61. Foreign investors are playing a relatively minor role in the governance of firms in many countries.
a. True
b. False
62. Large German firms must include employees, union members, and shareholders in the formal governance structure.
a. True
b. False
63. Attitudes toward corporate governance in Japan are affected by the concepts of obligation, family, and consensus.
a. True
b. False
64. 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
65. If a stakeholder is dissatisfied with a firm, it will withdraw its support and give it to another firm.
a. True
b. False
66. Corporate governance mechanisms are designed to ensure that top managers make strategic decisions that best
serve the interests of the entire group of stakeholders.
a. True
b. False
67. Ethically responsible companies design and use governance mechanisms that will at least minimally satisfy
stakeholders’ interests.
a. True
b. False
68. Scandals at Enron, WorldCom, and HealthSouth illustrate the negative effects of poor ethical behavior on a firm’s
efforts to satisfy stakeholders.
a. True
b. False
Multiple Choice
69. 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.
70. 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.
71. In the United States, a firm’s key stakeholder(s) is(are) the
a. government.
b. executives.
c. shareholders.
d. customers.
72. 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
73. Corporate governance revolves around the relationship between which two parties?
a. shareholders and the board of directors
b. shareholders and managers
c. the board of directors and managers
d. None of the these options are correct.
74. 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.
75. 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.
76. Complete the following: In small firms, managers often own a
separation between ownership and managerial control.
a. small; small
b. small; large
c. large; small
d. large; large
percentage of the firm, which means there is
77. The separation between firm ownership and management creates a(n) relationship.
a. governance
b. control
c. agency
d. dependent
78. An agency relationship exists when one party delegates
a. decision-making responsibility to a second party.
b. financial responsibility to employees.
c. strategy implementation actions to functional managers.
d. ownership of a company to a second party.
79. 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.
80. 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
81. 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
82. 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.
83. 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.
84. A major conflict of interest between top executives and owners, is that top executives wish to diversify the firm in
order to , whereas owners wish to diversify the firm to .
a. generate free cash flows; reduce the risk of total firm failure
b. increase the price of the firm’s stock; increase the dividends paid out from free cash flows
c. reduce the risk of total firm failure; reduce their total portfolio risk
d. reduce their employment risk; increase the company‘s value
85. 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.
86. Agency costs reflect all of the following EXCEPT costs.
a. monitoring
b. enforcement
c. opportunity
d. incentive
87. 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.
88. 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.
89. 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.
90. Usually, large-block shareholders are considered to be those shareholders with at least
stock.
a. 5
b. 25
c. 50
d. 75
percent of the firm’s
91. 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.
92. As ownership of the corporation is diffused, shareholders‘ ability to monitor managerial decisions
a. increases.
b. decreases.
c. remains constant.
d. is eliminated.
93. 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.
94. The ownership of major blocks of stock by institutional investors have resulted in all of the following EXCEPT
a. making CEOs more accountable for their performance.
b. challenges to the decisions of boards.
c. focusing attention on ineffective boards of directors.
d. a direct effect on firm performance.
95. 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.
96. Monitoring by shareholders is usually accomplished through
a. management consultants.
b. government auditors.
c. the firm’s top managers.
d. the board of directors.
97. 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.
98. 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
99. 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.
100. 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.
101. 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.
102. Several members of the board of directors of American Textile Products (ATP) have proposed creating the
position of lead director. What circumstances would most likely have initiated this proposal?
a. ATP has been the initiator of several hostile takeovers in the last 2 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.
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. 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.
105. 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.
106. 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 be truly objective by having no ownership interest in the firm.
107. The CEO and Chairman of the board of directors Alta Corp. is dismayed by a lack of effort and insights his
directors provide during board meetings. The directors are all outsiders, experienced, and run their own successful
firms. The CEO/chair genuinely seeks their greater involvement. What 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 an lead director.
d. All of these options are correct.
108. 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.
109. 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.
110. Managers in the United States receive compensation than managers in the rest of the world.
a. equivalent
b. higher
c. lower
d. more variable
111. 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
112. 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.
113. 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.
114. 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. 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.