Deck 10: Corporate Governance

Question 1

According to the chapter Opening Case, despite popular beliefs, most CEOs did not receive pay increases when their firms lost market value.

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

Answer 3

True

Question 4

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 5

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

Question 6

The chapter Opening Case suggests that an inadequate system of corporate governance is frequently blamed for high CEO pay during periods where corporate performance has been poor.

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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.

Question 15

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 16

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

Question 17

According to the chapter Opening Case, most CEOs earn about 10 times the amount received by their lowest-paid employee.

Question 18

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

Question 19

According to the chapter Opening Case, an average of $47.22 million was paid to CEOs in 2008 when their firms had experienced significant losses.

Question 20

The chapter Opening Case reports on a survey in the Financial Times where respondents from several countries believed that business leaders were not paid too much.

Question 21

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

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

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

Question 24

Institutional owners are financial institutions such as stock mutual funds and pension funds that control large-block shareholder positions.

Question 25

More intense application of governance mechanisms may produce significant changes in strategies, for example, firms may take on fewer risky projects and thus increase potential shareholder wealth.

Question 26

The serious problems experienced in the financial services industry are likely the result of poor governance and top-level managers making very bad strategic decisions.

Question 27

While the implementation of the Sarbanes-Oxley Act in 2002 has been controversial to some, most believe that the results of it have been generally positive.

Question 28

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

Question 29

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

Question 30

An appropriately structured and effective board protects owners from managerial opportunism such as that found at financial services firms including AIG and Merrill Lynch where shareholders and employees encountered significant losses.

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

Boards have the power to direct the affairs of the organization, punish and reward managers, and protect shareholders's rights and interests.

Question 33

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

Question 34

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 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

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

Question 40

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

Question 41

The takeover market as a source of external discipline is used only when internal governance mechanisms are relatively weak and have proven to be ineffective.

Question 42

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 43

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

Question 44

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

Question 45

According to the chapter Strategic Focus, the recent crisis in the financial services sector was incorrectly attributed to weak boards of directors.

Question 46

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 47

As discussed in the chapter Strategic Focus, Borders' decision to downsize its board was a bad one since research shows that larger boards are more effective at governing companies than smaller ones.

Question 48

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

Question 49

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 50

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 51

DDD MetalWorks plans to go public in the next two 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 52

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

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 separation of the positions of CEO and chairperson of the board of directors reduces the power of the CEO over firm governance practices.

Question 55

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 56

Some of the changes occurring on corporate boards as noted in the chapter Strategic Focus are changes to the balance of independent and inside members, renewed emphasis on audit and compensation committees, and ensuring that outside board members spend more time on board business so that they can make informed decisions.

Question 57

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

Question 58

According to the chapter Strategic Focus, the weakness of corporate boards was exemplified by the fact that the President of the United States had to fire a highly ineffective CEO because the board of General Motors had failed to act in recent years.

Question 59

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

Question 60

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 61

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 62

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

Question 63

The chapter Strategic Focus indicates that while corporate governance is importance in developed countries such as the United States, it is relatively unimportant in countries such as India where poor corporate governance rarely has an adverse affect on companies.

Question 64

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

Question 65

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

Question 66

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 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

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

Question 69

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

Question 70

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 71

Although the market for corporate control lacks the precision of internal governance mechanisms, the fear of acquisition and influence by corporate raiders is an effective constraint on managers acting in their own self interest.

Question 72

The Chinese governance system has been moving towards the Western model in recent years.

Question 73

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

Question 74

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 75

According to the chapter Strategic Focus, corporate governance failure at Satyam in India caused damage not only to the company, but also to the reputation of corporate governance in India.

Question 76

Ethically responsible companies design and use governance mechanisms that serve all stakeholders' interests.

Question 77

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

Question 78

Recent research shows that CEOs of public and private companies in Japan receive similar levels of compensation, but their compensation is not tied closely to observable performance goals.

Question 79

As globalization grows, adequate corporate governance is becoming an important requirement for doing business with a foreign firm.

Question 80

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