Deck 11: Corporate Performance, Governance, and Business Ethics

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

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.

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.

Question 6

All stakeholders have an exchange relationship with the company.

Question 7

An agency relationship continues throughout the hierarchy within a company.

Question 8

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

Question 9

Agency theory offers a way of understanding why managers do not always act 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.

Question 11

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

Question 12

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

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.

Question 14

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

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.

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

Which of the following is NOT an accurate statement about current levels of pay for CEOs of U.S.-based firms?

A) CEOs also earn from the stock options that they grant to managers.
B) Empire building helps CEOs increase their earnings.
C) CEO compensation is closely tied to corporate performance in most firms.
D) CEO pay is rising more rapidly than pay for other workers.
E) The level of CEO compensation is determined by the corporate Board of Directors.

Question 22

_____ are internal stakeholders in a company.

A) Customers
B) Government regulators
C) Board members
D) Suppliers
E) Creditors

Question 23

Which of the following statements is true about the Board of Directors?

A) The Board members are directly elected by the employees of the company.
B) The Board has no legal authority to hire, fire, and compensate the CEO.
C) Some of the Board members hold positions on the boards of several companies.
D) The Board has no power to nominate people for positions in management.
E) Divisional and functional managers usually form the Board.

Question 24

Which of the following statements is true about strategic control systems?

A) They are usually set by government regulators and require top management to follow them.
B) Their primary purpose is to foster on-the-job consumption.
C) Their purpose is to ensure that the wealth of stockholders is maximized.
D) They relieve employees and management of legal and ethical constraints.
E) They are designed to encourage information asymmetry.

Question 25

Which of the following statements is true about corporate raiders?

A) They are underperforming corporations that have been acquired by other companies.
B) They are government-funded organizations that help underperforming companies recover.
C) They may purchase stock in a company to take over the business and run it more efficiently.
D) They lack power to interfere with the top management decisions.
E) They discourage companies from pursuing strategies that help maximize stockholder wealth.

Question 26

Gamma Corp. recently bought stocks in an under-performing company that has failed to maximize stockholder wealth. Gamma Corp. made changes to the top management structure of the company and persuaded the management to pursue strategies that maximize the wealth of stockholders. Gamma Corp. has been able to earn millions by doing so. Which of the following concepts is illustrated in this scenario?

A) Greenmail
B) Agency theory
C) Information asymmetry
D) Self-dealing
E) On-the-job consumption

Question 27

_____ is a source of gaining wealth by corporate raiders who benefit by pushing companies to either change their corporate strategy to one that will benefit stockholders, or by charging a premium for these stocks when the company wants to buy them back.

A) Stock option
B) Greenmail
C) Self dealing
D) On-the-job consumption
E) Risk capital

Question 28

Stock-based compensation schemes for senior executives are designed to align the interests of managers with those of stockholders.

Question 29

Which of the following statements is true about takeover constraint?

A) It encourages managers to put their own interests above those of stockholders.
B) It usually occurs when the management has maximized the wealth of the stockholders.
C) It often gives senior managers more independence when it comes to granting stock options.
D) It has ceased to exist in companies since the late 1990s.
E) It is the governance mechanism of last resort invoked only when the others have failed.

Question 30

Which of the following statements is true in the context of financial statements and auditors?

A) The information contained in the financial statements can enable a stockholder to calculate the ROIC of a company in which he or she invests.
B) Publicly traded companies in the United States are not required to file quarterly or annual reports with the SEC.
C) So far, there have been no cases in which auditors were found cooperating with companies to misrepresent financial information.
D) The SEC requires that the accounts be audited by a committee formed by the Board members and senior employees of the company.
E) Sarbanes-Oxley Act in 2002 barred CEOs and CFOs from endorsing their company's financial statements.

Question 31

Which of the following statements concerning profitability and profit growth is NOT true?

A) Attaining future profit growth may require investments that reduce the current rate of profitability.
B) Managers must find the right balance between profitability and profit growth.
C) Too much emphasis on current profitability at the expense of profit growth can make an enterprise less attractive to shareholders.
D) Satisfying the claims of other key stakeholder groups happens at the risk of decreased profitability and profit growth.
E) Too much emphasis on profit growth can reduce profitability and make an enterprise less attractive to shareholders.

Question 32

Matthew is a divisional manager at Venus Inc. and reports to the CEO of the company. The CEO delegates resources and authority to Matthew so that he can ensure good performance from the division. Matthew has more employees working for him than required and he has not told the CEO about this, even though there are other departments that are in need of more employees. Which of the following concepts is illustrated here?

A) Information asymmetry
B) On-the-job consumption
C) Greenmail
D) Glass-ceiling effect
E) Takeover constraint

Question 33

Which of the following statements is true in the context of stock-based compensation?

A) Stock options usually result in information asymmetry.
B) Stock-based compensation schemes for executives can align management and stockholder interests.
C) A particular cause for concern is that stock options are often granted at extremely high strike prices.
D) Critics deny that stock-based compensations motivate managers to improve company performance.
E) Granting more stock options often results in an increase in stockholder equity.

Question 34

Which of the following statements is true in the context of principal-agent relationships?

A) The agency relationship is confined to the top management and does not continue down the hierarchy within the company.
B) Agents almost always have more information about the resources they are managing than the principal does.
C) Information asymmetry can make it easier for principals to measure how well an agent is performing.
D) In a principal-agent relationship, the decision making power rests entirely with the principals.
E) The relationship between the company and the suppliers is an example of a principal-agent relationship.

Question 35

Ethical dilemmas are situations where there is no agreement over exactly what the accepted principles of right and wrong are.

Question 36

When corporate CEOs and top managers use their power and control over funds to satisfy their personal desires for wealth or status, it is called:

A) on-the-job consumption.
B) greenmail.
C) information asymmetry.
D) self-dealing.
E) risk capital.

Question 37

Principals almost always have more information about the resources that agents are managing than the agents themselves.

Question 38

Arnold is a CEO at Gamma LLC. He has control over the corporate funds of the company. Arnold has often used funds from the company to pay for his travel and hotel expenses. The funds could otherwise have increased stockholder returns. Which of the following concepts is illustrated in this scenario? 

A) Corporate governance
B) On-the-job consumption
C) Greenmail
D) Information asymmetry
E) Information manipulation

Question 39

Which of the following is true of stakeholders?

A) Creditors are examples of internal stakeholders.
B) Stakeholders do not engage in an exchange relationship with their company.
C) Stockholders are internal stakeholders that provide an enterprise with risk capital.
D) The goals of different stakeholder groups within a company are the same, and therefore do not lead to any conflicts.
E) It is mandatory for a company to satisfy the claims of all stakeholders.

Question 40

_____ are external stakeholders in a company.

A) Stockholders
B) Managers
C) Employees
D) Customers
E) Board members

Question 41

The internal research department of Libra Inc. has found that the packaging of health supplements produced by the company is faulty, and resulting in poor quality. Despite this knowledge, the company has not improved the packaging and instead has advertised to its customers that their packaging is foolproof. Which of the following concepts is illustrated in this scenario? 

A) Information manipulation
B) Anticompetitive behavior
C) Agency strategy
D) Information symmetry
E) On-the-job consumption

Question 42

Venus LLC is a large monopolistic electronic firm. The firm has been putting a lot of pressure on some of the complementor companies, asking them to bundle their products along with the products made by Venus LLC, which will make it mandatory for customers to buy Venus LLC products along with the complementary products, even if they are unrelated. In this scenario, Which of the following does Venus LLC's actions demonstrate?

A) Agency strategy
B) Dumping strategy
C) Price limiting
D) Anticompetitive behavior 
E) On-the-job consumption

Question 43

Which of the following statements concerning stock-based compensation schemes for executives is NOT true?

A) Under accounting regulations that were enforced until 2005, stock options, like wages and salaries, were expensed.
B) Huge stock-option grants can align the interests of management and stockholders.
C) Stock-based compensation schemes can dilute the equity of stockholders.
D) Huge stock-option grants increase the outstanding number of shares in a company.
E) Top managers can earn huge bonuses from stock options that were granted several years prior.

Question 44

Alpha LLC is a large paint manufacturing company. Despite government regulations, the company has been illegally disposing of its chemical wastes in a lake, which is an important habitat for several fish and birds. Which of the following ethical concerns is illustrated in this scenario?

A) On-the-job consumption 
B) Opportunistic exploitation
C) Environmental degradation
D) Self-dealing
E) Substandard working conditions

Question 45

Which of the following is a major function of the Board of Directors of a company?

A) Approving decisions made by divisional managers
B) Monitoring line managers
C) Aligning corporate strategy with stockholder interests 
D) Creating contracts with suppliers
E) Designing marketing strategies for the company

Question 46

Nicole is a salesperson at a local Ford dealership. Her bonus pay is dependent upon surpassing sales targets, thus increasing the profitability of the company. Which of the following governance mechanisms is illustrated in this scenario?

A) Stock options
B) Self-dealing
C) The takeover constraint
D) Employee incentives
E) Greenmail

Question 47

Which of the following is NOT a responsibility of the Board of Directors?

A) Monitor corporate strategy decisions and ensure that they are consistent with stockholder interests
B) Apply sanctions on management when appropriate
C) Hire, fire, and compensate the CEO
D) Develop targets for divisional managers
E) Make sure the audited financial statements present a true picture of the company's financial situation

Question 48

The purpose of governance mechanisms in corporations is to:

A) centralize company resources to the top management.
B) reduce the scope and frequency of the agency problems.
C) satisfy the requirements of the Securities and Exchange Commission (SEC).
D) limit corporate growth to manageable rates.
E) monitor the performance of the Board of Directors.

Question 49

A criticism of stock-based compensation plans is that:

A) they discourage empire building.
B) they reduce motivation among agents.
C) they do not align management and stockholder interests
D) they dilute stockholders' equity.
E) they adversely affect the earnings of principals.

Question 50

Which of the following statements about the Board of Directors is NOT true?

A) Board members are elected by stockholders.
B) The Board can be held legally accountable for a company's actions.
C) The Board has the legal authority to hire, fire, and compensate the CEO.
D) All the directors are full-time employees of the company.
E) Outside directors help perform the monitoring function of the Board.

Question 51

To foster ethical behavior through organizational culture, businesses should:

A) avoid explicitly articulating values that place a strong emphasis on ethical behavior.
B) draft a formal statement of the ethical priorities they will follow.
C) encourage self-dealing among managers.
D) eliminate the need for a moral compass.
E) avoid putting strong governance processes in place.

Question 52

Which of the following is NOT a governance mechanism used to align the interests of managers and stockholders?

A) Self-dealing
B) The board of directors
C) Stock-based compensation schemes
D) Strategic control systems 
E) Takeover constraints

Question 53

To ensure that basic ethical principles are adhered to in the organization, managers should:

A) build an organizational culture that places a high value on economic aspects.
B) make sure that leaders within the business only articulate the rhetoric of ethical behavior.
C) put minimal governance processes in place.
D) check with prior employees regarding someone's reputation before hiring.
E) foster and encourage on-the-job consumption.

Question 54

Jacob is a senior manager at Aries LLC.  He has been earning significant bonuses in addition to his salary. He often misrepresents the financial information about the operations he handles, and he acquires more financial resources than he actually needs to run operations. Which of the following concepts is illustrated in this scenario?

A) Glass-ceiling effect
B) Self-dealing
C) Agency strategy
D) Takeover constraints
E) Stock options

Question 55

Which of the following statements is true in the context of unethical behavior? 

A) Business ethics significantly differ from personal ethics.
B) An individual with a strong sense of personal ethics is more likely to engage in self-dealing.
C) A personal ethical code will exert a profound influence on the way individuals behave as businesspeople.
D) Focusing only on applying straightforward business calculus can completely eliminate ethical concerns.
E) An organizational culture that fosters decision making on purely economic terms eliminates unethical practices.

Question 56

A stock option is a right to buy:

A) shares of the company's stock at the stock's current price.
B) shares of the company's stock at half the stock's current price.
C) shares of the company's stock at a predetermined price at some point in the future.
D) bonds issued by the company.
E) stock in an underperforming company.

Question 57

_____ is a situation where an agent has more knowledge about resources he or she is managing than the principal has.

A) Information manipulation
B) On-the-job consumption
C) Information asymmetry
D) Greenmail
E) Self-dealing

Question 58

Members of the Board of Directors are supposed to be agents for:

A) stockholders.
B) employees.
C) executive officers.
D) customers.
E) suppliers.

Question 59

In order to reduce its production costs, Delta LLC has moved its manufacturing facilities to an under-developed country where there are few labor laws. The employees at the manufacturing facilities are children and teenagers, and they receive minimal wages. Which of the following ethical issues is illustrated in this scenario? 

A) On-the-job consumption
B) Opportunistic exploitation
C) Self-dealing
D) Information manipulation
E) Substandard working conditions 

Question 60

Gemini Corp. is a large automobile manufacturer that has contracts with several suppliers. To gain more benefits from an upholstery supplier, Gemini Corp. unilaterally changed the contract and pressurized the supplier to lower its prices. Which of the following concepts is illustrated in this scenario?

A) Opportunistic exploitation
B) On-the-job consumption
C) Agency strategy
D) Greenmail
E) Self-dealing

Question 61

Business ethics are concerned with accepted principles of right or wrong governing the conduct of businesspeople. Identify and discuss the common examples of unethical decisions that businesspeople have made.

Question 62

Explain the principles of agency theory, including the issues it addresses. What are some effective ways to deal with agency problems, as implied or stated by agency theory?

Question 63

Which of the following governance mechanisms is regarded as the option of last resort?

A) Strategic control system
B) Takeover constraint
C) Board of Directors
D) Stock-based compensation system
E) Financial statements and auditors

Question 64

Consider a national chain of company-owned fast-food restaurants. For this firm, list the important stakeholders. Then describe how each stakeholder group can affect the firm's profitability.

Question 65

A circumstance in which a manager is using company funds for his or her own personal consumption is called _____.

A) information manipulation
B) self-dealing
C) takeover constraint
D) greenmail
E) information asymmetry

Question 66

To make sure that ethical issues are considered in business decisions:

A) companies should eliminate the principal-agent approach.
B) companies should have a no-layoff policy.
C) top managers should articulate and model ethical behaviors.
D) top managers should generously grant stock options.
E) companies should hire and promote employees with a strong focus on economic gains.

Question 67

When managers of a firm seek to unilaterally rewrite the terms of contracts with suppliers, buyers, or complement providers in a way that is more favorable to their firm, they are engaging in:

A) opportunistic exploitation.
B) information manipulation.
C) downsizing.
D) greenmail.
E) self-dealing.

Question 68

When managers pay bribes to gain access to lucrative business contracts, they are engaging in:

A) information asymmetry
B) utilitarianism.
C) self-dealing.
D) greenmail.
E) corruption.