Deck 10: Corporate Governance and Ethics

Question 1

Executive compensation, ownership concentration, and the matrix organizational structure are all examples of internal governance mechanisms.

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

In the United States, a number of CEOs who have be fired by their firms have also been removed as members of other firms' board of directors (Chapter 10 Opening Case).

Answer 3

False

Question 4

In a large number of family-owned firms, ownership and managerial control are not separated.

Question 5

Corporate governance is important to nations as shown by efforts in India and China to make their corporate governance mechanisms consistent with global standards (Chapter 10 Opening Case).

Question 6

The three internal corporate governance mechanisms are ownership concentration, board of directors, and the market for corporate control.

Question 7

In the U.S., the members of the board of directors are a firm's key stakeholders and a company's legal owners.

Question 8

According to the Chapter 10 Opening Case, actions of boards of directors in nations throughout the world receive very little scrutiny.

Question 9

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.

Question 10

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.

Question 11

The separation of ownership and control is the most effective means used by firms to prevent managerial opportunism.

Question 12

In the modern U.S. corporation, the ownership and managerial control of the firm are separated.

Question 13

Corporate governance is a means to establish harmony between parties (the firm's owners and its top-level managers) whose interests may conflict.

Question 14

Recent emphasis on corporate governance stems mainly from the failure of corporate governance mechanisms to adequately monitor and control top-level managers' decisions.

Question 15

Corporate governance is weak in many Chinese firms and there is concern about the validity and reliability of some auditors' and the quality of companies' financial statements (Chapter 10 Opening Case).

Question 16

Corporate governance involves oversight in areas where owners, managers, and members of boards of directors may have conflicts of interest.

Question 17

According to the Chapter 10 Opening Case, one of the responsibilities of the board of directors is to have a succession plan for the CEO in place.

Question 18

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.

Question 19

In the United States, the primary goal of a firm is to maximize profits to provide a financial gain to shareholders.

Question 20

Executive compensation is considered an external corporate governance mechanism because it determined in part by market forces.

Question 21

Agency costs include incentives for executives, monitoring, enforcement costs, and any individual financial losses incurred by principals.

Question 22

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.

Question 23

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.

Question 24

The primary role of the board of directors is to monitor and control top-level executives to protect owners' interests.

Question 25

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.

Question 26

As a rule, shareholders prefer more product diversification than do managers because shareholders wish to reduce risk and maximize wealth.

Question 27

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.

Question 28

In 2009, estimates were that institutional owners owned roughly 10% of all U.S. equity and 20% of the equity among the 1000 largest U.S. companies.

Question 29

Ownership of many modern corporations is now concentrated in the hands of institutional investors rather than individual stockholders.

Question 30

Large-block shareholders typically own at least 5% of a corporation's issued shares. .

Question 31

Individual shareholders with small ownership percentages are less dependent on the board of directors to represent their interests than are large block shareholders.

Question 32

A top-level manager's reputation is a dependable predictor of his/her future behavior.

Question 33

Research evidence suggests that ownership concentration is` associated with lower levels of firm diversification which conforms to the interests of stockholders.

Question 34

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.

Question 35

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.

Question 36

Both top executives and owners of the firm wish to diversify the firm to reduce risk.

Question 37

In general, when governance mechanisms are strong, managers have free rein in their decisions.

Question 38

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.

Question 39

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.

Question 40

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.

Question 41

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 non-management board member activities.

Question 42

Because top management decisions are usually complex and nonroutine, determining the quality of executive performance is beyond the power of boards of directors.

Question 43

A provision of the Frank-Dodd Act called "say for pay" (Chapter 10 Strategic Focus) allows shareholders to approve the compensations packages for top managers.

Question 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.

Question 45

One suggestion given in the Chapter 10 Strategic Focus for aligning agents' and principals' interests is to award stock options with a strike price that is the average of the last 90 days and that cannot be exercised for five years.

Question 46

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.

Question 47

Generally, the board of directors can be classified as insiders, unrelated insiders, outsiders, and unrelated outsiders.

Question 48

The use of executive compensation as a governance mechanism is more challenging to firms implementing international strategies than those strictly operating domestically.

Question 49

Boards with many members from the firm's top management team tend to have weak monitoring and control systems for managerial decisions.

Question 50

The separation of the positions of CEO and chairperson of the board of directors reduces the power of the CEO over firm governance practices.

Question 51

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.

Question 52

A powerful CEO would oppose the appointment of a lead director on the board of directors.

Question 53

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.

Question 54

According to the Chapter 10 Strategic Focus, well-known compensation consultant Graf Crystal reported that there is a relationship between shareholder returns and CEO compensation; companies are paying CEOs for the performance they deliver.

Question 55

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.

Question 56

The performance of individual board members and entire boards are being evaluated more formally and with greater intensity than in years past.

Question 57

A board comprised 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.

Question 58

DDD MetalWorks plans to go public in the next two 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.

Question 59

Well-designed stock option-based compensation plans should have the option strike prices substantially lower than the current stock prices.

Question 60

According to the Chapter 10 Strategic Focus, Walt Disney CEO Robert Iger believes that many CEOs are rewarded primarily for short-term rather than long-term performance.

Question 61

Attitudes toward corporate governance in Japan are affected by the concepts of obligation, family, and consensus.

Question 62

Recent research shows that CEOs of public and private companies in Japan receive similar levels of compensation, but their compensation is not tied closely to observable performance goals.

Question 63

China YTC International has established an audit committee within its board of directors, appointed three new independent directors, and more openly speaks of serving investor's needs. This example illustrates that corporate governance in China may be tilting towards the Western model.

Question 64

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.

Question 65

As globalization grows, adequate corporate governance is becoming an important requirement for doing business with a foreign firms and in foreign countries.

Question 66

The most effective defense against a hostile takeover is the poison pill strategy.

Question 67

Foreign investors are playing a relatively minor role in the governance of firms in many countries.

Question 68

The increased use of the market for corporate control has decreased the sophistication and variety of managerial defense tactics that are used in takeovers.

Question 69

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.

Question 70

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.

Question 71

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.

Question 72

An advantage of severance packages is that they may encourage top level managers to accept takeover bids that are attractive to shareholders.

Question 73

The way that U.S. corporate boards of directors are presently structured, they have little influence on the unethical behavior of top management.

Question 74

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.

Question 75

Clorox's board rejected Carl Icahn's initial bid of $76.50 per share and his subsequent bid of $80 per share indicating that both bids undervalued the firm's true worth. This example suggests that investors sometimes use the market for corporate control to take ownership in firms that are performing well.

Question 76

Large German firms must include employees, union members, and shareholders in the formal governance structure.

Question 77

The Chapter 10 Strategic Focus indicates that Rio Tinto's most effective internal corporate governance mechanism was its executive compensation system.

Question 78

According to the Chapter 10 Strategic Focus, corporate governance can be challenging for firms such as Rio Tinto with significant product and geographic diversification.

Question 79

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.

Question 80

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.