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a.
setting the option strike price substantially higher than the current stock price.
b.
insuring 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.
83. 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
84. 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.
85. Japanese keiretsu are:
a.
management structures related to total quality management systems.
b.
company unions, which are a type of governance system.
c.
the banks owing the largest shares of stock in the firm.
d.
a system of cross-shareholding among firms.
86. 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.
87. The repurchase at a premium of the target firm’s shares that were acquired by the aggressor firm in a hostile takeover
in exchange for an agreement that the aggressor 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.
88. Historically, ____ have been at the center of German corporate governance structure.
a.
banks
b.
institutional shareholders
c.
public pension funds
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d.
government agencies
89. Which of the following statements is 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 Aufsichsrat (the supervisory tier of the
Board).
d.
Large institutional investors such as pension funds, and insurance companies are relatively insignificant
owners of corporate stock.
90. 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 the above
91. 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.
92. 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
93. Managers in the United States receive ____ compensation than managers in the rest of the world.
a.
equivalent
b.
higher
c.
lower
d.
more variable
94. 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 non-routine.
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.
95. Agency costs reflect all of the following EXCEPT ____ costs.
a.
monitoring
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b.
enforcement
c.
opportunity
d.
incentive
96. 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.
97. All of the following statements are TRUE about the use of defense tactics by the target firm during a hostile takeover
EXCEPT:
a.
defense tactics are usually beneficial for the executives of the target firm.
b.
defense tactics are opposed by institutional investors.
c.
defense tactics vary in their effectiveness as a defense to takeovers.
d.
defense tactics make the costs of a takeover lower.
98. 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.
99. ____ is an important influence in Japanese corporate governance structures.
a.
Innovation
b.
Consensus
c.
Competition
d.
Individualism
100. 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
101. Usually, large-block shareholders are considered to be those shareholders with at least ____ percent of the firm’s
stock.
a.
5
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b.
25
c.
50
d.
75
102. 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.
103. 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
104. 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
105. 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.
106. 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.
over-valued firms
107. 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:
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a.
usually on the verge of bankruptcy.
b.
typically under-performing their industry.
c.
often performing above their industry averages.
d.
always outperforming their industry.
108. 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.
109. Research suggests that Boards of Directors perform better if:
a.
the CEO is also the chairperson of the Board of Directors.
b.
the Bard includes employees as voting members.
c.
the Board is homogenous in composition.
d.
outside directors own significant equity in the organization.
110. 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.
111. 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.
112. Ambrose Bierce, the CEO of DictionAry, has been paid a lump sum amounting to 3 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.
113. 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.
114. Managerial employment risk is the:
a.
risk that managers will behave opportunistically.
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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.
115. 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.
116. 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.
117. 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.
118. 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.
119. Boards of Directors are now becoming more involved in:
a.
the strategic decision-making process.
b.
selecting new CEOs.
c.
the firm’s tax issues.
d.
governmental relations.
120. Monitoring by shareholders is usually accomplished through:
a.
management consultants.
b.
government auditors.
c.
the firm’s top managers.
d.
the Board of Directors.
121. German executives are not dedicated to the maximization of shareholder value to the degree that is the case for
executives in the UK and 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.
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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.
122. The interests of multinational corporations’ shareholders may be best served when there is:
a.
a uniform compensation plan for all corporate executives, United States and foreign alike.
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.
123. 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.
124. 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
125. 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.
126. Agricultural Chemicals, Inc., was the target of a hostile takeover 6 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 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 under-performing.
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.
127. 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.
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128. 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.
129. Which of the following is TRUE of trends in Japan’s corporate governance structure?
a.
Compensation of CEOs in both private and public companies is being tied more closely to observable
performance goals.
b.
Increased regulation in the financial sector has increased the cost of mounting hostile takeovers.
c.
Banks’ influence over corporations is increasing.
d.
The gap in compensation between CEOs in public and private companies is increasing.
130. 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.
131. 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.
132. 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.
133. 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
134. 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. Who is ultimately responsible for the
corporate climate that resulted in this wrongdoing?
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a.
The director of food service for IFS
b.
The Board of Directors of IFS
c.
The employees directly involved in the wrongdoing
d.
The head of contract services for the Marines
135. Define the agency relationship and managerial opportunism and discuss their strategic implications.
136. Describe the market for corporate control and its implications for organizations.
137. How does corporate governance foster ethical strategic decisions and how important is this to top-level executives?
138. Discuss the difficulties in establishing performance-based compensation plans for executives.
139. Define the three internal corporate governance mechanisms and how they may be used to control and monitor
managerial decisions.
140. Discuss the effect of the separation of ownership and control in the modern corporation.
141. Briefly compare and contrast corporate governance in the United States, Germany, and Japan, and China.
142. What is corporate governance and how is it used to monitor and control managers’ decisions?
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Answer Key
1. True
2. True
3. False
4. True
5. False
6. True
7. False
8. False
9. True
10. False
11. True
12. True
13. True
14. True
15. True
16. True
17. False
18. False
19. False
20. True
21. True
22. False
23. True
24. True
25. True
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26. True
27. False
28. False
29. False
30. True
31. False
32. True
33. True
34. True
35. True
36. False
37. True
38. True
39. True
40. True
41. False
42. True
43. False
44. False
45. False
46. True
47. True
48. True
49. False
50. True
51. False
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52. False
53. True
54. True
55. False
56. False
57. True
58. True
59. True
60. False
61. True
62. False
63. True
64. True
65. True
66. True
67. True
68. True
69. c
70. d
71. b
72. d
73. c
74. b
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77. d
78. b
79. b
80. c
81. a
82. a
83. b
84. d
85. d
86. b
87. a
88. a
89. b
90. b
91. d
92. b
93. b
94. d
95. c
96. b
97. d
98. b
99. b
100. b
102. b
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103. c
104. d
105. b
106. c
107. c
108. b
109. d
110. c
111. b
112. a
113. d
114. c
115. b
116. d
117. c
118. c
119. a
120. d
121. c
122. d
123. a
124. c
125. a
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128. d
129. a
130. a
131. b
132. b
133. d
134. b
135. The separation of owners and managers creates an agency relationship. An agency relationship exists when a
principal hires an agent as a decision-making specialist to perform a service. Some problems that result from the agency
relationship between owners and managers include the potential for a divergence of interests and a lack of direct control
of the firm by shareholders. Managerial opportunism is the seeking of self-interest with guile. It is both an attitude and a
set of behaviors, which cannot be perfectly predicted from the agent’s reputation. Top executives may make strategic
decisions that maximize their personal welfare and minimize their personal risk, such as excessive product diversification.
Decisions such as these prevent the maximization of shareholder wealth, which is supposed to be the top executives’
priority. Although shareholders implement corporate governance mechanisms to protect themselves from managerial
opportunism, these mechanisms are imperfect. Agency costs include the costs of managerial incentives, monitoring costs,
enforcement costs, and the individual financial losses incurred by principals (owners of the firm) because governance
mechanisms cannot guarantee total compliance by the agents (managers).
136. The market for corporate control is composed of individuals and firms who buy ownership positions in (e.g., take
over) potentially undervalued firms to form a new division in an established firm or to merge the two previously separate
firms. The target firm’s top management team is usually replaced because it is assumed to be partly responsible for
formulating and implementing the strategy that led to poor firm performance. The market for corporate control is
(supposedly) triggered by low corporate performance by a firm relative to competitors in its industry. Thus, the market for
corporate control should act as a control mechanism for corporate governance that leads to the replacement of under-
performing executives. But, the market for corporate control is not an efficient governance mechanism because in reality
many of the firms taken over have above-average performance. Hostile takeovers, on the other hand, are typically
triggered by poor performance. Some managers have sought to buffer themselves from the effect of the market for
corporate control (hostile takeovers) by instituting golden parachutes that will pay the managers significant extra
compensation if the firm is taken over. Those and other takeover defenses are intended to increase the costs of mounting a
takeover and reducing the managers’ risk of losing their jobs. Examples of takeover defenses include asset restructuring,
changes in the financial structure of the firm, reincorporation in another state, and greenmail. These defense tactics are
controversial and the research on their effectiveness is inconclusive. Most institutional investors oppose them.
137.
Governance mechanisms focus on the control of managerial decisions to ensure that the interest of shareholders, the most
important stakeholder, will be served. But shareholders are just one stakeholder along with product market stakeholders
(e.g., customers, suppliers, and host communities) and organizational stakeholders (e.g., managerial and nonmanagerial
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Top-level executives are monitored by the Board of Directors. All corporate stakeholders are vulnerable to unethical
behaviors by the firm. If the image of the firm is tarnished, the image of customers, suppliers, shareholders, and Board
members is also tarnished. Top-level managers, as the agents who have been hired to make decisions that are in
shareholders’ best interests, are ultimately responsible for the development and support of an organizational culture that
allows unethical decisions and behaviors. The Board of Directors has the power and responsibility to enforce this
expectation.
The decisions and actions of a corporation’s Board of Directors can be an effective deterrent to unethical behaviors. The
Board has the power to hold top managers accountable for unethical actions as they can hire and fire these managers.
Thus, the Board of Directors, which holds a position above the firm’s highest-level managers, holds considerable power
over top-level executives and can set and enforce standards for ethical behaviors within the organization.
138. Executive compensation, especially long-term incentive compensation, is complicated. First, the strategic decisions
made by top-level managers are typically complex and non-routine; as such, direct supervision of executives is
inappropriate for judging the quality of their decisions. Because of this, there is a tendency to link the compensation of
top-level managers to measurable outcomes such as financial performance. Second, an executive’s decision often affects a
firm’s financial outcomes over an extended period of time, making it difficult to assess the effect of current decisions on
the corporation’s performance. In fact, strategic decisions are more likely to have long-term, rather than short-term, effects
on a company’s strategic outcomes. Third, a number of other factors affect firm performance. Unpredictable economic,
social, or legal changes make it difficult to discern the effects of strategic decisions. Thus, although performance-based
compensation may provide incentives to managers to make decisions that best serve shareholders’ interests, such
compensation plans alone are imperfect in their ability to monitor and control managers.
Although incentive compensation plans may increase firm value in line with shareholder expectations, they are subject to
managerial manipulation. For instance, annual bonuses may provide incentives to pursue short-run objectives at the
expense of the firm’s long-term interests. Supporting this conclusion, some research has found that bonuses based on
annual performance were negatively related to investments in R&D, which may affect the firm’s long-term strategic
competitiveness. Although long-term performance-based incentives may reduce the temptation to underinvest in the short
run, they increase executive exposure to risks associated with uncontrollable events, such as market fluctuations and
industry decline. Long-term incentives may not be highly valued by a manager: thus, firms may have to overcompensate
managers when they use long-term incentives.
139. The three internal corporate governance mechanisms are: ownership concentration, the Board of Directors, and
executive compensation. Ownership concentration is based on the number of large-block shareholders and the percentage
of shares they own. With significant ownership percentage, institutional investors, such as mutual funds and pension
funds, are often able to influence top executives’ strategic decisions and actions. Thus, unlike diffuse ownership, which
tends to result in relatively weak monitoring and control of managerial decisions, concentrated ownership produces more
active and effective monitoring of top executives. An increasingly powerful force in corporate America, institutional
owners are actively using their positions of concentrated ownership in individual companies to force managers and Boards
of Directors to make decisions that maximize a firm’s value. These owners (e.g., CalPERS) have caused poorly
performing CEOs to be ousted from the firm. The Board of Directors, elected by shareholders, is composed of insiders,
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