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1. Founders usually start up firms and completely own and control these enterprises.
a. True
2. The trend since the 1980s has been for expanded state ownership and declining privatization.
a. True
3. Typically, small shareholders who are not happy with firm performance simply sell their stock and invest elsewhere.
a. True
b. False
4. The increased size of holdings by institutional investors limits the ability of those investors to dump the stock.
a. True
5. SOEs are an excellent way for firms to solve their incentive problems.
a. True
b. False
6. Evidence indicates that family ownership plays a positive role in the performance of large firms.
a. True
b. False
7. The relationship between shareholders and professional managers is a relationship between principals and agents.
a. True
8. Principal-principal conflicts occur within one class of principals, such as a disagreement among certain
majority stockholders and other majority stockholders.
a. True
b. False
9. Agents and principals both bear a portion of the agency costs in a principal-agent relationship.
a. True
b. False
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10. Information asymmetries are a major source of agency problems.
a. True
b. False
11. Agency problems are eliminated by reducing information asymmetries.
a. True
b. False
12. Inside directors are top executives of the firm.
a. True
b. False
13. The trend around the world is to introduce more inside directors and fewer outside directors.
a. True
b. False
14. CEO duality refers to a situation in which two people share the role of CEO.
a. True
15. Board interlocks refer to bonding and teamwork among the members of a board of directors.
a. True
b. False
16. How directors strategically prioritize is about the same around the world.
a. True
b. False
17. CEO duality presents a significant agency issue.
a. True
18. Outside directors of a board are not always independent.
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19. Avoiding governance issues on a board of directors is accomplished by having more outside directors.
a. True
b. False
20. The market for corporate control is another term for the stock market.
a. True
b. False
21. The market for private equity involves going private by tapping into private equity.
a. True
b. False
22. Internal governance mechanisms employed by boards of directors include “carrots” and “sticks.”
a. True
b. False
23. Because of the market for corporate control, the long-term profitability of postmerger firms is impressively high.
a. True
b. False
24. The governance mechanisms that affect corporations in the United States and United Kingdom are characterized by
market-oriented systems and strong external mechanisms.
a. True
b. False
25. Overall, governance practices need to fit with the nature of the industry in which firms are competing. This
cautions against prescribing universal “best” practices.
a. True
b. False
26. Managerial human capital refers to the skills and abilities of top managers and directors.
a. True
b. False
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27. Formal legal protection encourages founding families and their heirs to dilute their equity.
a. True
b. False
28. Large shareholders in emerging economies usually need to have a significantly lower percentage of shares to ensure
control than in theUnited States.
a. True
29. The rise of capitalism has not affected governance.
a. True
b. False
30. FPI investors demand less protection.
a. True
31. The thirst for global capital requires adherence to listing requirements.
a. True
32. From a corporate governance standpoint, some of the most valuable, rare, and hard–to imitate firm-specific
resources are the skills and abilities of top managers and directors.
a. True
b. False
33. The ability to successfully list a foreign firm on a high-profile exchange such as NYSE leads to a higher valuation for
that firm as opposed to domestic firms.
a. True
b. False
34. In industries experience significant turbulence, the agency costs of CEO duality outweigh the benefits.
a. True
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35. Corporate governance is ultimately a choice about political governance.
a. True
36. Recently, stewardship theory suggests that by and large managers can be viewed as stewards of owners’
interests.
a. True
37. Convergence advocates argue that a “survival-of the-fittest” process will force firms globally to accept the
best practices exemplified by Anglo-American practices.
a. True
b. False
38. A criticism often leveled against SOEs is their lack of accountability.
a. True
b. False
ANSWER: True
39. “Capitalism without risk of failure becomes socialism” is the essence of the moral hazard of government bailouts.
a. True
b. False
40. From a corporate governance standpoint, a narrow scope may be indicative of managers’ empire-building and risk
reduction.
a. True
41. Ownership will likely be diffused for:
a. A start-up firm.
b. Family-owned firms.
c. State-owned firms.
d. about three-quarters of U.S.-listed firms.
42. In corporate governance, most small shareholders:
a. Attend annual shareholder meetings.
b. Have strong incentives to monitor how the firm is being run.
c. Prefer to free-ride and hope other shareholders monitor manager behavior.
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43. Outside of the Anglo-American world, most large firms:
a. Have a widely held ownership.
b. Insist on significant separation between ownership and control.
c. Are typically owned and controlled by families or the state.
44. Family ownership and control of large firms may:
a. Provide better incentive for a focus on long-term performance.
b. Minimize conflicts between owners and managers typical of large firms.
c. Lead to destruction of value as a result of conflict.
45. An often-mentioned drawback of state –owned enterprises is:
a. An ability to avoid bankruptcy and job loss.
b. Frequent conflict between ownership and management.
c. Little incentive to improve performance.
d. All of the above.
46. Agency theory assumes that managers:
a. Have a responsibility to the owners.
b. Avoid opportunistic and self-serving activities.
c. Eliminate agency costs.
d. Can be left to their own devices.
47. In regard to global convergence:
a. Advocates argue that globalization will stymie a “survival-of the-fittest” process.
b. Advocates claim firms will be forced to adopt globally the best practices.
c. Others contend that governance practices cannot continue to diverge throughout the world.
d. The text indicates that complete divergence in corporate governance is realistic.
48. Strategists should:
a. Understand the nature of principal–agent and principal–principal conflicts to create better governance
mechanisms.
b. Develop firm-specific capabilities to differentiate on governance dimensions.
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c. Understand the rules, anticipate changes, and be aware of differences, especially when doing business
abroad.
d. All of the above.
49. As the opening case pointed out, on the positive side private, equity firms excel in all the following ways
EXCEPT:
a. They reduce income inequality between financiers and the rest of us.
b. They use a high level of debt that imposes strong financial discipline.
c. Private equity turns managers from agents to principals with substantial equity, thus providing a
powerful incentive to them.
d. They pay managers more generously, but also punish failure more heavily.
50. As the opening case points out on the negative side, private equity firms have been accused of all of the
following EXCEPT:
a. Increasing the income inequality between financiers and the rest of us.
b. Stripping assets from previously high-performing firms.
c. Internationally, causing shock in countries suddenly facing the full rigor of Anglo-American private
equity.
d. Placing CSR ahead of all rational economic decisions.
51. The defense of private equity includes all of the following points except:
a. While private equity results in job cuts, the same might happen if targets were acquired by public firms.
b. It would not be rational for private buyers to destroy their prize therefore they attempt to avoid doing
that.
c. Their record as corporate citizens is no more barbaric than that of public firms.
d. The actions of U.S. private equity firms have enhanced the image of the U.S. and capitalism around the
world.
52. Diffused ownership is the opposite of concentrated ownership, and is more common in:
a. The United States and United Kingdom.
b. South America.
c. Asia.
53. Most large, publicly traded UK corporations are now characterized by all of the following except:
a. Diffused ownership.
b. Numerous small shareholders.
c. A separation of ownership and control.
d. Corporate managers who own a majority of the stock.
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54. Which of the following is true regarding large institutional investors?
a. They include professionally managed mutual funds and pension pools.
b. They own about 25 percent of the stock in major corporations.
c. They are less likely to exercise shareholder rights than smaller investors.
55. In regard to family ownership, all of the following are true EXCEPT:
a. Most small firms in the world are owned and controlled by families.
b. The vast majority of large corporations throughout continental Europe, Asia, Latin America, and Africa no longer
feature concentrated family ownership and control.
c. Family ownership and control may provide better incentives for the firm to focus on long-run performance.
d. Such ownership may also minimize the conflict between owners and professional managers typically encountered
56. The primary reason that agency problems persist is:
a. Poor stewardship on the part of principals.
b. Poor delegation on the part of agents.
c. Information asymmetries.
d. None of the above.
57. An example of a principal–principal conflict would be one between:
a. Principals and agents.
b. Shareholders and managers.
c. Board of directors and managers.
d. Controlling shareholders and minority shareholders.
58. Managers from a controlling family who divert resources from the firm for family or personal use have engaged in:
a. Stewardship.
b. Expropriation.
c. CEO duality.
d. Cross-listing.
59. Which of the following is true in regard to outside directors?
a. The trend around the world is to introduce fewer outside directors.
b. In the United States, less than a half century ago, most boards were made up entirely or largely of outside
directors.
c. Many U.S. firms are now favoring a board that is entirely made of people who are insiders due the need for
people who can understand the increasing complexity of MNEs.
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d. Academic research has failed to empirically establish a link between the outsider/insider ratio and firm
performance.
60. Which of the following is true regarding CEO duality?
a. From an agency theory standpoint, if the board is to supervise agents such as the CEO, it seems imperative that
the board be chaired by the same individual.
b. In US firms with CEO duality, the trend now is to appoint a lead independent director, who chairs the sessions
held by outside directors that do not involve company executives.
c. A corporation led by two top leaders—a board chairperson and a CEO—will at least have unity of command and
experience less top-level conflict.
d. Firms around the world are being pressured to combine the two top jobs..
61. Which of the following supports the idea that CEO duality can be effective?
a. Unity of command is increased by two leaders.
b. CEO duality provides a continuity that tends to reduce top-level conflicts.
c. CEOs appreciate close scrutiny by a board chairperson.
d. It is easier to recruit capable individuals for a CEO position if the role of chairperson is not tied to job
62. Boards of directors perform all of the following EXCEPT:
a. Day-to-day operations .
b. Service.
c. Resource acquisition functions.
d. Control.
63. Many firms operate under the assumption that _____________ can better safeguard shareholder interests.
a. Inside directors.
b. Outside directors.
c. Interlocking directors.
d. Management members of the board.
64. In recent years, CEO duality has:
a. Is no longer allowed for firms operating in the United States.
b. Increased from 12% in 2002 to 48% in 2010.
c. Become a less common practice among firms around the world.
d. Decreased based on conclusive research evidence showing it is less effective than nonduality.
65. The service aspect of the role that boards of directors perform is to:
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a. Challenge managerial decisions.
b. Advise the CEO.
c. Protect shareholder interests.
d. Rubber stamp managerial actions.
66. Which of the following would be considered a benefit to having inside directors on a board of directors?
a. Greater independence from managerial influence
b. Greater first-hand knowledge about the firm.
c. More effective control of managers.
d. None of the above.
67. Which of the following make up a governance package?
a. Internal Mechanisms + External Mechanisms.
b. Carrots to motivate managers such as stock options.
c. The market for private equity.
d. The Market for Corporate Control.
68. Following the notion of a board of directors providing “carrots” and “sticks” for a firm’s management, which of the
following would be considered a “stick”?
a. Pay for performance.
b. Stock options.
c. CEO dismissal.
d. Golden parachutes.
69. The label of __________ has been applied to management focus on stock prices based on the view that the purpose of
firms is to serve the economic interests of shareholders.
a. Shareholder capitalism.
b. Stewardship theory.
c. CEO duality.
d. Governance package.
70. Which of the following is true of Anglo–American corporate governance systems but not true of German–Japanese
systems?
a. It is bank-oriented and network-based.
b. It relies mostly on exit-based external systems.
c. It could be described as stakeholder capitalism.
d. It is a highly developed successful economy.
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71. Three decades of privatization suggest all of the following EXCEPT:
a. Privatization to insiders helps improve the performance of small firms.
b. In large corporations privatization to insiders, without external governance pressures, is hardly
conducive for needed restructuring.
c. Outside ownership and control, preferably by blockholders, funds, foreigners, and/ or banks, are more
likely to facilitate restructuring.
d. When outside investors such as institutional investors do come in, they fail to assert their power.
72. Industry-based considerations regarding corporate governance include all of the following EXCEPT:
a. Having more outside directors on the board is often regarded as having a negative impact on
performance because of their lack of understanding as compared to insiders.
b. In industries characterized by rapid innovation requiring significant R&D investments (such as
information technology), outside directors may have a negative impact on firm performance.
c. Research finds that for firms in low-growth, stable industries, no relationship exists between inside
management ownership and firm performance.
d. In industries experiencing great turbulence, the presence of a single leader may allow a faster and more
unified response to changing events.
73. In light of industry-based considerations, governances practices need to:
a. Follow universal best practices.
b. Increase the number of outside directors for firms in high-growth turbulent industries.
c. Create a fit with the nature of the firm’s industry.
74. In countries that have weak formal legal and regulatory institutions, concentrated ownership and control:
a. Minimizes the occurrence of principal-principal conflicts.
b. Mostly benefits minority shareholders.
c. Minimizes the occurrence of principal-agent conflicts.
d. Are likely to become more diffuse.
75. In recent years, the increased prevalence of shareholder capitalism is the result of:
a. The global diffusion of best practices.
b. The impact of globalization.
c. The rise of capitalism.
d. All of the above.
76. Institution-based considerations in governance include all of the following EXCEPT:
a. Formal institutional framework.
b. International experience of senior executives.
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c. Impact of informal norms and values.
d. Lack of legal protection and its impact regarding large shareholders in emerging economies.
77. Which are NOTamong the aspects of globalization?
a. Contact with different governance norms.
b. FPI investors demand more protection.
c. The focus on governance has been replaced by a focus on shareholder value.
d. The global diffusion of “best practices.”
78. In order to tap into a larger pool of capital, Firm A _______ its shares on the stock exchanges in two foreign
countries.
a. Cross-lists.
b. Tunnels.
c. Diffuses.
d.
79. The view that private ownership is superior to state ownership in economic policy making is known as the:
a. Beijing Consensus.
b. Washington Consensus.
c. Moral hazard.
d. Stewardship theory.
80. The likelihood of the same managers, managing the same assets, performing more effectively and reducing the level
of principal-agent conflicts, is greater when:
a. Informal rules are taken out of the mix.
b. Based on CEO duality.
c. Operating under the market for corporate control.
d. Private equity is involved.
81. You are the founder of a firm that appears to have significant long-term growth potential. Right now you
and your family own 100% of the firm’s shares and you are trying to figure out whether to keep things that way.
How might you do that? Should you do that?
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83. Are there potential issues involving economic power and national sovereignty in the dominant stock
ownership position of institutional investors?
84. Can interlocking directorates lead to unfair market advantages and investor exploitation? How?
85. What is the potential relationship between concern about a board dominated by insiders and concern about
excess executive pay?
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86. When is it best for a board of directors to use a “carrot” as a governance mechanism, and when is it better to
use a “stick”?
87. Describe the difference between the market for corporate control and the market for private equity.
88. Choose one of the aspects of the comprehensive model of corporate governance—industry-based, resource-
based, or institution-based considerations—and how those factors influence the overall model.
ANSWER:
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89. Are managers (agents) opportunistic?
90. How does understanding corporate governance help in answering the four fundamental questions of