C H A P T E R 1
Law, Value Creation, and Risk Management
TRUE FALSE QUESTIONS
1. Private law provides the legal rules within which firms compete.
2. Managers can make their own “public” law.
3. Insurance policies may help firms manage risk.
4. Researchers have determined that Fortune 500 firms convicted of illegal conduct earned significantly
lower returns on assets than firms that had not been convicted of wrongdoing.
5. Lobbying legislators is one method by which managers can help shape the environment in which
they do business.
6. Laws enacted in response to corporate misdeeds often impose fewer restrictions and costs on
business than would have been imposed had firms as a whole acted more responsibly at the outset.
7. Promoting economic growth is one of the primary public policy objectives of laws and regulations
applicable to business.
8. Worker protection is one major public policy concern underlying U.S. business law.
9. Researchers found a statistically significant inverse relationship between a country’s economic
prosperity, as measured by the per capita gross domestic product, and the country’s judicial
independence.
10. As used in the text, the term “legal astuteness” refers to the ability of a manager to avoid situations
making consultation with legal counsel necessary.
11. The entering into of nondisclosure agreements is an unethical practice that should not be tolerated by
a legally astute manager.
12. A legally astute manager would wait as long as possible to consult legal counsel once a problem
arises in order to keep legal fees to a minimum.
13. A legally astute manager understands that legal analysis is often ambiguous.
14. Each activity in regard to “law and the value chain” referenced in the text has legal aspects.
15. The European Union’s center of operations is in Brussels, Belgium.
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16. Under the resource-based view of a business firm, a firm’s resources can be a source of sustained
competitive advantage if they are valuable, rare, and perfectly imitable by competitors.
17. Self-regulation within the advertising industry has been largely successful in reducing the number of
fast-food commercials directed at children.
18. Law is dynamic as opposed to static
19. The Election Act of China gives businesspeople the right to be elected as congresspersons.
20. The protection of private property rights is one way to promote economic growth within a society.
MULTIPLE CHOICE QUESTIONS
1. Which of the following is not one of the four primary public policy objectives furthered by laws and
regulations applicable to U.S. business?
A. Promoting economic growth
B. Protecting workers
C. Promoting consumer welfare
D. Promoting governmental regulation
E. Promoting public welfare
2. Managers can make their own ______ law by entering into contracts and crafting certain governance
structures.
4 LAW, VALUE CREATION, AND RISK MANAGEMENT
A. Public
B. Primary
C. Cohesive
D. Private
3. The ______ approach recognizes that “business decisions consist of continuous, interrelated
economic and moral components.”
A. Procedural
B. Systems
C. Conciliatory
D. Mandated
4. Which of the following is a theory that recognizes that firms have relationships with many
constituent groups which both affect and are affected by the actions of the firm?
A. Stakeholder
B. Stockholder
C. Relational
D. Cohesive
5. Which of the following was enacted after widespread abuses in the subprime mortgage market?
A. The Walsh-Healy Mortgage Reformation and Consumer Protection Act of 2009
B. The Mortgage Lending and Financial Reform Act of 2009
C. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
D. The Financial Institution Regulatory Pronouncement and Consumer Revision Act of 2010
6. Which of the following is true regarding legally astute management teams practicing strategic
compliance management?
A. The cost of complying with government regulation is viewed as an investment, not an expense.
B. The cost of complying with government regulation is viewed as an expense which should be
avoided until legal action is threatened.
C. Only the minimum necessary to comply with any applicable law should be done.
D. Both that the cost of complying with government regulation is viewed as an expense which
should be avoided until legal action is threatened and that only the minimum necessary to comply
with any applicable law should be done.
7. Through which of the following can managers help shape the legal environment in which they do
business?
A. By lobbying legislators
B. By forming coalitions
C. By refusing to follow laws viewed as unneeded by company officials
D. By lobbying legislators and by forming coalitions, but not by refusing to follow laws viewed as
unneeded by company officials
8. Which of the following is a type of law referencing formal rules embodied in constitutions and
statutes enacted by legislatures?
A. Public
B. Private
C. Substantive
D. Remedial
9. Which of the following is a type of law referencing formal rules embodied in judicial decisions
rendered by courts?
A. Public
B. Private
C. Substantive
D. Remedial
10. Which of the following is NOT a way in which U.S. law protects workers?
A. Through regulating certain terms and conditions of employment
B. Through requiring the employer to provide certain benefits
C. Through protecting civil rights in the workplace
D. Through requiring the provision of educational opportunities to workers
11. Which of the following is an advocacy group that has lobbied against marketing to children?
A. The Alliance to Ban Advertising Targeting Children
B. The Protect the Children Foundation
C. The Center for Science in the Public Interest
D. The Group for Ethical Marketing Practices
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12. Which of the following is true regarding a comparison of the law of the United States and the law of
the European Union?
A. Laws of the United States and the European Union differ in regard to consumer privacy and
emissions standards but are similar in regard to chemical usage and accounting standards.
B. Laws of the United States and the European Union differ in regard to consumer privacy,
emissions standards, and chemical usage but are similar in regard to accounting standards.
C. Laws of the United States and the European Union differ in regard to consumer privacy,
emissions standards, chemical usage, and accounting standards.
D. Laws of the United States and the European Union are similar in all significant areas involving
business regulation and vary in only minor respects
13. Which of the following is true regarding typical requirements placed on employers mandating the
provision of employee benefits?
A. Employers are typically required to provide workers’ compensation, to pay unemployment
insurance, and to pay social security and Medicare taxes.
B. Employers are typically required to pay unemployment insurance and to pay social security and
Medicare taxes, but employers are not required to pay workers’ compensation insurance.
C. Employers are typically required to pay workers’ compensation insurance and to pay social
security and Medicare taxes, but employers are not required to pay unemployment insurance.
D. Employers are typically required to provide workers’ compensation and to pay unemployment
insurance, but employers are not required to pay social security and Medicare taxes.
14. U.S. business law promotes consumer welfare through which of the following?
A. By encouraging the sale of safe products at a fair price
B. By preventing deceptive practices
C. By refusing to recognize consumer privacy
D. By encouraging the sale of safe products at a fair price and by preventing deceptive practices, but
not by refusing to recognize consumer privacy
15. The “systems approach” to business and society builds on which of the following stakeholder theory
insights?
A. That firms have relationships with many constituent groups, which both affect and are affected
by the actions of the firm.
B. That firms have relationships with many constituent groups, and that these groups must be
managed to best promote value to stockholders.
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C. That although firms have relationships with many constituent groups, these groups have little
impact on the ongoing management of business firms.
D. That firms have relationships with only a few groups, such as employees, that are directly
connected with business operations.
16. Which of the following is a term addressing the ability of a manager to communicate effectively
with counsel and to work together to solve complex problems?
A. Legal astuteness
B. Conciliatory interaction
C. Mediation
D. Arbitration
17. Which of the following has the responsibility for deciding which allocation of resources and rewards
in a business makes the most business sense?
A. The general manager
B. The in-house lawyer
C. An independently retained lawyer
D. An independently retained law firm, not just one lawyer
18. Which of the following is not a component of legal astuteness as referenced in the text?
A. A set of value-laden attitudes about the importance of law to the firm’s success
B. A practice of leaving the resolution of legal issues to outside counsel
C. The ability to exercise informed judgment when managing the legal aspects of business
D. Context-specific knowledge of the law and the appropriate use of legal tools
19. Which of the following is listed in the text as a component of managing risk when assembling a team
in business development?
A. Analyzing any covenants not to compete
B. Purposefully refusing to address issues such as sexual harassment
C. Informing employees that e-mail communications are not discoverable
D. Ignoring whistleblower protection
20. The ______ approach to business and society introduced in the text is a descriptive framework that
integrates legal and societal considerations with mainstream theories of competitive advantage and
social responsibility.
A. Integrative
B. Systems
C. Proactive
D. Economic
21. Which of the following is true regarding laws and practices of the European Union and its members?
A. European antitrust regulators are often more sympathetic to competitors than are U.S. authorities.
B. European antitrust regulators lack the authority to block mergers.
C. European antitrust regulators have the authority to block only foreign mergers, not mergers of
companies located within the European Union.
D. It is expected that the impact of the European Union on corporate planning and strategy will
become less, not more, evident in the future.
22. Which of the following is a type of relationship building lobbying prevalent in China?
A. Xantu
B. Olaying
C. Guanxi
D. Quinta
23. Which of the following is true regarding the criminal law in China?
A. It prohibits businesses from paying bribes to government officials, but a payment of money is not
considered a bribe unless the amount is significant.
B. It prohibits businesses from paying any bribes to government officials, regardless of amount.
C. It allows the payment of bribes in any amount to government officials.
D. It allows solvent business to pay bribes in any amount to government officials, but prohibits the
payment of bribes by insolvent businesses.
24. Which of the following is a Chinese law applying to corporate political activities in China?
A. The Election Act of China
B. The Criminal Law of China
C. The Lobbying Law of China
D. The Election Act of China and the Criminal Law of China, but not the Lobbying Law of China
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25. As the public has become more concerned about childhood obesity, which of the following is a
government agency referenced in the text that is considering a ban on certain types of children’s
advertising?
A. The American Consumer Agency
B. The Federal Communications Commission
C. The Federal Trade Commission
D. The Federal-State Advertising Coalition
26. Congress rescinded the jurisdiction of which of the following agencies over advertising to children?
A. The American Consumer Agency
B. The Federal Communications Commission
C. The Federal Trade Commission
D. The Federal-State Advertising Coalition
27. Which of the following was created by food advertisers in an attempt to halt government regulation
aimed at stopping marketing preying on children’s vulnerability?
A. The Children’s Advertising Review Unit
B. The Minor’s Board Unit
C. The Minor Protection Review Unit
D. The Children’s Enhancement Board
Fact Pattern 1-1 (questions 28-31 apply)
28. Refer to fact pattern 1-1. The covenants not to compete involved which of the following types of
law?
A. Public
B. Private
C. Circumscribed
D. Tangent
29. Refer to fact pattern 1-1. The use of covenants not to compete involves which of the following
forces identified by Michael Porter and referenced in the text?
A. Supplier power
B. Threat of entry
C. Substitution
D. Buyer power
30. Refer to fact pattern 1-1. The government regulations pertaining to the use of certain chemicals
involved which of the following types of law?
A. Public
B. Private
C. Circumscribed
D. Tangent
31. Refer to fact pattern 1-1. Assuming that Susan seeks to be a legally astute manager, which of the
following is true regarding the advice given by Sam to ignore the regulations pending an
investigation?
A. Sam is correct that it is unlikely that any investigation will ever occur and that the regulations
may be safely ignored.
B. Sam is correct only if ABC has not had past investigations because if past investigations have
occurred, it is more likely that the company will be the target of future investigations.
C. Sam is incorrect but only because safety regulations are concerned.
D. Sam is incorrect because a legally astute manager will take a proactive approach to regulations.
32. Molly, the CEO of a corporation owning a number of pet stores, calls you for advice. She tells you
that she received inside information that the stock of the company was going to go down because of
reports that a number of dogs sold by the store had become ill and that she, therefore, immediately
sold all her stock in the company before the information became public. She tells you that she has
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been advised that she is going to be charged with a securities violation involving insider trading.
Which of the following is true regarding her situation?
A. Corporate executives may be fined but may not be sent to jail.
B. Corporate executives may be sent to jail, but only for offenses endangering others.
C. Corporate executives may be sent to jail, but only for fraud involving banks.
D. Corporate executives may be sent to jail for violation of criminal laws.
33. Which of the following was the result in Sorrell v. IMS Health Inc., the case in the text in which
drug manufacturers challenged as unconstitutional a Vermont statute prohibiting pharmacies form
selling prescriber-identifying information for marketing prescription drugs without the consent of
prescribers?
A. That although speech promoting marketing was not protected by the First Amendment, the law
was unconstitutional based on the due process clause.
B. That the statute regulated commercial speech which was evaluated under an “intermediate”
standard and that the law was, therefore, constitutional.
C. That the statute did not involve constitutional issues and was, therefore, a permissible type of
regulation.
D. That the conduct prohibited by the law was protected by the First Amendment and that the law
was unconstitutional.
ESSAY QUESTIONS
1. Under the resource-based view of a firm, when can a firm’s resources be a source of sustained
competitive advantage?
2. What are the four ways referenced in the text by which U.S. law promotes public welfare?
3. Assume that after paying a large fine, a company survives charges of illegal activity. In what ways
does illegal conduct put a company at a competitive disadvantage?
4. Discuss ways in which laws and regulations promote economic growth.
5. How does U.S. business law provide worker protection?