Deck 12: Corporate Governance Emea Edition

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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 7

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 8

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 9

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 10

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 11

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

Question 12

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 13

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.

Question 14

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

Question 15

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 16

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

Question 17

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

Question 18

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

Question 19

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 20

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

Question 21

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 22

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 23

Poor ethical behavior as seen at Enron and Satyam (described in the Strategic Focus) has devastating effects on the firm's stakeholders (and stockholders in particular) and illustrates a failure of corporate governance mechanisms.

Question 24

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 25

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 26

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 27

Agency costs reflect all of the following EXCEPT ____ costs.

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

Question 28

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

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

Question 29

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 30

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

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

Question 31

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 32

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 33

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 34

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 35

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 36

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.

Question 37

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) financial institutions such as mutual funds and pension funds that control large-block shareholder positions.
D) prevented by the Sarbanes-Oxley Act from owning more than 50% of the stock of any one firm.

Question 38

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 39

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

Question 40

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

Question 41

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 42

Historically, ____ have been at the center of German corporate governance structure.

A) banks
B) institutional shareholders
C) public pension funds
D) government agencies

Question 43

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 backgrounds
B) strengthening the internal management and accounting control systems
C) compensating directors with stock options rather than with fixed remuneration
D) establishing and using formal processes to evaluate the board's performance

Question 44

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 45

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 46

The repurchase at a premium of shares of stock that have been acquired by the aggressor firm in a hostile takeover in exchange for an agreement that the aggressor will no longer target the company for takeover is called

A) greenmail.
B) a standstill agreement.
C) crossing the palm with silver.
D) a poison pill.

Question 47

The longer the focus of managerial incentive compensation, the greater the ____ top-level managers.

A) earnings potential for
B) risks borne by
C) incentives for
D) potential tax burden for

Question 48

Boards of directors are now becoming more involved in

A) the strategic decision making process.
B) selecting new CEOs.
C) the firm's tax issues.
D) governmental relations.

Question 49

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

A) the firm is overpriced in the market.
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 50

All of the following are correct about the chapter Strategic Focus on fraud and corporate governance failure at Satyam Computer Services Ltd. EXCEPT

A) Satyam's stock price suffered a significant decline.
B) The CEO was involved in overstating company revenues and profits.
C) The CEO was never held responsible for his unethical actions.
D) The CEO was a recipient of the Golden Peacock Award for Corporate Governance.

Question 51

German executives are not dedicated to the maximization of shareholder value largely because

A) the roles of CEO and chairperson of the board of directors are usually combined.
B) large institutional investors control large blocks of stock.
C) private shareholders rarely have large ownership positions in the firm.
D) of the focus on stewardship-management in German firms rather than the financial performance focus of U.S. firms.

Question 52

One means that is considered to improve the effectiveness of outside directors is

A) mandating that all outside directors be drawn from government or academia rather than industry.
B) requiring that outside directors be former executives of the firm.
C) requiring outside directors to own significant equity stakes in the firm.
D) requiring that outside directors be truly objective by having no ownership interest in the firm.

Question 53

The market for corporate control may not be as efficient as previously thought as recent findings suggest that those firms targeted for takeover by active corporate raiders are

A) usually on the verge of bankruptcy.
B) typically under-performing their industry.
C) often performing above their industry averages.
D) always outperforming their industry.

Question 54

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

A) boards of directors.
B) stock brokerage companies.
C) the government.
D) banks.

Question 55

Japanese keiretsu are

A) management structures related to total quality management systems.
B) company unions, which are a type of governance system.
C) the banks owing the largest shares of stock in the firm.
D) a system of cross-shareholding among firms.

Question 56

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 57

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

A) a uniform compensation plan for all corporate executives, U.S. and foreign alike.
B) executive compensation that is primarily based on long-term performance.
C) elevation of foreign executive compensation to U.S. levels.
D) a variety of compensation plans for executives of foreign subsidiaries.

Question 58

Which of the following statements is about corporate governance in Germany is FALSE?

A) The Vorstand (management board) of a German corporation makes decisions about strategy and management.
B) The Vorstand is elected by the firm's employees.
C) Employees, union members, and shareholders appoint members to the Aufsichsrat (the supervisory tier of the board).
D) Large institutional investors such as pension funds and insurance companies are relatively insignificant owners of corporate stock.

Question 59

Which of the following is FALSE about corporate governance in China?

A) The Chinese governance system has been moving towards the Western model in recent years.
B) The compensation of top executives of Chinese companies is closely related to prior and current financial performance of the firm.
C) The state is becoming far less dominant in determining the strategies employed by most firms.
D) Firms with higher state ownership tend to have lower market value and more volatility in those values over time.

Question 60

The governance mechanism most closely connected with deterring unethical behaviors by holding top management accountable for the corporate culture is

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

Question 61

How does corporate governance foster ethical strategic decisions and how important is this to top-level executives?

Question 62

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

Question 63

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

Question 64

Briefly compare and contrast corporate governance in the U.S., Germany, and Japan, and China.

Question 65

Discuss the difficulties in establishing performance-based compensation plans for executives.