Question 1

Because top management decisions are usually complex and nonroutine, direct supervision (even by the firm's board of directors) is likely to be ineffective as a means of judging the quality of their decisions.

Accepted Answer

Top management decisions often involve strategic, long-term considerations that are complex and nonroutine, making it difficult for direct supervision to effectively assess their quality.

Question 2

KorniCo is determined to defend itself against a hostile takeover, no matter what.If the company wants to choose the most effective defense it should adopt the poison pill strategy, which will make its stock less attractive to the potential acquirer.

Accepted Answer

The poison pill strategy is a common defense mechanism used by companies to make their stock less attractive to potential acquirers, thereby deterring hostile takeovers.

Question 3

Hedge funds, as part of the market for corporate control, identify a firm that is underperforming and then invest in it with the goal of improving that firm's performance.

Accepted Answer

Hedge funds often engage in activist investing, where they target underperforming companies to implement changes that can enhance the firm's value and performance.

Question 4

Xion Industries is a private firm, but it experiences both direct and indirect control from the government to influence the strategies it uses.In addition, it finds it advantageous to maintain political ties with the government in order to gain access to resources.Of the United States, Japan, China, and Germany, it is most likely that Xion is based in China.

Accepted Answer

In China, the government often exerts significant control over private firms, and maintaining political ties can be crucial for accessing resources, aligning with the description of Xion Industries.

Question 5

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.

Accepted Answer

The creation of a "lead director" role can enhance board effectiveness by providing independent leadership, improving board agenda management, and ensuring proper oversight of non-management board member activities.

Question 6

Firms in China that have higher state ownership have been shown to have more volatility and lower market value, in part because government-mandated social goals take precedence over shareholder returns.

Accepted Answer

State-owned enterprises in China often prioritize government objectives over profitability, leading to increased volatility and lower market value compared to private firms.

Question 7

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.

Accepted Answer

Managers in firms that have been subjects of hostile takeovers often find their value diminished as the new owners may not trust them or may want to bring in their own management team.

Question 8

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 the firm's shareholders.

Accepted Answer

Top managers are often motivated to align their interests with shareholders to avoid conflicts and ensure the firm's success, as external investors can exert significant influence and pressure.

Question 9

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

Accepted Answer

Globalization increases interactions between firms from different countries, necessitating strong corporate governance to ensure transparency, accountability, and compliance with international standards.

Question 10

Severance packages are generally opposed, partly because they have a low level of success as a defense strategy.However, those who want to encourage top-level managers to accept a takeover bid that will best serve shareholders' interest would tend to favor this option.

Accepted Answer

Severance packages can incentivize top-level managers to accept takeover bids by providing financial security, aligning their interests with shareholders who may benefit from the takeover.

Question 11

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.

Accepted Answer

Long-term incentives align the interests of managers with those of shareholders, reducing agency problems by tying compensation to company performance and shareholder value.

Question 12

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.

Accepted Answer

Stock option repricing is often used as a tool to retain and motivate employees when the company's stock price has fallen significantly, making existing options less attractive or worthless.

Question 13

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

Accepted Answer

Stock option-based compensation plans typically set the strike price at or above the current stock price to incentivize employees to increase the company's value.

Question 14

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.

Accepted Answer

Lowering the strike prices in an executive stock option plan is typically intended to retain and motivate executives, not as a defense against a hostile takeover.

Question 15

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.

Accepted Answer

The market for corporate control is not always efficient because factors other than performance and governance, such as strategic fit or market conditions, can influence takeover decisions.

Question 16

The market for corporate control is composed of individuals and firms that buy ownership positions in or purchase all of potentially undervalued corporations typically for the purpose of forming new divisions in established companies or merging two previously separate firms.

Accepted Answer

The market for corporate control involves buying ownership in undervalued companies to restructure them, often through mergers or forming new divisions.

Question 17

The top management of RavenCrest, Inc.has 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.

Accepted Answer

Stock options and golden parachutes provide financial incentives for top management to support acquisition deals, as they can lead to personal financial gain.

Question 18

Pat and Terry are top-level managers at Descitt Corp.When LVG Enterprises made an offer to purchase Descitt, Pat and Terry felt that their jobs were in jeopardy.Now that the Descitt board has rejected the offer, Pat and Terry view this as an expression of faith in their leadership and can be confident that their positions at the firm are secure.

Accepted Answer

The answer of Pat and Terry are top-level managers at...

Question 19

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

Accepted Answer

International strategies often involve complex environments, diverse regulations, and cultural differences, making it harder to align executive compensation with firm performance compared to domestic operations.

Question 20

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

Accepted Answer

The increased use of the market for corporate control has actually led to more sophisticated and varied managerial defense tactics to prevent takeovers.

Quiz 10: Corporate Governance