or against Castellani's position. Either way, a good answer should (1) address the specific arguments of Castellani as expressed in his testimony and (2) as required in the exam question, use relevant concepts, terms, or theories to support your position. You can use any concepts, terms, or theories that we learned, but your answer should clearly demonstrate how the concepts, terms, or theories you chose are relevant to Castellani's case.

This question is based on a Wall Street Journal article "Buybacks Can Juice Per-Share Profit, Pad Executive Pay" found in Appendix B of this exam. Do you think the corporate practice of buying their own stock is ethically justifiable? Why or why not? Defend your position using concepts, terms, or theories that you learned in this course. Write your answer inside the box below. [Hint: "EPS" stands for earnings per share, which is an indicator of a company's profitability. EPS is calculated by net income less any dividends paid to the shareholders, divided by the number of outstanding shares.]

You can develop your argument either in support of or against the WSJ's article's critique of stock buybacks. Either way, a good answer should (1) address the specific arguments about stock buybacks as expressed in the article and (2) as required in the exam question, use relevant concepts, terms, or theories to support your position. You can use any concepts, terms, or theories that we learned, but your answer should clearly demonstrate how the concepts, terms, or theories you chose are relevant to stock buybacks.

According to the article "Some Paradoxes of Whistleblowing" by Michael Davis, which of the following is not considered an element of the complicity theory of whistleblowing?

You have a good reason to believe that revealing the information you discovered will prevent the harm to the public

B Corps (benefit corporation)

a company whose character allows the board to consider social environment ahead of profit maximization

Shareholder activism

actions by large shareholders to protect their interests when they feel that managerial actions of a corporation converge from shareholder value maximization.

The term shareholder value refers to

any economic value, profit, or wealth that is created by the corporation as a direct result of its business operation, and that is distributed to the owners of corporate equities, in other words, the shareholders.

Kaplan vs. Walsh debate

ceo pay

what is the main issue with ceo duality?

conflict of interest

What kind of claimants for stakeholders?

fixed claimants

"proxy access"

gives investors the right to place competing nominees for director seats on companies' official proxies.

residual claimant

is the agent who receives the remainder of a random amount once predictable payments are made

What is the separation of ownership and control in publicly traded corporations?

it means that the shareholders aren't really in control of the company

Who are the Agents

managers

What kind of claimants for shareholders?

residual claimants

agency theory key insights

separation of ownership and control conflict of interest

Who are the Principals

shareholders/ owners

Stewardship theory

sincere and doing the right thing

According to Lori Ryan, Ann Buchholtz, and Robert Kolb in their article "New Directors in Corporate Governance and Finance: Implications for Business Ethics Research," what does "CEO duality" mean? Provide a brief definition of the term. Write your answer inside the box below.

situation in which a ceo serves the board chair position

The term shareholder value principle also refers to

the business principle that the primary objective of corporations is to maximize shareholder value

What does it mean when someone says "shareholders are the residual claimants"?

they are the ones who receive the profit after what is left over with costs

What was Berle and Means' finding?

they found out that corporations aren't necessarily owned by large wealthy individuals. Managers are the ones in control.

b-corps and public benefit corporations are not the same

true