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

The following statement accurately reflects the current governance environment: "It used to be that it was considered somehow impolite or improper for a board member not to ask a tough question, now it is considered irresponsible to ask a tough question."

Answer 2

False

Question 3

In the U.S., institutional investors are mainly the primary lenders to the firm, usually banks.

Answer 3

False

Question 4

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

Question 5

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

Question 6

The ultimate in shareholder concentration would be one person holding all shares of a company's stock.

Question 7

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

Question 8

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

Question 9

In ZYX Corp., two shareholders own 85 percent of company stock. This represents a high degree of ownership concentration.

Question 10

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

Question 11

The climate for corporate governance can best be viewed as a balance between being strong enough to monitor while avoiding being so restrictive as to constrain the CEO's ability to make decisions.

Question 12

Failures of corporate internal controls and inadequate internal control systems allowed unethical executives at such companies as Enron and Tyco to act in their own self-interest.

Question 13

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

Question 14

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

Question 15

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

Question 16

The impact of the Sarbanes-Oxley Act has been substantial on the governance processes of the firm, but overall firm strategy has been unaffected.

Question 17

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 18

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

Question 19

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

Question 20

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

Question 21

DDD MetalWorks plans to go public in the next two years. In order to be listed on either the New York Stock Exchange or the American Exchange, the firm will need to restructure its present board of directors which is made up of insiders and related outsiders to a board of directors that is dominated by related outsiders and independent outsiders.

Question 22

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

Question 23

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

Question 24

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 25

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 26

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

Question 27

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

Question 28

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 29

Shareholders can rely on the market for corporate control to effectively discipline poor-performing executives if internal governance mechanisms fail.

Question 30

Generous severance packages make executives less resistant to the market for corporate control.

Question 31

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

Question 32

The market for corporate control is often viewed as a "court of last resort" as it is an external governance mechanism that becomes active when a firm's internal controls fail.

Question 33

The top management of RavenCrest, Inc. have significant stock options in RavenCrest. They are therefore more likely to experience a takeover attempt by another firm than if they did not have stock options.

Question 34

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

Question 35

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 36

Both Japan and the U.S. have market-based financial and corporate governance structures.

Question 37

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

Question 38

Executives whose bonuses are based on long-term outcomes (rather than short-term outcomes) by the firm are often relatively overcompensated because executives are reluctant to take on the additional risk.

Question 39

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

Question 40

Stock options attempt to align managers' and owners' interests by tying managerial compensation and firm performance together.

Question 41

In the U.S., a firm's key stakeholder(s) is(are) the

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

Question 42

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

Question 43

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 above.

Question 44

Archibald Smith has moved from an upper-middle management job at Chromatic Array, Inc., to a similar position with Pixilair Corporation. The gap between CEO pay and the pay of other top executives at Chromatic was significantly larger than at Pixilair. What difference can Archibald expect?

A) The working relationships among the top management team will be more collaborative at Pixilair than at Chromatic.
B) The focus of Chromatic's board of directors will have been more on the creation of shareholder wealth than Pixilair's focus.
C) The rating of Pixilair by Institutional Shareholders Services will be less favorable than Chromatic's rating.
D) Pixilair will be more vulnerable to hostile takeover than Chromatic.

Question 45

Corporate governance changes are occurring in developed countries, but few such reforms are taking place in transitional economies such as China and Russia

Question 46

Shareholder value is

A) the firm's free cash flow.
B) the total revenue of the firm.
C) determined by the size of the firm.
D) reflected in the price of the stock.

Question 47

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 48

Corporate governance mechanisms must serve the minimal needs of all stakeholders.

Question 49

In a company such as Enron, one can argue that the company's governance system reflected Enron's standards as a company.

Question 50

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

Question 51

Japanese organizations' focus on stewardship-management produces greater investments in long-term research and development than does the U.S. system, which is financially-oriented.

Question 52

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

Question 53

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 54

In the U.S., the fundamental goal of business is to

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

Question 55

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

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

Question 56

Research suggests that firms with ____ perform better, especially when collaboration among top management team members is important.

A) greater emphasis on stock options
B) larger proportion of insiders on the board of directors
C) smaller pay gap between the CEO and other top executives
D) benchmarking used for top executive pay

Question 57

A primary objective of corporate governance is to

A) determine and control the strategic direction of an organization, so that the top executives are focused on maximizing corporate profits.
B) ensure that the interests of top-level managers are aligned with the interests of shareholders.
C) lobby legislators to pass laws that are aligned with the organization's interests.
D) resolve conflicts among corporate employees.

Question 58

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 59

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 60

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 61

All of the following are unintended consequences of the Sarbanes-Oxley Act EXCEPT

A) some foreign firms have delisted on U.S. stock exchanges.
B) a number of publicly-traded companies have decided to privatize.
C) an increased number of IPOs (initial public offerings) are expected.
D) internal auditing costs have increased by about one-third.

Question 62

A virtually exclusive reliance on financial controls may occur when outsider-dominated boards exist. This may lead to all of the following EXCEPT

A) high executive turnover.
B) increased diversification of the firm.
C) excessive management compensation.
D) reduction in R&D expenditure.

Question 63

The New York Stock Exchange requires that the audit committee be

A) available to comment to external analysts.
B) composed solely of outside directors.
C) liable for any illegal actions by the top management team.
D) made up of CPAs with auditing experience.

Question 64

As ownership of the corporation is diffused, shareholders' ability to monitor managerial decisions

A) increases.
B) decreases.
C) remains constant.
D) is eliminated.

Question 65

The top management team at Sierra Infusion is concerned about the declining performance of firms in their industry. The team members are becoming concerned about the security of their jobs at Sierra Infusion. At a meeting over dinner, the top management team agrees to go to the board of directors with a proposal for

A) increased diversification of Sierra Infusion.
B) the addition of outside directors to the board.
C) increased shareholder participation in decision making.
D) greater concentration on Sierra's core industry.

Question 66

In contrast to managers' desires, shareholders usually prefer that free cash flows be

A) used to diversify the firm.
B) returned to them as dividends.
C) used to reduce corporate debt.
D) re-invested in additional corporate assets.

Question 67

The ownership of major blocks of stock by institutional investors have resulted in all of the following EXCEPT

A) making CEOs more accountable for their performance.
B) increasing the concentration of ownership of large U.S. firms.
C) focusing attention on ineffective boards of directors.
D) tying the compensation of CEOs to measurable financial criteria.

Question 68

Usually, large block shareholders are considered to be those shareholders with at least ____ percent of the firm's stock.

A) 5
B) 25
C) 50
D) 75

Question 69

Institutional owners are

A) shareholders in the large institutional firms listed on the New York Stock Exchange.
B) banks and other lending institutions that have provided major financing to the firm.
C) large block shareholders such as mutual funds and pension funds.
D) prevented by the Sarbanes-Oxley Act from owning more than 50% of the stock of any one firm.

Question 70

Which of the following is a FALSE statement about corporate governance?

A) Governance is used to establish order between parties whose interests may be in conflict.
B) Corporate governance mechanisms sometimes fail to monitor and control top managers' decisions.
C) Corporate governance mechanisms can be in conflict with one another.
D) Corporate governance is best achieved with aboard of directors with strong ties to management.

Question 71

Ownership concentration is determined by both

A) the number of blockholders and the parties they represent.
B) the number of blockholders and total percentage of shares they own.
C) the number of outside directors and the parties they represent.
D) the number of outside directors and total percentage of shares they own.

Question 72

Generally, a board member who is a source of information about a firm's day-to-day activities is classified as a(an) ____ director.

A) lead independent
B) inside
C) related
D) encumbered

Question 73

A major conflict of interest between top executives and owners, is that top executives wish to diversify the firm in order to ____, while owners wish to diversify the firm to ____.

A) generate free cash flows, reduce the risk of total firm failure
B) increase the price of the firm's stock, increase the dividends paid out from free cash flows
C) reduce the risk of total firm failure, reduce their total portfolio risk
D) reduce their employment risk, increase the company's value

Question 74

The Sarbanes-Oxley Act requires all of the following EXCEPT

A) installation of an outsider as the lead director on the Board of Directors.
B) accounting firms are forbidden from providing both auditing and consulting services to clients.
C) CEOs and CFOs must personally certify the company's financial reports.
D) independence of the committees on the firm's Board of Directors.

Question 75

Agency costs reflect all of the following EXCEPT ____ costs.

A) monitoring
B) enforcement
C) opportunity
D) incentive

Question 76

The board of directors of Acme Brands is discussing the design of a very generous stock option plan for its top executives. During the debate, one of the directors raises the point that CalPERS owns a significant portion of Acme Brand stock. Which of the following statements is likely to be TRUE?

A) This will have no effect on the stock option plan design discussion, because CalPERS' main concern is stock dividends.
B) CalPERS' interest in Acme Brands will cause the directors to reduce the size of the stock option plan from what it would otherwise have been.
C) CalPERS supports generous stock option plans for executives because it motivates underperforming executives.
D) For legal reasons, the board cannot consider the interests of CalPERS over the interests of its top executives.

Question 77

Product diversification provides two benefits to managers that do not accrue to shareholders: ____ and ____.

A) greater experience in a wider range of industries, lessening of managerial employment risk
B) the manager frequently invests in the acquired firm which allows him or her extensive profits, the manager can frequently buy excess assets divested by the acquired firm
C) the manager's supervisory needs are lowered, the manager is allowed greater time to oversee a wider range of activities
D) the opportunity for higher compensation through firm growth, a reduction in managerial employment risk

Question 78

Monitoring by shareholders is usually accomplished through

A) management consultants.
B) government auditors.
C) the firm's top managers.
D) the board of directors.

Question 79

Compared to managers, shareholders prefer

A) safer strategies with greater diversification for the firm.
B) riskier strategies with more focused diversification for the firm.
C) safer strategies with more focused diversification for the firm.
D) riskier strategies with greater diversification for the firm.

Question 80

Research suggests that the activism of institutional investors such as TIAA-CREF and CalPERS

A) increases shareholder value significantly.
B) may not have a direct effect on firm performance.
C) is so aggressive that boards of directors have become overly cautious.
D) has weakened the effect of other governance mechanisms.