Question 1

Emphasizing current profitability at the expense of future profitability and profit growth makes an enterprise more attractive to shareholders.

Accepted Answer

Shareholders typically value long-term growth and sustainability over short-term gains, as future profitability ensures ongoing returns and stability.

Question 2

Governance mechanisms help align the incentives between principals and agents, and help monitor and control agents.

Accepted Answer

Governance mechanisms are designed to address the principal-agent problem, where the interests of the principal (such as shareholders or owners) may not align with those of the agent (such as managers or employees). These mechanisms help align incentives, provide monitoring and control, and ensure accountability, which can improve organizational performance and reduce risk. Examples of governance mechanisms include performance-based incentives, board oversight, internal controls, and regulatory oversight.

Question 3

Attaining future profit growth may require investments that reduce the current rate of profitability.

Accepted Answer

Investing in research and development, hiring new employees, or expanding into new markets may lead to decreased profitability in the short term, but can create opportunities for future growth and higher profitability in the long term. Therefore, it is often necessary to sacrifice current profitability for future growth and success.

Question 4

According to an SEC investigation, Computer Associates, one of the world's largest software companies, backdated contracts to boost the company's reported revenues. This is not an ethical business practice.

Accepted Answer

Backdating contracts to boost revenues is considered unethical as it misrepresents financial statements to investors and stakeholders.

Question 5

Strategic control systems are the primary governance mechanisms established within a company to reduce the scope of the agency problem between levels of management.

Accepted Answer

Strategic control systems are specifically designed to align the goals of different levels of management within an organization in order to reduce the agency problem.

Question 6

All stakeholders have an exchange relationship with the company.

Accepted Answer

All stakeholders, whether they are customers, employees, investors, suppliers, or the community, interact with the company in some way and exchange something of value, such as goods, services, money, or information. Therefore, they have a mutual and interdependent relationship with the company.

Question 7

An agency relationship continues throughout the hierarchy within a company.

Accepted Answer

An agency relationship exists between a principal (the employer) and an agent (the employee), and this relationship continues throughout the hierarchy within a company, from senior management to entry-level employees.

Question 8

An effective governance arrangement exists when the CEO is also the chairman of the Board of Directors.

Accepted Answer

It is generally not considered best practice for the CEO to also hold the position of chairman of the Board of Directors, as it can create conflicts of interest and limit the ability of the Board to provide independent oversight of the company. Separate positions of CEO and chairman allow for a clearer division of responsibilities and a more effective system of checks and balances within the organization.

Question 9

Agency theory offers a way of understanding why managers do not always act in the best interests of stakeholders.

Accepted Answer

Agency theory suggests that there may be a conflict of interest between managers, who are the agents, and stakeholders, who are the principals. As a result, managers may prioritize their own interests over those of stakeholders, leading to actions that are not in the best interests of stakeholders.

Question 10

Financial statements can be a tool of effective governance only if they provide consistent, detailed, and accurate information.

Accepted Answer

Financial statements are able to provide valuable information to governing bodies only if they offer consistent, detailed, and accurate information. With incorrect, vague, or inconsistent data, executives will not be able to make informed decisions about the management of their organizations, leaving them vulnerable to financial losses, reduced performance, and other negative outcomes. Therefore, it is critical that organizations take the necessary steps to guarantee that their financial statements are well-organized, transparent, and trustworthy.

Question 11

There is a certain amount of performance ambiguity inherent in the relationship between a principal and agent.

Accepted Answer

This statement is true. The principal-agent relationship is characterized by a certain level of uncertainty regarding the actions and decisions of the agent, as the principal cannot fully control or monitor the agent's performance. This ambiguity can lead to moral hazard and adverse selection problems, as well as conflicts of interest between the two parties.

Question 12

Strike price is the price at which the stock was trading when the option was originally granted.

Accepted Answer

The answer of Strike price is the price at which...

Question 13

In corporations, agency theory is used to explain the relationship between stockholders and corporate managers, and between upper-level managers and the lower-level managers they supervise.

Accepted Answer

Agency theory is indeed used to explain the relationship between stockholders and corporate managers, as well as between upper-level and lower-level managers. Its main focus is on the potential conflicts of interest that can arise due to differences in goals, information, and incentives between these different parties.

Question 14

Inside directors are not full-time employees of the company.

Accepted Answer

Inside directors are typically employees of the company who also serve on the board of directors.

Question 15

Maximizing long-run profitability and profit growth is the best way to satisfy the claims of several key stakeholder groups irrespective of how the company accomplishes this goal.

Accepted Answer

While maximizing long-run profitability and profit growth is important, how a company achieves these goals matters significantly. Ethical practices, environmental sustainability, and social responsibility are crucial for satisfying the broader claims of stakeholders, including employees, customers, communities, and shareholders. Ignoring these aspects can lead to reputational damage, legal issues, and ultimately, financial losses.

Question 16

Phil is an employee at Global Tech Inc. He is considered an external stakeholder.

Accepted Answer

Phil is an employee of the company, making him an internal stakeholder rather than an external one.

Question 17

A union and the general public are examples of internal stakeholders.

Accepted Answer

A union and the general public are examples of external stakeholders, not internal stakeholders. Internal stakeholders include employees, managers, and shareholders who have a direct interest in the company's operations and performance.

Question 18

Stockholders receive a return on their investment in a company's stock from dividend payments and capital appreciation.

Accepted Answer

Stockholders can receive a return on their investment through dividend payments, which are a portion of the company's profits distributed to shareholders, and capital appreciation, which is an increase in the stock's market value over time.

Question 19

If a company fails to take stakeholder claims into account, stakeholders may withdraw their support.

Accepted Answer

If a company ignores stakeholder claims, it can lead to dissatisfaction and loss of support from stakeholders, which can have negative consequences for the company.

Question 20

While many agency relationships work well, problems arise when agents and principals have different goals.

Accepted Answer

This statement is true. When agents and principals have different goals, conflicts can arise as the agent may prioritize their own interests over those of the principal, leading to friction and potentially damaging the relationship.

Quiz 11: Corporate Performance, Governance, and Business Ethics