Deck 10: Corporate Governance

Question 1

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.

Answer 1

False

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

In the United States, the members of the Board of Directors are a firm's key stakeholders and a company's legal owners.

Question 6

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

Question 7

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

Question 8

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

Question 9

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.

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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 15

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

Question 16

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 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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 23

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 24

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 25

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

Question 26

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

Question 27

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 28

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

Question 29

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 30

A powerful CEO would oppose the appointment of a lead director on the Board of Directors.

Question 31

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

Question 32

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 33

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 34

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 35

DDD MetalWorks plans to go public in the next 2 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 36

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 37

A Board composed 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 38

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

Question 39

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 40

Generally, the Board of Directors can be classified as insiders, unrelated insiders, outsiders, and unrelated outsiders.

Question 41

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 42

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

Question 43

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

Question 44

Long-term incentives facilitate a Board of Directors' pay-related decisions designed to avoid potential agency problems by linking managerial compensation to the wealth of common shareholders.

Question 45

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 46

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 47

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

Question 48

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 49

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 50

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

Question 51

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 52

For top-level managers, Board acceptance of the acquiring firm's offer usually leads to job loss because the acquiring firm wants new leadership. If the offer is refused, however, the job loss risk is minimal.

Question 53

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.

Question 54

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 55

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

Question 56

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 57

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

Question 58

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

Question 59

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 60

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 61

Amos Ball, Inc., is a printing company in Iowa that has been family owned and managed for three generations. Which of the following statements is most likely to be TRUE?

A) Agency costs at Amos Ball are high.
B) If research findings are valid, Amos Ball, Inc., will perform better if a family member is CEO than if an outsider is CEO.
C) At Amos Ball, the opportunity for managerial opportunism is high.
D) The functions of risk-bearing and decision making are separate at Amos Ball.

Question 62

Which of the following is NOT an internal governance mechanism?

A) The board of directors
B) Ownership concentration
C) Executive compensation
D) The market for corporate control

Question 63

The separation between firm ownership and management creates a(n) ____ relationship.

A) governance
B) control
C) agency
D) dependent

Question 64

Ethically responsible companies design and use governance mechanisms that will at least minimally satisfy stakeholders' interests.

Question 65

Corporate governance is all of the following EXCEPT:

A) mechanisms used to determine and control the strategic direction and performance of organizations.
B) a means to establish and maintain harmony between owners and top managers whose interests may conflict.
C) ensuring that top managers' interests are aligned with the interests of stockholders.
D) resolve conflicts among corporate employees.

Question 66

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

Question 67

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

Question 68

An agency relationship exists when one party delegates:

A) decision-making responsibility to a second party.
B) financial responsibility to employees.
C) strategy implementation actions to functional managers.
D) ownership of a company to a second party.

Question 69

If a stakeholder is dissatisfied with a firm, it will withdraw its support and give it to another firm.

Question 70

Managerial employment risk is the:

A) risk that managers will behave opportunistically.
B) risk undertaken by managers to earn stock options.
C) managers' risk of job loss, loss of compensation, and/or loss of reputation.
D) risk managers will not find a new top management position if they should be dismissed.

Question 71

Scandals at Enron, WorldCom, and HealthSouth illustrate the negative effects of poor ethical behavior on a firm's efforts to satisfy stakeholders.

Question 72

In the United States, a firm's key stakeholder(s) is(are) the:

A) government.
B) executives.
C) shareholders.
D) customers.

Question 73

In the United States, the fundamental goal of business is to:

A) ensure customer satisfaction.
B) maximize shareholder wealth.
C) provide job security.
D) generate profits.

Question 74

Corporate governance revolves around the relationship between which two parties?

A) Shareholders and the Board of Directors
B) Shareholders and managers
C) The Board of Directors and managers
D) None of the the above

Question 75

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

Question 76

Corporate governance is important to nations because:

A) shareholders want large stock returns.
B) firms seek to invest in nations with national governance standards that are acceptable to them.
C) company Boards have lobbied for strong governance.
D) the United States requires that other nations adopt its governance practices.

Question 77

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

Question 78

Complete the following: In small firms, managers often own a ____ percentage of the firm, which means there is ____ separation between ownership and managerial control.

A) small; small
B) small; large
C) large; small
D) large; large

Question 79

Corporate governance mechanisms are designed to ensure that top managers make strategic decisions that best serve the interests of the entire group of stakeholders.

Question 80

Managers may decide to invest ____ in products that are not associated with the firm's current lines of business to increase the firm's level of diversification and decrease their employment risk.

A) unsubstantial profits
B) free cash flows
C) marginal profits
D) frozen assets