Deck 10: Corporate Governance

Question 1

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

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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 9

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

Question 10

Agency costs include incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by principals.

Question 11

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

Question 12

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

Question 13

An agency relationship exists when one party delegates decision-making responsibility to a second party for compensation.

Question 14

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 15

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

Question 16

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

Question 17

In modern corporations-especially those in the United States and the 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 18

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

Question 19

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

Question 20

Corporate governance is the set of mechanisms used to manage the relationships among stakeholders and to determine and control the strategic direction and performance of organizations.

Question 21

The Dodd-Frank Wall Street Reform and Consumer Protection Act is the most sweeping set of financial and regulatory reforms in the United States since the Great Depression.

Question 22

The implementation of the Sarbanes-Oxley Act in 2002 has been, but most believe that it has had positive results in terms of protecting the interests of shareholders as well as other stakeholders.

Question 23

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 24

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

Question 25

Research evidence suggests that ownership concentration is associated with lower levels of firm diversification, which conforms to the interests of stockholders.

Question 26

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 27

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

Question 28

More than three-fourths of the members of the PeteSys board of directors are also part of the firm's top management team.Because of their inside knowledge, this should lead to strong monitoring and control systems for managerial decisions in the firm.

Question 29

CEO duality exists when a single individual is both the CEO and the chair of the board.

Question 30

Because of recent ineffective performance, boards of directors are experiencing increasing pressure from shareholders, lawmakers, and regulators to be more forceful in preventing managers from acting in their own interest.

Question 31

Research suggests that institutional activism may not have a strong direct effect on firm performance, but it may indirectly influence a targeted firm's strategic decisions, including those concerned with social issues.

Question 32

More intense application of governance mechanisms such as mandated by Sarbanes-Oxley and Dodd-Frank may cause firms to take on fewer risky projects and thus increase potential shareholder wealth.

Question 33

MTW 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 34

Generally, board members are classified as insiders, unrelated insiders, outsiders, and unrelated outsiders.

Question 35

Institutional owners, despite their size, are usually unable to discipline ineffective top-level managers and cannot influence a firm's choice of strategies and overall strategic direction.

Question 36

A board composed primarily of outside directors will have better insights as to the firm's intended strategic initiatives, the reasons for the initiatives, and the outcomes expected from them than will inside directors.

Question 37

Ray and Gina own shares of stock in a number of different companies.None of their holdings are very large.Because they make their own investment decisions, they are not as dependent on the board of directors to represent their interests as the large-block shareholders are.

Question 38

In recent years, the number of individuals who are large-block shareholders has declined and been replaced by institutional owners.

Question 39

Ownership concentration is defined by the number of large-block shareholders and the total percentage of the firm's shares they own.

Question 40

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions related to consumer protection, systemic risk oversight, and capital requirements for banks, but not for executive compensation.

Question 41

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.

Question 42

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.

Question 43

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.

Question 44

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.

Question 45

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 46

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.

Question 47

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 48

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.

Question 49

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

Question 50

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.

Question 51

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.

Question 52

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 53

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

Question 54

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 55

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 56

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.

Question 57

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.

Question 58

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.

Question 59

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

Question 60

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 61

Prints4U is a small printing firm in Minneapolis, MN.As is typical for a firm of this size, the managers own a __________ percentage of the firm.As a result, there is __________ separation between ownership and managerial control.

A) small; less
B) small; greater
C) large; less
D) large; greater

Question 62

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

Question 63

Scandals at companies such as Enron, WorldCom, and HealthSouth illustrate the negative effects of poor ethical behavior on a firm's efforts to satisfy stakeholders.

Question 64

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) 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 65

In the United States, a firm's key stakeholder(s) is(are) the:

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

Question 66

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

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

Question 67

Corporate governance mechanisms are designed to ensure that top-level managers make strategic decisions that best serve the interests of all stakeholders.

Question 68

Corporate governance is all of the following EXCEPT:

A) a set of mechanisms used to determine and control the strategic direction and performance of organizations.
B) a means to establish and maintain harmony between owners and top managers whose interests may conflict.
C) a way to ensure that top managers' interests are aligned with the interests of stockholders.
D) a method for resolving conflicts among corporate employees.

Question 69

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 70

Ethically responsible companies design and use governance mechanisms that will at least minimally satisfy stakeholders' interests.

Question 71

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

Question 72

LeederTech is facing a hostile takeover.Its focus as a defense strategy has been to ensure some continuity.It has decided to pursue a strategy that will prevent an acquirer from replacing the entire board of directors immediately, even though this tends to have very low success and a negative or negligible effect on shareholder wealth.What strategy did LeederTech select?

A) Capital structure change
B) Corporate charter amendment
C) Greenmail
D) Poison pill

Question 73

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

Question 74

Corporate governance primarily revolves around the relationship between which of the following two parties?

A) Shareholders and the board of directors
B) Shareholders and managers
C) The board of directors and managers
D) Owners and customers

Question 75

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

Question 76

Corporate governance is important to nations because:

A) shareholders want large stock returns.
B) firms seek to invest in nations with national governance standards that are acceptable to them.
C) company boards have lobbied for strong governance.
D) the United States requires that other nations adopt its governance practices.

Question 77

Why would the top-level managers at Nutzandboltz, a hardware company, decide to invest free cash flow in product lines such as clothing or toys?

A) To defend against a hostile takeover
B) To increase the level of diversification
C) To enhance executive compensation
D) To minimize managerial risk

Question 78

In the United States, the fundamental goal of business is to:

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

Question 79

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

Question 80

Which of the following is NOT an internal governance mechanism?

A) Board of directors
B) Ownership concentration
C) Executive compensation
D) Market for corporate control