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Q:
If the market for corporate control were efficient as a governance device, then only ____ would be targets for takeovers.
a. firms with unethical top executives
b. firms earning above-average returns
c. poorly performing firms
d. over-valued firms
Q:
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. If research findings are valid, 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.
Q:
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
Q:
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
Q:
James Abercrombie has a thriving consulting firm specializing in training Boards of Directors in decision-making skills. Mr. Abercrombie has had striking success in reducing conflict and hostility among directors and allowing Boards to develop more cohesiveness. Mr. Abercrombie is considering expanding his consulting practice overseas. Which of the following statements is most likely to be TRUE?
a. Mr. Abercrombie will have a large market in Japan because the culture highly values consensus decision making.
b. Japanese firms will have little interest in Mr. Abercrombie's specialty because these skills are already practiced at a high level.
c. German firms will not be interested in Mr. Abercrombie's services because the German system of decision making is based on authority and few conflicts emerge.
d. Mr. Abercrombie should find significant need for his services in companies in transitional economies.
Q:
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
Q:
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
Q:
____ is an important influence in Japanese corporate governance structures.
a. Innovation
b. Consensus
c. Competition
d. Individualism
Q:
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.
Q:
All of the following statements are TRUE about the use of defense tactics by the target firm during a hostile takeover EXCEPT:
a. defense tactics are usually beneficial for the executives of the target firm.
b. defense tactics are opposed by institutional investors.
c. defense tactics vary in their effectiveness as a defense to takeovers.
d. defense tactics make the costs of a takeover lower.
Q:
The Board of Directors of CamCell, Inc., wishes to design a CEO compensation plan that will align the personal interests of the CEO with the interests of the shareholders in long-term firm performance. The Board wishes the CEO to take more short-term risks in order to achieve potentially higher long-term returns. Consequently, the Board has decided on an incentive plan that involves payout based on the firm's performance five years in the future. CamCell is presently searching for a new CEO. Which of the following statements is true?
a. This plan will be very attractive in luring candidates for the CEO position.
b. CamCell may have to over-compensate its CEO in order to offset the personal risk a CEO would undertake under this plan.
c. Institutional investors disapprove of long-term executive incentive plans and they may sell their blocks of stock in CamCell.
d. This type of plan is likely to cause the CEO to underinvest in R&D in order to boost CamCell's long-term profitability.
Q:
Agency costs reflect all of the following EXCEPT ____ costs.
a. monitoring
b. enforcement
c. opportunity
d. incentive
Q:
Which of the following reasons would NOT explain the difficulty of determining appropriate executive compensation?
a. The decisions made by top-level managers are typically complex and non-routine.
b. An executive's decisions often affect firm performance only over the long run.
c. A number of factors intervene between top-level management decisions and firm performance (e.g., unpredictable economic, social, or legal changes).
d. The compensation committee may not have comprehensive firm performance data.
Q:
Managers in the United States receive ____ compensation than managers in the rest of the world.
a. equivalent
b. higher
c. lower
d. more variable
Q:
Generally, a Board member who is a source of information about a firm's day-to-day activities is classified as a(n) ____ director.
a. lead independent
b. inside
c. related
d. encumbered
Q:
Corporate governance is all of the following EXCEPT:
a. 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. ensuring that top managers' interests are aligned with the interests of stockholders.
d. resolve conflicts among corporate employees.
Q:
Corporate governance revolves around the relationship between which two parties?
a. Shareholders and the Board of Directors
b. Shareholders and managers
c. The Board of Directors and managers
d. None of the the above
Q:
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.
Q:
Historically, ____ have been at the center of German corporate governance structure.
a. banks
b. institutional shareholders
c. public pension funds
d. government agencies
Q:
The repurchase at a premium of the target firm's shares that were 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.
Q:
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.
Q:
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.
Q:
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.
Q:
Managers may decide to invest ____ in products that are not associated with the firm's current lines of business to increase the firm's level of diversification and decrease their employment risk.
a. unsubstantial profits
b. free cash flows
c. marginal profits
d. frozen assets
Q:
The Board of Directors of CyberScope, Inc., is designing a stock option plan for its CEO that will motivate the CEO to increase the market value of the firm. Consequently, the Board is:
a. setting the option strike price substantially higher than the current stock price.
b. insuring that the strike price value of the options can be lowered if the organizational environment becomes more risky.
c. having the stock option plan designed by insiders on the Board of Directors who are familiar with day-to-day operations of the firm.
d. consulting accounting advisors to make sure that the plan transfers wealth to the CEO without immediately appearing on the balance sheet of CyberScope.
Q:
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.
Q:
Several members of the Board of Directors of American Textile Products (ATP) have proposed creating the position of lead director. What circumstances would most likely have initiated this proposal?
a. ATP has been the initiator of several hostile takeovers in the last 2 years.
b. The Board has been successful in reducing the percentage of CEO pay that is composed of stock options.
c. The CEO/chairperson of the Board has been suspected of opportunistic behavior.
d. The firm is traded on the New York Stock Exchange and must change its corporate governance to comply with the NYSE's new rules.
Q:
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.
Q:
The CEO of Skyco, a publicly-traded company that has been earning below-average returns, has been publicly criticized by shareholders for persuading the Board of Directors to give her interest-free loans, for having the company purchase and furnish a lavish apartment in Paris for her personal use on her twice-yearly trips there, and for excessive stock options. The CEO's behavior may be indication of:
a. reasonably compensating a CEO.
b. a weak Board of Directors.
c. the laxity of institutional investors.
d. the difference in risk propensity between owners and managers.
Q:
A major conflict of interest between top executives and owners, is that top executives wish to diversify the firm in order to ____, whereas owners wish to diversify the firm to ____.
a. generate free cash flows; reduce the risk of total firm failure
b. increase the price of the firm's stock; increase the dividends paid out from free cash flows
c. reduce the risk of total firm failure; reduce their total portfolio risk
d. reduce their employment risk; increase the company's value
Q:
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.
Q:
The separation between firm ownership and management creates a(n) ____ relationship.
a. governance
b. control
c. agency
d. dependent
Q:
Simon Leagreet, the Chairperson and CEO of L-EVA Industries, Inc., has long been the major power at L-EVA. A majority of the directors are concerned that while Mr. Leagreet has been responsible for the firm's earning above-average returns, he has been displaying a tendency toward personal extravagance at the firm's expense. In order to limit Mr. Leagreet's power, the Board of Directors plans to:
a. elect an insider as the lead director.
b. appoint another individual as chairperson of the Board of Directors.
c. require Mr. Leagreet to personally certify the firm's financial reports.
d. reduce the size of the stock option package provided to Mr. Leagreet.
Q:
In the United States, a firm's key stakeholder(s) is(are) the:
a. government.
b. executives.
c. shareholders.
d. customers.
Q:
The ownership of major blocks of stock by institutional investors have resulted in all of the following EXCEPT:
a. making CEOs more accountable for their performance.
b. challenges to the decisions of Boards.
c. focusing attention on ineffective Boards of Directors.
d. a direct effect on firm performance.
Q:
As ownership of the corporation is diffused, shareholders' ability to monitor managerial decisions:
a. increases.
b. decreases.
c. remains constant.
d. is eliminated.
Q:
The CEO and Chairman of the Board of Directors Alta Corp. is dismayed by a lack of effort and insights his directors provide during Board meetings. The directors are all outsiders, experienced, and run their own successful firms. The CEO/chair genuinely seeks their greater involvement. What would you recommend?
a. Requiring that the directors own stock in the company.
b. Establishing a formal process to evaluate the Board's performance.
c. Electing a lead director.
d. All of these options are correct.
Q:
Which of the following is FALSE about corporate governance in China?
a. The Chinese governance system may be tilting toward the Western model.
b. With increasing frequency, the compensation of top executives of Chinese companies is closely related to prior and current financial performance of the firm.
c. The state still uses direct and/or indirect controls to influence 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.
Q:
The most effective defense against a hostile takeover is the poison pill strategy.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
Q:
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.
a. True
b. False
Q:
In a large number of family owned firms, ownership and managerial control are not separated.
a. True
b. False
Q:
The use of executive compensation as a governance mechanism is more challenging to firms implementing international strategies than those strictly operating domestically.
a. True
b. False
Q:
Corporate governance is a means to establish harmony between parties (the firm's owners and its top-level managers) whose interests may conflict.
a. True
b. False
Q:
The primary role of the Board of Directors is to monitor and control top-level executives to protect owners' interests.
a. True
b. False
Q:
Well-designed stock option-based compensation plans should have the option strike prices substantially lower than the current stock prices.
a. True
b. False
Q:
The performance of individual Board members and entire Boards are being evaluated more formally and with greater intensity than in years past.
a. True
b. False
Q:
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.
a. True
b. False
Q:
Because of recent ineffective performance, Boards of Directors are experiencing increasing pressure from shareholders, lawmakers, and regulators to be more effective in preventing managers from acting in their own interest.
a. True
b. False
Q:
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.
a. True
b. False
Q:
Research suggests that institutional activism may not have a strong direct effect on firm performance but may indirectly influence the targeted firm's strategic decisions, including those concerned with international diversification and innovation.
a. True
b. False
Q:
As a rule, shareholders prefer more product diversification than do managers because shareholders wish to reduce risk and maximize wealth.
a. True
b. False
Q:
The increased use of the market for corporate control has decreased the sophistication and variety of managerial defense tactics that are used in takeovers.
a. True
b. False
Q:
Attitudes toward corporate governance in Japan are affected by the concepts of obligation, family, and consensus.
a. True
b. False
Q:
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.
a. True
b. False
Q:
Both top executives and owners of the firm wish to diversify the firm to reduce risk.
a. True
b. False
Q:
In general, when governance mechanisms are strong, managers have free rein in their decisions.
a. True
b. False
Q:
If a stakeholder is dissatisfied with a firm, it will withdraw its support and give it to another firm.
a. True
b. False
Q:
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.
a. True
b. False
Q:
Hedge funds, as part of the market for corporate control, identifies a firm that is underperforming and then invests in it with the goal of improving that firm's performance.
a. True
b. False
Q:
Corporate governance involves oversight in areas where owners, managers, and members of Boards of Directors may have conflicts of interest.
a. True
b. False
Q:
Agency costs include incentives for executives, monitoring, enforcement costs, and any individual financial losses incurred by principals.
a. True
b. False
Q:
Because top management decisions are usually complex and nonroutine, determining the quality of executive performance is beyond the power of Boards of Directors.
a. True
b. False
Q:
The separation of ownership and control is the most effective means used by firms to prevent managerial opportunism.
a. True
b. False
Q:
The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions related to consumer protection, systemic risk oversight, capital requirements for banks, but not for executive compensation.
a. True
b. False
Q:
Large German firms must include employees, union members, and shareholders in the formal governance structure.
a. True
b. False
Q:
The three internal corporate governance mechanisms are ownership concentration, Board of Directors, and the market for corporate control.
a. True
b. False
Q:
In the United States, the primary goal of a firm is to maximize profits to provide a financial gain to shareholders.
a. True
b. False
Q:
In recent years, the number of individuals who are large-block shareholders have declined and been replaced by institutional owners such as mutual funds and pension funds.
a. True
b. False
Q:
Recent emphasis on corporate governance stems mainly from the failure of corporate governance mechanisms to adequately monitor and control top-level managers' decisions.
a. True
b. False
Q:
Corporate governance mechanisms are designed to ensure that top managers make strategic decisions that best serve the interests of the entire group of stakeholders.
a. True
b. False
Q:
Executive compensation is considered an external corporate governance mechanism because it determined in part by market forces.
a. True
b. False
Q:
An advantage of severance packages is that they may encourage top-level managers to accept takeover bids that are attractive to shareholders.
a. True
b. False
Q:
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.
a. True
b. False
Q:
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.
a. True
b. False
Q:
As globalization grows, adequate corporate governance is becoming an important requirement for doing business with a foreign firms and in foreign countries.
a. True
b. False
Q:
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.
a. True
b. False
Q:
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.
a. True
b. False
Q:
Individual shareholders with small ownership percentages are less dependent on the Board of Directors to represent their interests than are large block shareholders.
a. True
b. False
Q:
The way that U.S. corporate Boards of Directors are presently structured, they have little influence on the unethical behavior of top management.
a. True
b. False
Q:
A top-level manager's reputation is a dependable predictor of his/her future behavior.
a. True
b. False