Deck 11: Corporate Performance, Governance, and Business Ethics

Question 1

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

Answer 1

True

Question 2

Financial statements can be a tool of effective governance only if they provide consistent,detailed,and accurate information.

Answer 2

True

Question 3

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

Answer 3

False

Question 4

A union and the general public are examples of internal stakeholders.

Question 5

The term information asymmetry describes the difference in personal ethics that agents and principals have.

Question 6

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

Question 7

Ethical decisions are those that are made in accordance with accepted principles of right and wrong.

Question 8

In corporations,agency theory is used to explain the relationship between stockholders and corporate managers,and between upper-level managers and the lower-level managers they supervise.

Question 9

One assumption of agency theory is that the principals have more information about the resources that are being managed than the agents do.

Question 10

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

Question 11

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

Question 12

Governance mechanisms help align the incentives between principals and agents and help monitor and control agents.

Question 13

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 14

An effective governance arrangement exists when the CEO is also the chair of the board of directors.

Question 15

Through stock ownership plans,stockholders receive employee benefits.

Question 16

While they do a good job of increasing employee satisfaction,positive incentive systems do little to maximize long-run profitability.

Question 17

All stakeholders are in an exchange relationship with the company.

Question 18

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

Question 19

While many agency relationships work well,problems arise when agents and principals have different goals.

Question 20

Critics of corporate governance state that boards with more inside directors than outside directors are generally an effective governance mechanism because they know more about how the company works.

Question 21

Which of the following is not a governance mechanism used to align the interests of managers and stockholders?

A) Stockholder meetings
B) The board of directors
C) Stock-based compensation schemes
D) The mission statement
E) Takeover constraints

Question 22

A stakeholder impact analysis would include which of the following steps?

A) Identification of stakeholders
B) Identification of stakeholders' interests and concerns
C) Assessment of the likelihood that a stakeholder will file discrimination charges against the company
D) Identification of stakeholders and their interests and concerns
E) Analysis of ethics violations

Question 23

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 prescribed as an ethical business practice.

Question 24

Although stockholders are legal owners,CEOs do not always pursue stockholders' interests.CEOs can pursue their own interests because

A) they can use their authority over corporate funds to satisfy their desires for status, power, and income.
B) they have the ability to initiate a leveraged buyout.
C) an outside director will not have knowledge of inside operations if he or she chairs the board.
D) stockholders are the weakest stakeholder group because they are removed from operations.
E) stockholder meetings are not required.

Question 25

When corporate CEOs and top managers use their power and control over funds to satisfy their personal desires for wealth or status,this is called

A) on-the-job consumption.
B) agency theory.
C) information asymmetry.
D) a tradeoff between stakeholders.
E) a performance measurement.

Question 26

In the 1990s,Sotheby's and Christie's,the two largest fine-art auction houses in the world were colliding to fix prices.These practices are acceptable in the business world to create competitiveness through collaborations.

Question 27

Which of the following stakeholders might not want a company to maximize its long-run profitability and profit growth?

A) Suppliers
B) Creditors
C) Customers
D) Suppliers and customers
E) Suppliers and creditors

Question 28

A company's stakeholders include which of the following?

A) Stockholders
B) Creditors
C) Employees
D) Customers
E) All of these

Question 29

In applying agency theory to problems of corporate management,the principals are the

A) employees.
B) CEO.
C) top management team.
D) CEO and the top management team.
E) stockholders.

Question 30

Agency theory would not be useful in understanding the relationship between

A) a CEO and his or her top management team.
B) top-level executives and middle managers.
C) managers at the same organizational level.
D) stockholders and the CEO.
E) lower-level managers and the workers they supervise.

Question 31

When are the interests of stockholders and senior managers likely to be most closely aligned?

A) When the board of directors is dominated by insiders
B) When managers receive most of their compensation in the form of a regular salary
C) When stockholders are weak
D) When managers receive most of their compensation in the form of stock options
E) When corporate raiders are unable to mount a takeover bid

Question 32

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

Question 33

External stakeholders of a company include

A) unions.
B) the board of directors.
C) executive officers.
D) stockholders.
E) employees.

Question 34

Internal stakeholders of a company include

A) unions.
B) customers.
C) the board of directors.
D) suppliers.
E) local communities.

Question 35

Confronted with agency problems,which of the following is(are)challenge(s)for principals?

A) Shape the behavior of agents so that they act in accordance with the goals set by principals
B) Reduce the information asymmetry between agents and principals
C) Develop mechanisms for removing agents who do not act in accordance with the goals of principals
D) Develop mechanisms for removing agents who mislead principals
E) All of these are challenges for principals

Question 36

Why should satisfying stockholder demands receive so much attention in many corporate mission statements?

A) Stockholders are the most powerful stakeholder group that a company has to satisfy.
B) Stockholders are the legal owners of the company and are the providers of risk capital.
C) Stockholders have been successful in blackmailing companies to get their interest satisfied before those of other claimants.
D) Typically, stockholders have the most invested in the company's continued survival.
E) Managers feel obliged to pay lip service to stockholder demands.

Question 37

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

A) Today, the average CEO earns more than 350 times the pay of the average blue-collar worker.
B) Most of CEO pay is in the form of salary.
C) CEO compensation is not 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 38

Which of the following statements concerning profitability and profit growth is false?

A) Attaining future profit growth may require investments that reduce current 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) Boosting a company's profitability and profit growth rate is inconsistent with satisfying the claims of other key stakeholder groups.
E) Too much emphasis on profit growth can reduce profitability and make an enterprise less attractive to shareholders.

Question 39

The relationship between an enterprise and its stakeholders is essentially what type of relationship?

A) Exchange
B) Master-servant
C) Bailor-bailee
D) Supply and demand
E) Quasi-egalitarian

Question 40

Why are some managers thought to engage in empire building?

A) Growth results in large company size, and large size satisfies managers' needs for power, status, income, and job security.
B) The pursuit of growth represents the best way of maximizing the long-run profitability of the company.
C) Growth is designed to increase market share, which in turn increases company profits.
D) Companies that do not grow stagnate.
E) Stockholders would rather invest in large companies than in small ones.

Question 41

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 the company's competitive strategy
E) Make sure the audited financial statements present a true picture of the company's financial situation

Question 42

Which of the following is not a criticism of boards?

A) Inside directors can use their control over information to influence outside directors.
B) The CEO nominates most board directors.
C) Outside board chairpersons are ineffective since the outside directors have no knowledge of company operations.
D) Insiders can control the information the board receives.
E) A board with more insiders may pursue strategies consistent with the interests of management rather than those of stockholders.

Question 43

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

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 directors are full-time employees of the company.
E) Outside directors help perform the monitoring function of the board.

Question 44

Which of the following is not a reason why the board of directors may act as the guardian of stockholder interests within a company?

A) Board members are directly elected by stockholders.
B) The board is positioned at the apex of decision making within a company and is thus in a good position to monitor strategies.
C) Board members can be held legally accountable for the actions of the company.
D) Many board members are the nominees of the company CEO.
E) The board has legal authority to hire, fire, and compensate senior executives.

Question 45

Members of the board of directors are supposed to be agents for

A) stockholders.
B) employees.
C) executive officers.
D) customers.
E) suppliers.

Question 46

What is the major purpose of a corporate board of directors?

A) To approve all decisions made by senior managers.
B) To monitor corporate strategy decisions and ensure that they are consistent with stockholders' interests.
C) To protect a company's consumers.
D) To select additional board members.
E) To approve corporate compensation systems.

Question 47

A takeover constraint

A) limits the extent to which managers pursue strategies that are inconsistent with shareholder interest.
B) prevents a company from being taken over.
C) uses the threat of a takeover to cause the CEO to fear the loss of his or her job.
D) is reduced by corporate raiders.
E) is greatest when a company's stock price is significantly higher than book value.

Question 48

A company's stockholders provide a company with

A) emotional and intellectual support.
B) risk capital.
C) free advertising.
D) advice on new product lines.
E) a code of ethics.

Question 49

Institutional investors are becoming more aggressive in exerting their power with the board by

A) boycotting stockholder meetings.
B) pursuing leveraged buyouts.
C) selling their shares when they do not agree with company actions.
D) defining a company's business for them.
E) pushing for more effective governance structures.

Question 50

Which of the following governance mechanisms is regarded as the option of last resort?

A) Strategic control system
B) Takeover
C) Board of directors
D) Stock-based compensation system
E) Financial statements and auditors

Question 51

Which of the following is not something that managers can do to make sure that ethical issues are considered in business decisions?

A) Hire and promote people who have a strong sense of personal ethics
B) Build an organizational culture that places a high value on ethical behavior
C) Adopt the Friedman doctrine
D) Act with moral courage
E) Put decision-making processes in place that require people to consider ethical dimensions of business decisions

Question 52

Business ethics is concerned with

A) teaching people the difference between right and wrong.
B) ensuring that managers weigh the ethical implications of their decisions.
C) ensuring that employees obey the law.
D) replacing economics with social responsibility in the decision-making process.
E) increasing profits.

Question 53

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

A) opportunistic exploitation.
B) ethical behavior.
C) corruption.
D) philosophical ethics.
E) self-dealing.

Question 54

The takeover constraint

A) effectively limits the number of independent companies that a company can acquire.
B) limits the degree to which managers can pursue strategies that are at variance with stockholder interests.
C) is a theoretical construct that can be ignored in practice.
D) limits the freedom that individual companies have to maximize their long-run return on investment.
E) is imposed by corporate managers on errant business-level managers.

Question 55

A criticism of stock-based compensation plans is that

A) they discourage empire building.
B) they induce managers to focus on the short term.
C) managers do not like them.
D) they dilute stockholders' equity.
E) they are publicly reported and therefore not subject to abuse.

Question 56

Which of the following statements concerning stock-based compensation schemes for executives is incorrect?

A) They are the most objective and unambiguous way to compensate executives.
B) They can align the interests of management and stockholders.
C) They can dilute the equity of stockholders.
D) The option strike price is typically the price that the stock was trading at when the option was granted.
E) None of these choices are correct.

Question 57

When managers pay bribes to gain access to lucrative business contracts,they are engaging in

A) opportunistic exploitation.
B) utilitarian ethics.
C) self-dealing.
D) information manipulation.
E) corruption.

Question 58

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

A) a company should use a bottom-up approach.
B) a company should have a no-layoff policy.
C) top managers should articulate and model ethical behaviors.
D) a company should give seminars to teach people what is legal and not legal.
E) a company should hire and promote employees who do whatever it takes to achieve organizational objectives.

Question 59

Pursuing strategies that maximize the long-run profitability and profit growth of a company benefits which group(s)of stakeholders?

A) Employees
B) Creditors
C) Charitable organizations in the local community
D) The general public
E) All of these

Question 60

The purpose of governance mechanisms in corporations is to

A) keep employees in line.
B) reduce the scope and frequency of the agency problem.
C) satisfy the requirements of the Securities and Exchange Commission (SEC).
D) limit corporate growth to manageable rates.
E) none of these choices.

Question 61

The takeover constraint refers to the

A) opportunity to acquire competitors if they are smaller than the acquiring company.
B) risk of being acquired by another company.
C) drop in the price of a share of stock due to a rumored takeover of the company.
D) lack of resources required to acquire another company.
E) reluctance of a company's managers to acquire another company.

Question 62

CEO compensation packages are most frequently criticized because of their

A) apparent lack of relationship to company performance.
B) life insurance benefits.
C) features.
D) cost to the company.
E) lack of motivation.

Question 63

Ethics may best be thought of as

A) legal prescriptions for conduct.
B) standards of right and wrong.
C) cultural mores.
D) desirable but unattainable behaviors.
E) all of these choices.

Question 64

Thinking of it in its simplest terms,the balanced scorecard approach may be viewed as the

A) dashboard on an automobile.
B) touchpad on a cell phone.
C) keyboard for a computer.
D) dials and indicators in an airplane cockpit.
E) none of these choices.

Question 65

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 66

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 67

Becca is a CEO at XYZ Company.She has recently invested corporate funds to take an exotic trip to the Cayman Islands.This is an example of which of the following?

A) Corporate governance
B) On-the-job consumption
C) Self-dealing
D) Anticompetitive behavior
E) Information manipulation

Question 68

A typical board of directors is composed of

A) inside directors.
B) external directors.
C) inside directors and consumer advocates.
D) outside directors and union representatives.
E) inside and outside directors.

Question 69

A stock option is a right to buy

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) none of these choices.

Question 70

Sarbanes-Oxley,federal legislation enacted in 2002,requires

A) CEOs to endorse their company's financial statements.
B) CFOs to endorse their company's financial statements.
C) companies to use the same accounting firm for auditing and consulting services.
D) members of the board of directors to post a surety bond.
E) CEOs and CFOs to endorse their company's financial statements.

Question 71

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 72

Identify and discuss the governance mechanisms that help align the incentives of stockholders and managers and help monitor and control management.

Question 73

Nicole is a salesperson at a local Ford dealership.Her bonus pay is dependent upon surpassing sales targets,thus increasing the profitability of the company.This is a form of which of the following governance mechanisms?

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