True / False
1. 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.
a. True
b. False
2. Corporate governance involves oversight in areas where owners, managers, and members of boards of directors
may have conflicts of interest.
a. True
b. False
3. Corporate governance is a means to establish harmony between parties (the firm’s owners and its top-level
managers) whose interests may conflict.
a. True
b. False
4. 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.
a. True
b. False
5. Recent emphasis on corporate governance stems mainly from the failure of corporate governance mechanisms to
adequately monitor and control top-level managers’ decisions.
a. True
b. False
6. The three internal corporate governance mechanisms are ownership concentration, board of directors, and the
market for corporate control.
a. True
b. False
7. Executive compensation is considered an external corporate governance mechanism because it determined in part
by market forces.
a. True
b. False
8. 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
9. 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
10. In the modern U.S. corporation, the ownership and managerial control of the firm are separated.
a. True
b. False
11. In a large number of family owned firms, ownership and managerial control are not separated.
a. True
b. False
12. 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
13. 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.
a. True
b. False
14. The separation of ownership and control is the most effective means used by firms to prevent managerial
opportunism.
a. True
b. False
15. A top-level manager’s reputation is a dependable predictor of his/her future behavior.
a. True
b. False
16. As a rule, shareholders prefer more product diversification than do managers because shareholders wish to reduce
risk and maximize wealth.
a. True
b. False
17. Both top executives and owners of the firm wish to diversify the firm to reduce risk.
a. True
b. False
18. Agency costs include incentives for executives, monitoring, enforcement costs, and any individual financial losses
incurred by principals.
a. True
b. False
19. In general, when governance mechanisms are strong, managers have free rein in their decisions.
a. True
b. False
20. 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
21. 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
22. 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.
a. True
b. False
23. 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.
a. True
b. False
24. 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
25. Ownership of many modern corporations is now concentrated in the hands of institutional investors rather than
individual stockholders.
a. True
b. False
26. Large-block shareholders typically own at least 5 percent of a corporation’s issued shares.
a. True
b. False
27. 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
28. 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.
a. True
b. False
29. 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.
a. True
b. False
30. 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.
a. True
b. False
31. The primary role of the board of directors is to monitor and control top-level executives to protect owners’ interests.
a. True
b. False
32. Individual shareholders with small ownership percentages are less dependent on the board of directors to represent
their interests than are large block shareholders.
a. True
b. False
33. 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.
a. True
b. False
34. Generally, the board of directors can be classified as insiders, unrelated insiders, outsiders, and unrelated outsiders.
a. True
b. False
35. Boards with many members from the firm’s top management team tend to have weak monitoring and control
systems for managerial decisions.
a. True
b. False
36. 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.
a. True
b. False
37. 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
38. A powerful CEO would oppose the appointment of a lead director on the board of directors.
a. True
b. False
39. 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
40. 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.
a. True
b. False
41. The performance of individual board members and entire boards are being evaluated more formally and with
greater intensity than in years past.
a. True
b. False
42. Because top management decisions are usually complex and nonroutine, determining the quality of executive
performance is beyond the power of boards of directors.
a. True
b. False
43. 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.
a. True
b. False
44. 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.
a. True
b. False
45. 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.
a. True
b. False
46. 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
47. 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
48. Well-designed stock option-based compensation plans should have the option strike prices substantially lower than
the current stock prices.
a. True
b. False
49. 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
50. 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.
a. True
b. False
51. 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.
a. True
b. False
52. 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
53. 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.
a. True
b. False
54. 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
55. 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.
a. True
b. False
56. 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
57. The most effective defense against a hostile takeover is the poison pill strategy.
a. True
b. False
58. An advantage of severance packages is that they may encourage top-level managers to accept takeover bids that
are attractive to shareholders.
a. True
b. False
59. 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.
a. True
b. False
60. As globalization grows, adequate corporate governance is becoming an important requirement for doing business
with a foreign firms and in foreign countries.
a. True
b. False