Question 1

Landon is a senior manager for the firm Anderssen Inc. Because of his experience, he has been appointed to the board of EEC Inc., even though he doesn't work for this firm. He also serves on the boards of several other companies. Landon is a(n) ________ for Anderssen and a(n) ________ for EEC.

Accepted Answer

Landon is an inside director for Anderssen and an outside director for EEC. Inside directors are generally part of the company's senior management team. Outside directors, unlike inside directors, are not employees of the firm. They frequently are senior executives from other firms or full-time professionals, who are appointed to a board and who serve on several boards simultaneously.

Question 2

Which of the following is true of the board of directors in a public stock company?

Accepted Answer

The shareholders of public stock companies appoint a board of directors to represent their interests. The board of directors is the centerpiece of corporate governance in such companies. Votes at shareholder meetings, generally in proportion to the amount of ownership, determine whose representatives are appointed to the board of directors.

Question 3

What do we call the board members who are part of a company's senior management team appointed by shareholders to provide the board with necessary information pertaining to the company's internal workings and performance?

Accepted Answer

Inside directors are generally part of the company's senior management team, such as the chief financial officer (CFO) and the chief operating officer (COO). They are appointed by shareholders to provide the board with necessary information pertaining to the company's internal workings and performance.

Question 4

A company scientist at a biotechnology company decides to work on his own research project, hoping to eventually start his own firm, rather than on the project he was assigned. However, the company's stockholders are unaware of this situation. This is an example of a(n) ________ in the context of a principal-agent problem.

Accepted Answer

This is an example of a moral hazard in the context of a principal-agent problem. In the principal-agent relationship, moral hazard describes the difficulty of the principal to ascertain whether the agent has really put forth a best effort.

Question 5

Stella accepts a job as vice president for human resources at a technology startup. She discovers that the startup believes that teamwork is so important that it plans to award all raises and bonuses by splitting them equally within a team rather than presenting them to individual employees. What action should Stella take regarding this plan?

Accepted Answer

In general, adverse selection occurs when information asymmetry increases the likelihood of selecting inferior alternatives. The problem is especially pronounced in team production, when the principal often cannot ascertain the contributions of individual team members. This creates an incentive for opportunistic employees to free-ride on the efforts of others.

Question 6

Nate is a recent graduate who states that he has interned at a major accounting firm so that his value as a candidate for employment increases. A start-up recruits Nate based on his stated credentials without verifying them. Two days into the job, Nate's team lead realizes that Nate does not know much of what he claimed to know during the interview. This scenario best exemplifies

Accepted Answer

This scenario best exemplifies adverse selection. In general, adverse selection occurs when information asymmetry increases the likelihood of selecting inferior alternatives. In principal-agent relationships, for example, adverse selection describes a situation in which an agent misrepresents his or her ability to do the job.

Question 7

Megan is a graduate student pursuing a course in business. Presented with the case of a company's unethical behavior, Megan wonders if the company's board of directors should ask the CEO to step down. Having a strong belief in Michael Porter's idea of value creation, Megan is most likely to conclude that company's board of directors

Accepted Answer

Megan is most likely to conclude that company's board of directors should ask the CEO to step down because it has a greater obligation toward society. According to Michael Porter, many public companies have defined value creation too narrowly in terms of financial performance. This implies that a firm's obligations should frequently go beyond the economic responsibility to increase profits, extending to legal, ethical, and philanthropic expectations that society has of the business enterprise.

Question 8

In a public stock company, senior executives, such as the CEO, face agency problems when

Accepted Answer

Senior executives, such as the CEO, face agency problems when they delegate authority of strategic business units to general managers. Employees who perform the actual operational labor are agents who work on behalf of the managers. Such front-line employees often enjoy an informational advantage over management.

Question 9

Adverse selection in a public stock company occurs when

Accepted Answer

In general, adverse selection occurs when information asymmetry increases the likelihood of selecting inferior alternatives. In principal-agent relationships, for example, adverse selection describes a situation in which an agent misrepresents his or her ability to do the job.

Question 10

Bellhaven Inc. has a board of directors that consists of seven members. Which of the following is most likely an accurate statement about Bellhaven's board of directors?

Accepted Answer

Bellhaven's board of directors most likely has a minority number of inside directors and it evaluates the firm's strategic initiatives. The board of director's functions include:
-Selecting, evaluating, and compensating the CEO. The CEO reports to the board. Should the CEO lose the board's confidence, the board may fire him or her.
-Overseeing the company's CEO succession plan
-Providing guidance to the CEO in the selection, evaluation, and compensation of other senior executives
-Reviewing, monitoring, evaluating, and approving any significant strategic initiatives and corporate actions such as large acquisitions
-Conducting a thorough risk assessment and proposing options to mitigate risk
-Ensuring that the firm's audited financial statements represent a true and accurate picture of the firm
-Ensuring the firm's compliance with laws and regulations

Question 11

Rajat Gupta's role in providing inside information to Galleon Group for the benefit of Galleon Group's stockholders and himself is an example of

Accepted Answer

Rajat Gupta's role in providing inside information to Galleon Group for the benefit of Galleon Group's stockholders and himself is an example of moral hazard. Moral hazard describes a situation in which information asymmetry increases the incentive of one party to take undue risks or shirk other responsibilities because the costs incur to the other party.

Question 12

Andrew is the president of a technology firm that has recently gone public. What action, if any, should Andrew take to build the confidence of his new shareholders?

Accepted Answer

Shareholders' interests are not uniform. The goals of some shareholders, such as institutional investors (e.g., retirement funds, governmental bodies, and so on), are generally the long-term viability of the enterprise combined with profitable growth. Long-term viability and profitable growth should allow consistent dividend payments and result in stock appreciation over time. The goals of other shareholders, such as hedge funds, are often to profit from short-term movements of stock prices. These more proactive investors often demand changes in a firm's strategy, such as spinning out certain divisions or splitting up companies into parts to enhance overall performance. Votes at shareholder meetings, generally in proportion to the amount of ownership, determine whose representatives are appointed to the board of directors.

Question 13

Shareholders of public companies need to appoint a board of directors to represent their interests because

Accepted Answer

Since all shareholders cannot possibly be directly involved in the running of a company, they appoint representatives. The shareholders of public stock companies appoint a board of directors to represent their interests. The board of directors is the centerpiece of corporate governance in such companies.

Question 14

At Agile Ltd., a cross-functional team is formed to work on a project for a new client. The team consists of Charles and four other members. At most of the team's presentations to senior management, Charles takes the lead and discusses project specifics with the management, while others chip in with additional information. At the completion of the project, Charles is recommended for promotion, while the other team members receive little recognition for their hard work. The reality is that Charles did very little actual work but spent some time compiling the project report based on different documents submitted by the others. This scenario at Agile Ltd. is a typical consequence of

Accepted Answer

This scenario at Agile Ltd. is a typical consequence of adverse selection. In general, adverse selection occurs when information asymmetry increases the likelihood of selecting inferior alternatives. In principal-agent relationships, for example, adverse selection describes a situation in which an agent misrepresents his or her ability to do the job. Such misrepresentation is common during the recruiting process. The problem is especially pronounced in team production, when the principal often cannot ascertain the contributions of individual team members. This in turn creates an incentive for opportunistic employees to free-ride on the efforts of others.

Question 15

Delores recently became a board member of a firm that has a history of reckless actions by senior employees. Which task would be appropriate for Delores to undertake to help safeguard the company's financial health?

Accepted Answer

In addition to general strategic oversight and guidance, the board of directors has other, more specific functions. These include conducting a thorough risk assessment, proposing options to mitigate risk, and ensuring the firm's compliance with laws and regulations.

Question 16

The board of directors of a public stock company consists of

Accepted Answer

The board of directors of a public stock company consists of individuals who formally represent the firm's shareholders and oversee the work of executives. The board is elected by the shareholders to represent their interests. Each director has a fiduciary responsibility-a legal duty to act solely in another party's interests-toward the shareholders because of the trust placed in him or her.

Question 17

According to the agency theory,

Accepted Answer

The principal-agent problem is a core part of agency theory, which views the firm as a nexus of legal contracts. In this perspective, corporations are viewed merely as a set of legal contracts between different parties. Conflicts that may arise are to be addressed in the legal realm.

Question 18

The root cause of the principal-agent problem between senior executives and lower-level employees can be explained by the

Accepted Answer

Senior executives, such as the CEO, face agency problems when they delegate authority of strategic business units to general managers. Employees who perform the actual operational labor are agents who work on behalf of the managers. Such front-line employees often enjoy an informational advantage over management.

Question 19

David and Fred are customer care employees at JPN Care. In between calls, David and Fred spend time on Facebook and YouTube. The relaxed guidelines at JPN allow them to do that. However, sometimes, they knowingly avoid answering calls or keep customers on hold, while they check their social networking accounts. Such behavior

Accepted Answer

Such behavior can be best described as opportunism by agents and can be stopped by implementing performance incentives and strict control mechanisms. The managerial implication of agency theory relates to the management functions of organization and control: The firm needs to design work tasks, incentives, and employment contracts and other control mechanisms in ways that minimize opportunism by agents.

Question 20

Gino is the CEO of a financial services firm. What action should Gino take to be sure the firm avoids moral hazards?

Accepted Answer

In general, moral hazard describes a situation in which information asymmetry increases the incentive of one party to take undue risks or shirk other responsibilities because the costs accrue to the other party. For example, bailing out homeowners from their mortgage obligations or bailing out banks from the consequences of undue risk-taking in lending are examples of moral hazard. The costs of default are rolled over to society. Knowing that there is a high probability of being bailed out ("too big to fail") increases moral hazard. In this scenario, any profits remain private, while losses become public.

Quiz 12: Corporate Governance and Business Ethics

Landon is a senior manager for the firm Anderssen Inc. Because of his experience, he has been appointed to the board of EEC Inc., even though he doesn't work for this firm. He also serves on the boards of several other companies. Landon is a(n) for Anderssen and a(n) for EEC.

Which of the following is true of the board of directors in a public stock company?

What do we call the board members who are part of a company's senior management team appointed by shareholders to provide the board with necessary information pertaining to the company's internal workings and performance?

In a public stock company, senior executives, such as the CEO, face agency problems when

Adverse selection in a public stock company occurs when

Bellhaven Inc. has a board of directors that consists of seven members. Which of the following is most likely an accurate statement about Bellhaven's board of directors?

Rajat Gupta's role in providing inside information to Galleon Group for the benefit of Galleon Group's stockholders and himself is an example of

Andrew is the president of a technology firm that has recently gone public. What action, if any, should Andrew take to build the confidence of his new shareholders?

Shareholders of public companies need to appoint a board of directors to represent their interests because

Delores recently became a board member of a firm that has a history of reckless actions by senior employees. Which task would be appropriate for Delores to undertake to help safeguard the company's financial health?

The board of directors of a public stock company consists of

According to the agency theory,

The root cause of the principal-agent problem between senior executives and lower-level employees can be explained by the

Gino is the CEO of a financial services firm. What action should Gino take to be sure the firm avoids moral hazards?