Deck 11: Corporate Governance, Social Responsibility, and Ethics

Question 1

The regulations instituted by the United States governmental organization known as the SEC make sure that managers do not misrepresent financial information and require that the accounts be audited by an independent, accredited accounting firm are also instituted in most other developed nations.

Answer 1

True

Question 2

If a company fails to take stakeholder claims into account when formulating its strategies, stakeholders may withdraw their support.

Answer 2

True

Question 3

When managers cannot find the right balance between profitability and profit growth, they can place too much emphasis on current profitability at the expense of future profitability and profit growth can make an enterprise less attractive to shareholders or they can place too much emphasis on profit growth can reduce the current profitability of the enterprise and have the same effect.

Answer 3

True

Question 4

Phil is an employee at Global Tech Inc. He is considered an external stakeholder.

Question 5

While the purpose of governance mechanisms is to reduce the scope and frequency of the agency problem, they are not involved in the alignment of the interests of business-unit managers with those of their superiors.

Question 6

Strategic control systems are the primary governance mechanisms established within a company to reduce the scope of the agency problem between levels of management.

Question 7

Attaining future profit growth may require investments that reduce the current rate of profitability.

Question 8

The stress of not knowing for sure if the agent is acting in his or her best interests or knowing for sure if the agent is using the resources to which he or she has been entrusted as effectively and efficiently as possible is caused by the performance ambiguity between a principal and agent.

Question 9

Only external stakeholders, such as customers, suppliers and creditors (including banks and bondholders), have an exchange relationship with a company.

Question 10

Maximizing long-run profitability and profit growth is the best way to satisfy the claims of several key stakeholder groups irrespective of how the company accomplishes this goal.

Question 11

With recent events, corporate boards have taken a hands-off role in top-management decisions and play a much more
passive role in corporate governance.

Question 12

An agency relationship continues throughout the hierarchy within a company.

Question 13

In a stakeholder impact analysis, after stakeholders' interests and concerns are identified it is necessary to identify the resulting strategic challenges.

Question 14

Agency theory offers a way of understanding why managers do not always act in the best interests of stakeholders.

Question 15

Stockholders receive a return on their investment in a company's stock from dividend payments and capital appreciation.

Question 16

One cause of the diverging interests between principals and agents is that managers in the company are motivated by different desires such as power, job security, and income and may use their position to help fulfill those desires rather than invest in ways that increase stockholder returns.

Question 17

Inside directors are not full-time employees of the company.

Question 18

According to an SEC investigation, Computer Associates, one of the world's largest software companies, backdated contracts to boost the company's reported revenues. This is not an ethical business practice.

Question 19

When managers consider the efficiency, timeliness and employee satisfaction in a company's scorecard, they are looking at the customer perspective.

Question 20

A union and the public are examples of internal stakeholders.

Question 21

Which of the following statements concerning profitability and profit growth is NOT true?

A) Attaining future profit growth may require investments that reduce the current rate of profitability.
B) Managers must find the right balance between profitability and profit growth.
C) Too much emphasis on current profitability at the expense of profit growth can make an enterprise less attractive to shareholders.
D) Satisfying the claims of other key stakeholder groups happens at the risk of decreased profitability and profit growth.
E) Too much emphasis on profit growth can reduce profitability and make an enterprise less attractive to shareholders.

Question 22

Which of the following is NOT an example of ways to monitor agents, evaluate their performance, and take corrective action?

A) Board of directors
B) Mandatory filing of detailed financial statements
C) Internal control systems
D) Reduction of information asymmetry
E) On-the-job consumption

Question 23

Which of the following is true of stakeholders?

A) Creditors are examples of internal stakeholders.
B) Stakeholders do not engage in an exchange relationship with their company.
C) Stockholders are internal stakeholders that provide an enterprise with risk capital.
D) The goals of different stakeholder groups within a company are the same and therefore do not lead to any conflicts.
E) It is mandatory for a company to satisfy the claims of all stakeholders.

Question 24

Which of the following statements is true about corporate raiders?

A) They are underperforming corporations that have been acquired by other companies.
B) They are government-funded organizations that help underperforming companies recover.
C) They may purchase stock in a company to take over the business and run it more efficiently.
D) They lack power to interfere with the top management decisions.
E) They discourage companies from pursuing strategies that help maximize stockholder wealth.

Question 25

Which of the following statements is true about takeover constraint?

A) It encourages managers to put their own interests above those of stockholders.
B) It usually occurs when the management has maximized the wealth of the stockholders.
C) It often gives senior managers more independence when it comes to granting stock options.
D) It has ceased to exist in companies since the late 1990s.
E) It is the governance mechanism of last resort and is often invoked only when other governance mechanisms have failed.

Question 26

Which of the following is a source of gaining wealth whereby corporate raiders either push companies to change their corporate strategy to one that will benefit stockholders, or charge a premium for stock when the company wants to buy it back?

A) A stock option
B) Greenmail
C) Self-dealing
D) On-the-job consumption
E) Risk capital

Question 27

Arnold is a CEO at Gamma LLC. He has control over the corporate funds of the company. Arnold has often used funds from the company to pay for his travel and hotel expenses. The funds could otherwise have increased stockholder returns. Which of the following concepts is illustrated in this scenario?

A) Corporate governance
B) On-the-job consumption
C) Greenmail
D) Information asymmetry
E) Information manipulation

Question 28

Which of the following statements is true in the context of financial statements and auditors?

A) The information contained in the financial statements can enable a stockholder to calculate the ROIC of a company in which he or she invests.
B) Publicly traded companies in the United States are not required to file quarterly or annual reports with the SEC.
C) So far, there have been no cases in which auditors were found cooperating with companies to misrepresent financial information.
D) The SEC requires that the accounts be audited by a committee formed by the board members and senior employees of the company.
E) Sarbanes-Oxley Act in 2002 barred CEOs and CFOs from endorsing their company's financial statements.

Question 29

Ethical dilemmas are situations where there is no agreement over exactly what the accepted principles of right and wrong are.

Question 30

Tom just received a $500 bonus for surpassing his yearly sales targets. This is an example of using employee incentives to motivate employees to work toward goals that are central to maximizing long-term profitability.

Question 31

Gamma Corp. recently bought stocks in an underperforming company that has failed to maximize stockholder wealth. Gamma Corp. made changes to the top management structure of the company and persuaded the management to pursue strategies that maximize the wealth of stockholders. Gamma Corp. has been able to earn millions by doing so. Which of the following concepts is illustrated in this scenario?

A) Greenmail
B) Agency theory
C) Information asymmetry
D) Self-dealing
E) On-the-job consumption

Question 32

Which of the following statements is true in the context of principal-agent relationships?

A) The agency relationship is confined to the top management and does not continue down the hierarchy within the company.
B) Agents almost always have more information about the resources they are managing than the principals do.
C) Information asymmetry can make it easier for principals to measure how well an agent is performing.
D) In a principal-agent relationship, the decision-making power rests entirely with the principals.
E) The relationship between the company and the suppliers is an example of a principal-agent relationship.

Question 33

Which of the following are an example of an internal stakeholder in a company?

A) Customers
B) Government regulators
C) Board members
D) Suppliers
E) Creditors

Question 34

Which of the following is NOT an accurate statement about current levels of pay for CEOs of U.S.-based firms?

A) CEOs also earn from the stock options that they grant to managers.
B) Empire building helps CEOs increase their earnings.
C) CEO compensation is closely tied to corporate performance in most firms.
D) CEO pay is rising more rapidly than pay for other workers.
E) The level of CEO compensation is determined by the corporate board of directors.

Question 35

Which of the following statements is true in the context of stock-based compensation?

A) Stock options usually result in information asymmetry.
B) Stock-based compensation schemes for executives can align management and stockholder interests.
C) A cause for concern is that stock options are often granted at extremely high strike prices.
D) Critics deny that stock-based compensations motivate managers to improve company performance.
E) Granting more stock options often results in an increase in stockholder equity.

Question 36

Matthew is a divisional manager at Venus Inc. and reports to the CEO of the company. The CEO delegates resources and authority to Matthew so that he can ensure good performance from the division. Matthew has more employees working for him than required and he has not told the CEO about this, even though there are other departments that need more employees. Which of the following concepts is illustrated here?

A) Information asymmetry
B) On-the-job consumption
C) Greenmail
D) Glass-ceiling effect
E) Takeover constraint

Question 37

Stock-based compensation schemes for senior executives are designed to align the interests of managers with those of stockholders.

Question 38

Which of the following statements is true about the board of directors?

A) The board members are directly elected by the employees of the company.
B) The board has no legal authority to hire, fire, and compensate the CEO.
C) Some of the board members hold positions on the boards of several companies.
D) The board has no power to nominate people for positions in management.
E) Divisional and functional managers usually form the board.

Question 39

Which of the following are an example of an external stakeholder in a company?

A) Stockholders
B) Managers
C) Employees
D) Customers
E) Board members

Question 40

Which of the following statements is true about strategic control systems?

A) They are usually set by government regulators and require top management to follow them.
B) Their primary purpose is to foster on-the-job consumption.
C) Their purpose is to ensure that the wealth of stockholders is maximized.
D) They relieve employees and management of legal and ethical constraints.
E) They are designed to encourage information asymmetry.

Question 41

Using a strategic control system known as the balanced scorecard model, which of the following would be evaluated from the customer perspective?

A) Level of service
B) Cash flow
C) Employee satisfaction
D) Percentage of revenues generated from new products in a defined period
E) Revenue growth

Question 42

Rebecca works at a company where she has consistently noticed the questionable decisions and unethical behavior of her superiors. She has decided to contact the media and "blow the whistle". Rebecca is exhibiting which kind of ethical principle?

A) Organization culture and leadership
B) Decision-making processes
C) Strong corporate governance
D) Moral courage
E) Hiring and promotion

Question 43

Which of the following statements is true in the context of unethical behavior?

A) Business ethics significantly differ from personal ethics.
B) An individual with a strong sense of personal ethics is more likely to engage in self-dealing.
C) A personal ethical code will exert a profound influence on the way individuals behave as businesspeople.
D) Focusing only on applying straightforward business calculus can eliminate ethical concerns.
E) An organizational culture that fosters decision making on purely economic terms eliminates unethical practices.

Question 44

Which of the following statements about the board of directors is NOT true?

A) Board members are elected by stockholders.
B) The board can be held legally accountable for a company's actions.
C) The board has the legal authority to hire, fire, and compensate the CEO.
D) All the directors are full-time employees of the company.
E) Outside directors help perform the monitoring function of the board.

Question 45

Robert has been the CEO at Nikita Incorporated for the last seven years. For the last three years, he has illegally diverted cash and assets to himself and his family members. He has abused corporate perks, such as using a company jet to fly to the Bahamas for a vacation and allowed his family members to use the gym and other amenities at the corporate office for free. He has spent corporate funds on vacation home in Miami, Florida and a threw a lavish New Year's Eve party for a hundred friends. Which of the following governance mechanisms is illustrated in this scenario?

A) Stock options
B) Self-dealing
C) The takeover constraint
D) Employee incentives
E) Greenmail

Question 46

Which of the following is NOT a responsibility of the board of directors?

A) Monitor corporate strategy decisions and ensure that they are consistent with stockholder interests
B) Apply sanctions on management when appropriate
C) Hire, fire, and compensate the CEO
D) Develop targets for divisional managers
E) Make sure the audited financial statements present a true picture of the company's financial situation

Question 47

Why do inside directors often dominate outsiders on a board of directors?

A) Insiders can use their position within the management hierarchy to exercise control over the company-specific information that the board receives.
B) They can present information in a way that puts them in a favorable light.
C) They have intimate knowledge of the company's operations, and because superior knowledge and control over information are sources of power.
D) They may be better positioned than outsiders to influence boardroom decision making.
E) All of these are reasons why inside directors often dominate outsiders on a board of directors.

Question 48

Which of the following statements concerning stock-based compensation schemes for executives is NOT true?

A) Under accounting regulations that were enforced until 2005, stock options, like wages and salaries, were expensed.
B) Huge stock-option grants can align the interests of management and stockholders.
C) Stock-based compensation schemes can dilute the equity of stockholders.
D) Huge stock-option grants increase the outstanding number of shares in a company.
E) Top managers can earn huge bonuses from stock options that were granted several years prior.

Question 49

Which of the following is a major function of the board of directors of a company?

A) Approving decisions made by divisional managers
B) Monitoring line managers
C) Aligning corporate strategy with stockholder interests
D) Creating contracts with suppliers
E) Designing marketing strategies for the company

Question 50

A criticism of stock-based compensation plans is that they:

A) discourage empire building.
B) reduce motivation among agents.
C) do not align management and stockholder interests.
D) dilute stockholders' equity.
E) adversely affect the earnings of principals.

Question 51

The internal research department of Libra Inc. has found that the packaging of health supplements produced by the company is faulty and resulting in poor quality. Despite this knowledge, the company has not improved the packaging and instead has advertised to its customers that this packaging is foolproof. Which of the following concepts is illustrated in this scenario?

A) Information manipulation
B) Anticompetitive behavior
C) Agency strategy
D) Information symmetry
E) On-the-job consumption

Question 52

Which of the following correctly describes the ethical right of each type of stakeholder?

A) Stockholders have the right to expect that a firm will not violate the basic expectations that society places on enterprises.
B) Customers have the right to be fully informed about the products and services they purchase, including the right to information about how those products might cause them harm.
C) Employees have the right to expect that the firm will abide by the rules of competition and not violate the basic principles of antitrust laws.
D) Suppliers have the right to safe working conditions, fair compensation for the work they perform, and just treatment by managers.
E) Competitors have the right to timely, accurate information about their investments in accounting statements.

Question 53

Which of the following has been a negative effect of the SEC requirement that publicly traded companies in the United States are required to file quarterly and annual reports that are audited by an independent, accredited accounting firm?

A) Stockholders can have complete faith that the information contained in financial statements accurately reflects the state of affairs of a company.
B) The information can enable a stockholder to calculate the profitability (ROIC) of a company in which he or she invests.
C) There have been issues of misrepresentation of the true financial state of companies to investors such as inflating the revenues or earnings to generate higher stock prices to give managers the benefits of stock option grants for personal gain at the expense of stockholders.
D) It has encouraged other developed nations to enact similar regulations and requirements.
E) It gives consistent, detailed, and accurate information about how efficiently and effectively the agents of stockholders, the managers, are running the company.

Question 54

A stock option is a right to purchase:

A) shares of the company's stock at the stock's current price.
B) shares of the company's stock at half the stock's current price.
C) shares of the company's stock at a predetermined price at some point in the future.
D) bonds issued by the company.
E) stock in an underperforming company.

Question 55

Alpha LLC is a large paint manufacturing company. Despite government regulations, the company has been illegally disposing of its chemical wastes in a lake, which is an important habitat for several fish and birds. Which of the following ethical concerns is illustrated in this scenario?

A) On-the-job consumption
B) Opportunistic exploitation
C) Environmental degradation
D) Self-dealing
E) Substandard working conditions

Question 56

Gemini Corp. is a large automobile manufacturer that has contracts with several suppliers. To gain more benefits from an upholstery supplier, Gemini Corp. unilaterally changed the contract and pressurized the supplier to lower its prices. Which of the following concepts is illustrated in this scenario?

A) Opportunistic exploitation
B) On-the-job consumption
C) Agency strategy
D) Greenmail
E) Self-dealing

Question 57

Venus LLC is a large monopolistic electronic firm. The firm has been putting a lot of pressure on some of the complementor companies, asking them to bundle their products along with the products made by Venus LLC, which will make it mandatory for customers to buy Venus LLC products along with the complementary products, even if they are unrelated. Which of the following is Venus LLC demonstrating?

A) Agency strategy
B) Dumping strategy
C) Price limiting
D) Anticompetitive behavior
E) On-the-job consumption

Question 58

To stimulate reduction in its production costs, Delta LLC has moved its manufacturing facilities to an underdeveloped country where there are few labor laws. The employees at the manufacturing facilities are children and teenagers, and they receive minimal wages. Which of the following ethical issues is illustrated in this scenario?

A) On-the-job consumption
B) Opportunistic exploitation
C) Self-dealing
D) Information manipulation
E) Substandard working conditions

Question 59

To foster ethical behavior through organizational culture, businesses should:

A) avoid explicitly articulating values that place a strong emphasis on ethical behavior.
B) draft a formal statement of the ethical priorities they will follow.
C) encourage self-dealing among managers.
D) eliminate the need for a moral compass.
E) avoid putting strong governance processes in place.

Question 60

Jacob is a senior manager at Aries LLC. He has been earning significant bonuses in addition to his salary. He often misrepresents the financial information about the operations he handles, and he acquires more financial resources than he needs to run operations. Which of the following concepts is illustrated in this scenario?

A) Glass-ceiling effect
B) Self-dealing
C) Agency strategy
D) Takeover constraints
E) Stock options

Question 61

Which of the following unethical behaviors violates the rights of competitors and, when government officials are involved, the right of citizens to expect that government officials will act in the best interests of the local community or nation?

A) Information asymmetry
B) Utilitarianism
C) Self-dealing
D) Greenmail
E) Corruption

Question 62

Business ethics are concerned with accepted principles of right or wrong governing the conduct of businesspeople. Identify and discuss the common examples of unethical decisions that businesspeople have made.

Question 63

To make sure that ethical issues are considered in business decisions:

A) companies should eliminate the principal-agent approach.
B) companies should have a no-layoff policy.
C) top managers should articulate and model ethical behaviors.
D) top managers should generously grant stock options.
E) companies should hire and promote employees with a strong focus on economic gains.

Question 64

Describe the four types of governance mechanisms that principals use to deal with agency problems.

Question 65

Explain the principles of agency theory, including the issues it addresses. What are some effective ways to deal with agency problems, as implied or stated by agency theory?

Question 66

Consider a national chain of company-owned fast-food restaurants. For this firm, list the important stakeholders. Then describe how each stakeholder group can affect the firm's profitability.

Question 67

Requiring an independent board of directors that is willing to hold top managers accountable for self-dealing and can verify the information managers provide is an example of which kind of ethical principle?

A) Organization culture and leadership
B) Decision-making processes
C) Strong corporate governance
D) Moral courage
E) Hiring and promotion

Question 68

What is the best way for managers to ensure that ethical considerations are taken into account? List five out of the seven things managers can and should do to ensure that basic ethical principles are adhered to, and that ethical issues are routinely considered when making business decisions. Describe at least one way to accomplish each of these tasks.

Question 69

Which of the following types of business law describes the accepted principles of right and wrong when dealing with competitive behavior?

A) Tort laws
B) Antitrust laws
C) Intellectual property law
D) Securities law
E) Contract laws

Question 70

When managers of a firm seek to unilaterally rewrite the terms of contracts with suppliers, buyers, or complement providers in a way that is more favorable to their firm, they are engaging in:

A) opportunistic exploitation.
B) information manipulation.
C) downsizing.
D) greenmail.
E) self-dealing.