Deck 11: Corporate Governance

Question 1

In the United States,the fundamental goal of business is to maximize profits.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

The members of the board of directors are a firm's key stakeholders and a company's legal owners.

Answer 3

False

Question 4

The appropriate use of a single mechanism results in the effective governance of a corporation.

Question 5

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

Question 6

As a governance mechanism,the market for corporate control is ineffective when internal controls fail.

Question 7

In general,managerial interests prevail when governance mechanisms are strong.

Question 8

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

Question 9

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

Question 10

A golden parachute provides automatic payments to top executives if their contracts are not renewed,regardless of the reason for nonrenewal.

Question 11

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

Question 12

Large-block shareholders typically own at least 10 percent of a corporation's issued shares.

Question 13

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

Question 14

Managers who own more than 1 percent of their firm's stock may be less likely to be forced out of their jobs,even when the firm is performing poorly.

Question 15

Because their investment in firms is passive in nature,large-block shareholders are unlikely to represent a powerful governance mechanism.

Question 16

The separation between owners and managers creates the potential for owners and managers to have conflicting interests.

Question 17

Firm performance accounts for approximately 40 percent of the variance in CEO pay.

Question 18

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

Question 19

The only role of the board of directors is to monitor and ratify major managerial decisions in order to protect the interests of the owners.

Question 20

Because top management decisions are usually complex and nonroutine,determining executive compensation is complicated.

Question 21

Firm size and executive compensation are:

A) negatively related.
B) positively related.
C) not related to each other.
D) not issues that affect the implementation of a firm's strategy.

Question 22

Managerial employment risk is reduced by:

A) increased diversification.
B) decreased managerial responsibility.
C) increased shareholder participation in decision making.
D) effective governance mechanisms.

Question 23

Regardless of size,German firms are required to have a two-tier board structure.

Question 24

A primary objective of corporate governance is to:

A) determine and control the direction of an organization,but not the performance of an organization.
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 25

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

A) greater experience in a wider range of industries,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 26

Free cash flows are:

A) cash streams that come from synergy between two firms following an acquisition.
B) cash streams that are obtained from legal proceedings in a court of law.
C) resources generated after investment in all projects that have a positive net present value within the firm's current businesses.
D) resources generated from investments in corporate stocks and bonds.

Question 27

In contrast to managers,shareholders may prefer that free cash flows be:

A) invested in tax free municipal bonds.
B) returned to them as dividends.
C) used to reduce corporate debt.
D) re-invested in additional corporate assets.

Question 28

Opportunism is both a(n) ____ and a(n) ____.

A) benefit,personal risk
B) threat,opportunity
C) life style,selfish undertaking
D) attitude,set of behaviors

Question 29

Corporate boards of directors can have little influence on the unethical behavior of top management.

Question 30

In many countries,but especially in the United States and the United Kingdom,the fundamental goal of business is to:

A) ensure customer satisfaction.
B) maximize shareholder wealth.
C) manage employees effectively.
D) create new jobs.

Question 31

Managerial employment risk is the:

A) risk of not finding qualified replacements for top management team members.
B) health risk faced by top management team members.
C) risk of job loss,loss of compensation,or loss of managerial reputation.
D) risk managers will not find a new top management team position if they should be dismissed.

Question 32

Which of the following is NOT an internal governance mechanism?

A) The board of directors
B) Ownership concentration
C) Executive compensation
D) The matrix organization structure

Question 33

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

Question 34

Corporate governance changes are occurring in developed countries,but few such reforms are taking place in transitional economies.

Question 35

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

Question 36

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

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

Question 37

Which of the following is NOT a true statement about corporate governance?

A) Governance is used to establish order between parties whose interests may be in conflict.
B) Corporate governance mechanisms have occasionally failed to monitor and control top managers' decisions.
C) A well functioning corporate governance and control system will seldom provide a competitive advantage.
D) Corporate governance should ensure that the interests of top-level managers are aligned with shareholders' interests.

Question 38

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

Question 39

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 40

Most U.S.firms consider the central stakeholder of the organization to be the:

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

Question 41

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) present and active.

Question 42

Given the demands for greater accountability and improved performance,which of the following is NOT a voluntary change many boards of directors have initiated?

A) Moving toward having directors from different countries
B) Strengthening the internal management and accounting control systems
C) Increasing the homogeneity of board members' backgrounds
D) Establishing and using formal processes to evaluate the board's performance

Question 43

As more shareholders own fewer shares of stock,shareholders' incentives to monitor managerial decisions:

A) increase.
B) decrease.
C) remain constant.
D) are not relevant.

Question 44

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

A) 3
B) 5
C) 7
D) 10

Question 45

Executive compensation is a governance mechanism that seeks to align managers' and owners' interests through all of the following EXCEPT:

A) bonuses.
B) long-term incentives such as stock options.
C) salary.
D) penalties for inadequate firm performance.

Question 46

The interests of multinational corporations' stockholders may be best served when there is:

A) a common compensation plan for all corporate executives.
B) only a long term compensation plan in place for executives.
C) both financial and strategic incentives for corporate executive compensation.
D) an array of unique compensation plans for corporate executives.

Question 47

Compared to shareholders,managers prefer:

A) higher levels of diversification with lower levels of risk.
B) higher levels of diversification with higher levels of risk.
C) lower levels of diversification with lower levels of risk.
D) lower levels of diversification with higher levels of risk.

Question 48

The ownership in most U.S.firms could be described as:

A) diffuse.
B) concentrated.
C) extremely variable.
D) understated.

Question 49

Institutional investors own over ____ percent of the stock in large U.S.corporations.

A) 10
B) 25
C) 50
D) 75

Question 50

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 51

Which of the following is NOT a factor affecting shareholders' preferences for a firm's level of diversification?

A) Level of cash flow available for investment
B) Top management team's experience in implementing a diversification strategy
C) Intensity of rivalry among competitors
D) The firm's primary industry

Question 52

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.

Question 53

The ownership of major blocks of stock by institutional investors may result in all of the following EXCEPT:

A) increased monitoring of CEO performance.
B) a lower proportion of insiders on the board of directors.
C) increased emphasis on the effectiveness of the boards of directors.
D) fewer managerial defenses against takeovers.

Question 54

Boards of directors are now becoming more involved in:

A) the strategic decision making process.
B) supporting the incumbent's choice of a successor.
C) the firm's tax issues.
D) shaping the culture of the firm.

Question 55

Without complete information about the reasons and expected outcomes of strategic initiatives,an outsider-dominated board of directors may emphasize:

A) financial evaluations.
B) strategic objectives.
C) increased diversification.
D) long term goals.

Question 56

Agency costs reflect all of the following EXCEPT:

A) monitoring costs.
B) enforcement costs.
C) market manipulation costs.
D) incentive costs.

Question 57

Recent research evidence shows that ownership concentration is associated with:

A) growth in revenues.
B) greater managerial autonomy.
C) lower levels of diversification.
D) a greater firm focus on mature,stable industries.

Question 58

Generally,a board member who is a source of information about a firm's day-to-day activities is classified as a(n):

A) outsider.
B) insider.
C) related outsider.
D) unrelated insider.

Question 59

Ownership in many modern corporations is now concentrated in the hands of ____ rather than ____.

A) preferred stockholders,common stockholders
B) bondholders,stockholders
C) institutional investors,individual shareholders
D) investment banks,venture capital firms

Question 60

The use of longer-term executive pay helps firms avoid:

A) a temporary lag in firm performance.
B) having to pay excess taxes.
C) potential agency problems.
D) "patchwork" compensation schemes.

Question 61

There is some evidence that performance bonuses for executives based on annual results are ____ investments in R&D where the firm was highly diversified.

A) negatively related to
B) positively related to
C) not correlated with
D) also connected to the level of

Question 62

Describe what the market for corporate control is and its implications for organizations.

Question 63

The market for corporate control serves as a means of governance when:

A) the value of the firm is too significant.
B) internal controls have failed.
C) the corporation has greatly exceeded performance expectations.
D) the top management team's interests and the owners' interests are aligned.

Question 64

Japanese keiretsu are ____.

A) management structures related to total quality management systems.
B) company unions which are a type of governance system.
C) consortia of Japanese banks.
D) a system of cross-shareholding among firms.

Question 65

The primary component of the large compensation packages of CEOs is (are):

A) incentives for specific performance outcomes.
B) bonuses for exemplary firm performance.
C) salary.
D) stock and stock options.

Question 66

What is corporate governance and how is it used to monitor and control managers' decisions?

Question 67

A change occurring in German corporations is that managerial decisions:

A) are beginning to include employee suggestions.
B) no longer affect management compensation levels.
C) no longer focus on just strategic objectives.
D) are beginning to reflect U.S.-style concern for shareholders.

Question 68

Discuss the effect of the separation of ownership and control in the modern corporation.

Question 69

Discuss the difficulties in establishing performance-based compensation plans.

Question 70

The major determinant of CEO pay is ____.

A) organizational performance.
B) organizational size.
C) the qualifications and experience of the CEO.
D) the proportion of insiders on the board of directors.

Question 71

Which of the following is true of Japan's corporate governance structure?

A) A market for corporate control is emerging.
B) Government intervention is increasing.
C) Stockholders are becoming more passive.
D) Relationships between corporations and the government are no longer close.

Question 72

Which of the following reasons would NOT explain the complexity of executive compensation?

A) The decisions made by top-level managers are typically complex and nonroutine.
B) An executive's decisions often affect firm performance only over the long run.
C) A number of factors intervene between top-level management decisions and firm performance.
D) The compensation committee may not have comprehensive firm performance data.

Question 73

Define the agency relationship and managerial opportunism and discuss their strategic implications.

Question 74

____ is an important influence in Japanese corporate governance structures.

A) Corporate longevity
B) Consensus
C) Concern for employees
D) Employee commitment to the organization

Question 75

Define the four internal corporate governance mechanisms and how they may be used to control and monitor managerial decisions.

Question 76

There is some evidence that those firms targeted for takeover by active corporate raiders are:

A) typically underperforming their industry.
B) performing above their industry averages in at least 50 percent of cases.
C) almost always outperforming their industry.
D) usually performing near the industry average.

Question 77

The governance mechanism most closely connected with deterring unethical behaviors by top management is ____.

A) ownership concentration
B) the market for corporate control
C) executive compensation systems
D) the board of directors

Question 78

Managers in the U.S.receive ____ compensation than managers in the rest of the world.

A) equivalent
B) higher
C) lower
D) equivalent if stock options are excluded from the calculation

Question 79

In Japan,the principal source of the active monitoring of large companies comes from:

A) individuals.
B) stock brokerage companies.
C) mutual funds.
D) banks.

Question 80

The ____ needs of ____ stakeholders must be satisfied through the firm's actions.

A) minimal,the key
B) maximum,all external
C) minimal,all
D) maximum,organizational