You are on page 1of 16

Chapter 11—Corporate Performance, Governance, and Business Ethics

TRUE/FALSE

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

ANS: F PTS: 1 DIF: Easy
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance
NAT: AACSB Analytic | Environmental Influence KEY: Knowledge

2. All stakeholders are in an exchange relationship with the company.

ANS: T PTS: 1 DIF: Moderate
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance
NAT: AACSB Analytic | Environmental Influence KEY: Knowledge

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

ANS: T PTS: 1 DIF: Moderate
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance
NAT: AACSB Analytic | Environmental Influence KEY: Knowledge

4. Through stock ownership plans, stockholders receive employee benefits.

ANS: F PTS: 1 DIF: Moderate
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Analytic | HRM KEY: Knowledge

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

ANS: T PTS: 1 DIF: Moderate
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Analytic | Environmental Influence
KEY: Knowledge

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

ANS: T PTS: 1 DIF: Moderate
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Analytic | Creation of Value
KEY: Comprehension

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

ANS: F PTS: 1 DIF: Easy
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Ethics | Legal Responsibilities
KEY: Comprehension
8. Agency theory offers a way of understanding why managers do not always act in the best interests of
stakeholders.

ANS: T PTS: 1 DIF: Moderate
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance
NAT: AACSB Ethics | Legal Responsibilities

9. 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.

ANS: T PTS: 1 DIF: Moderate
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance
NAT: AACSB Ethics | Legal Responsibilities KEY: Knowledge

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

ANS: T PTS: 1 DIF: Easy
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance
NAT: AACSB Ethics | Legal Responsibilities KEY: Knowledge

11. The term information asymmetry describes the difference in personal ethics that agents and principals
have.

ANS: F PTS: 1 DIF: Moderate
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance
NAT: AACSB Ethics | Ethical Responsibilities KEY: Knowledge

12. One assumption of agency theory is that the principals have more information about the resources that
are being managed than the agents do.

ANS: F PTS: 1 DIF: Moderate
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance
NAT: AACSB Ethics | Ethical Responsibilities KEY: Knowledge

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

ANS: T PTS: 1 DIF: Easy
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Ethics | Ethical Responsibilities
KEY: Knowledge

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

ANS: T PTS: 1 DIF: Moderate
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Ethics | Ethical Responsibilities
KEY: Knowledge

15. While they do a good job of increasing employee satisfaction, positive incentive systems do little to
maximize long-run profitability.
ANS: F PTS: 1 DIF: Moderate
OBJ: 4 - Explain why these governance mechanisms do not always work as intended
NAT: AACSB Analytic | Motivation Concepts KEY: Knowledge

16. Ethical decisions are those that are made in accordance with accepted principles of right and wrong.

ANS: T PTS: 1 DIF: Easy
OBJ: 5 - Identify the main ethical issues that arise in business and the causes of unethical behavior
NAT: AACSB Ethics | Ethical Responsibilities KEY: Knowledge

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

ANS: T PTS: 1 DIF: Moderate
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Ethics | Ethical Responsibilities
KEY: Knowledge

18. Critics of corporate governance state that boards with more inside directors than outside directors are
generally an effective governance mechanism because they know more about how the company works.

ANS: F PTS: 1 DIF: Moderate
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Ethics | Ethical Responsibilities
KEY: Comprehension

19. An effective governance arrangement exists when the CEO is also the chair of the board of directors.

ANS: F PTS: 1 DIF: Moderate
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Ethics | Ethical Responsibilities
KEY: Knowledge

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

ANS: T PTS: 1 DIF: Moderate
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Analytic | Motivation Concepts
KEY: Comprehension

21. In the 1990s, Sotheby's and Christie's, the two largest fine-art auction houses in the world were
colliding to fix prices. These practices are acceptable in the business world to create competitiveness
through collaborations.

ANS: F PTS: 1 DIF: Difficult
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Reflective Thinking | Ethical Responsibilities
KEY: Application

22. 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 prescribed as an
ethical business practice.
ANS: T PTS: 1 DIF: Moderate
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Reflective Thinking | Ethical Responsibilities
KEY: Application

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

ANS: F PTS: 1 DIF: Moderate
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance
NAT: AACSB Reflective Thinking | Environmental Influence KEY: Application

MULTIPLE CHOICE

24. A company's stakeholders include which of the following?
a. Stockholders
b. Creditors
c. Employees
d. Customers
e. All of these
ANS: E PTS: 1 DIF: Moderate
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance
NAT: AACSB Analytic | Environmental Influence KEY: Comprehension

25. The relationship between an enterprise and its stakeholders is essentially what type of relationship?
a. Exchange
b. Master-servant
c. Bailor-bailee
d. Supply and demand
e. Quasi-egalitarian
ANS: A PTS: 1 DIF: Moderate
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance
NAT: AACSB Analytic | Environmental Influence KEY: Comprehension

26. Internal stakeholders of a company include
a. unions.
b. customers.
c. the board of directors.
d. suppliers.
e. local communities.
ANS: C PTS: 1 DIF: Moderate
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance
NAT: AACSB Analytic | Environmental Influence KEY: Knowledge

27. External stakeholders of a company include
a. unions.
b. the board of directors.
c. executive officers.
d. stockholders.
e. employees.
ANS: A PTS: 1 DIF: Moderate
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance
NAT: AACSB Analytic | Environmental Influence KEY: Knowledge

28. Why should satisfying stockholder demands receive so much attention in many corporate mission
statements?
a. Stockholders are the most powerful stakeholder group that a company has to satisfy.
b. Stockholders are the legal owners of the company and are the providers of risk capital.
c. Stockholders have been successful in blackmailing companies to get their interest satisfied
before those of other claimants.
d. Typically, stockholders have the most invested in the company's continued survival.
e. Managers feel obliged to pay lip service to stockholder demands.
ANS: B PTS: 1 DIF: Moderate
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Analytic | Creation of Value
KEY: Comprehension

29. Which of the following statements concerning profitability and profit growth is false?
a. Attaining future profit growth may require investments that reduce current 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. Boosting a company's profitability and profit growth rate is inconsistent with satisfying the
claims of other key stakeholder groups.
e. Too much emphasis on profit growth can reduce profitability and make an enterprise less
attractive to shareholders.
ANS: D PTS: 1 DIF: Difficult
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Analytic | Creation of Value
KEY: Comprehension

30. Although stockholders are legal owners, CEOs do not always pursue stockholders' interests. CEOs can
pursue their own interests because
a. they can use their authority over corporate funds to satisfy their desires for status, power,
and income.
b. they have the ability to initiate a leveraged buyout.
c. an outside director will not have knowledge of inside operations if he or she chairs the
board.
d. stockholders are the weakest stakeholder group because they are removed from operations.
e. stockholder meetings are not required.
ANS: A PTS: 1 DIF: Moderate
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Ethics | Ethical Responsibilities
KEY: Comprehension

31. Why are some managers thought to engage in empire building?
a. Growth results in large company size, and large size satisfies managers' needs for power,
status, income, and job security.
b. The pursuit of growth represents the best way of maximizing the long-run profitability of
the company.
c. Growth is designed to increase market share, which in turn increases company profits.
d. Companies that do not grow stagnate.
e. Stockholders would rather invest in large companies than in small ones.
ANS: A PTS: 1 DIF: Moderate
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Ethics | Ethical Responsibilities
KEY: Comprehension

32. A stakeholder impact analysis would include which of the following steps?
a. Identification of stakeholders
b. Identification of stakeholders' interests and concerns
c. Assessment of the likelihood that a stakeholder will file discrimination charges against the
company
d. Identification of stakeholders and their interests and concerns
e. Analysis of ethics violations
ANS: D PTS: 1 DIF: Moderate
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Analytic | Creation of Value
KEY: Comprehension

33. Which of the following stakeholders might not want a company to maximize its long-run profitability
and profit growth?
a. Suppliers
b. Creditors
c. Customers
d. Suppliers and customers
e. Suppliers and creditors
ANS: D PTS: 1 DIF: Moderate
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Analytic | Creation of Value
KEY: Comprehension

34. Confronted with agency problems, which of the following is(are) challenge(s) for principals?
a. Shape the behavior of agents so that they act in accordance with the goals set by principals
b. Reduce the information asymmetry between agents and principals
c. Develop mechanisms for removing agents who do not act in accordance with the goals of
principals
d. Develop mechanisms for removing agents who mislead principals
e. All of these are challenges for principals
ANS: E PTS: 1 DIF: Moderate
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Ethics | Ethical Responsibilities
KEY: Comprehension

35. Which of the following is not an accurate statement about current levels of pay for CEOs of U.S.-
based firms?
a. Today, the average CEO earns more than 350 times the pay of the average blue-collar
worker.
b. Most of CEO pay is in the form of salary.
c. CEO compensation is not 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.
ANS: B PTS: 1 DIF: Moderate
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Ethics | Ethical Responsibilities
KEY: Knowledge

36. When corporate CEOs and top managers use their power and control over funds to satisfy their
personal desires for wealth or status, this is called
a. on-the-job consumption.
b. agency theory.
c. information asymmetry.
d. a tradeoff between stakeholders.
e. a performance measurement.
ANS: A PTS: 1 DIF: Moderate
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Analytic | Motivation Concepts
KEY: Knowledge

37. In applying agency theory to problems of corporate management, the principals are the
a. employees.
b. CEO.
c. top management team.
d. CEO and the top management team.
e. stockholders.
ANS: E PTS: 1 DIF: Easy
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Ethics | Ethical Responsibilities
KEY: Knowledge

38. Agency theory would not be useful in understanding the relationship between
a. a CEO and his or her top management team.
b. top-level executives and middle managers.
c. managers at the same organizational level.
d. stockholders and the CEO.
e. lower-level managers and the workers they supervise.
ANS: C PTS: 1 DIF: Moderate
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Ethics | Ethical Responsibilities
KEY: Comprehension

39. When are the interests of stockholders and senior managers likely to be most closely aligned?
a. When the board of directors is dominated by insiders
b. When managers receive most of their compensation in the form of a regular salary
c. When stockholders are weak
d. When managers receive most of their compensation in the form of stock options
e. When corporate raiders are unable to mount a takeover bid
ANS: D PTS: 1 DIF: Moderate
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Ethics | HRM
KEY: Comprehension

40. Which of the following is not a governance mechanism used to align the interests of managers and
stockholders?
a. Stockholder meetings
b. The board of directors
c. Stock-based compensation schemes
d. The mission statement
e. Takeover constraints
ANS: A PTS: 1 DIF: Moderate
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Ethics | Ethical Responsibilities
KEY: Comprehension

41. 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 the company's competitive strategy
e. Make sure the audited financial statements present a true picture of the company's financial
situation
ANS: D PTS: 1 DIF: Moderate
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Ethics | Ethical Responsibilities
KEY: Comprehension

42. A company's stockholders provide a company with
a. emotional and intellectual support.
b. risk capital.
c. free advertising.
d. advice on new product lines.
e. a code of ethics.
ANS: B PTS: 1 DIF: Easy
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Analytic | Creation of Value
KEY: Knowledge

43. Members of the board of directors are supposed to be agents for
a. stockholders.
b. employees.
c. executive officers.
d. customers.
e. suppliers.
ANS: A PTS: 1 DIF: Moderate
OBJ: 3 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Ethics | Ethical Responsibilities
KEY: Knowledge

44. Which of the following statements about the board of directors is false?
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 directors are full-time employees of the company.
e. Outside directors help perform the monitoring function of the board.
ANS: D PTS: 1 DIF: Moderate
OBJ: 3 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Ethics | Ethical Responsibilities
KEY: Comprehension

45. Which of the following is not a criticism of boards?
a. Inside directors can use their control over information to influence outside directors.
b. The CEO nominates most board directors.
c. Outside board chairpersons are ineffective since the outside directors have no knowledge
of company operations.
d. Insiders can control the information the board receives.
e. A board with more insiders may pursue strategies consistent with the interests of
management rather than those of stockholders.
ANS: C PTS: 1 DIF: Moderate
OBJ: 3 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Ethics | Ethical Responsibilities
KEY: Comprehension

46. Institutional investors are becoming more aggressive in exerting their power with the board by
a. boycotting stockholder meetings.
b. pursuing leveraged buyouts.
c. selling their shares when they do not agree with company actions.
d. defining a company's business for them.
e. pushing for more effective governance structures.
ANS: E PTS: 1 DIF: Moderate
OBJ: 3 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Ethics | Ethical Responsibilities
KEY: Knowledge

47. Which of the following is not a reason why the board of directors may act as the guardian of
stockholder interests within a company?
a. Board members are directly elected by stockholders.
b. The board is positioned at the apex of decision making within a company and is thus in a
good position to monitor strategies.
c. Board members can be held legally accountable for the actions of the company.
d. Many board members are the nominees of the company CEO.
e. The board has legal authority to hire, fire, and compensate senior executives.
ANS: D PTS: 1 DIF: Moderate
OBJ: 3 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Ethics | Ethical Responsibilities
KEY: Comprehension

48. A criticism of stock-based compensation plans is that
a. they discourage empire building.
b. they induce managers to focus on the short term.
c. managers do not like them.
d. they dilute stockholders' equity.
e. they are publicly reported and therefore not subject to abuse.
ANS: D PTS: 1 DIF: Moderate
OBJ: 4 - Explain why these governance mechanisms do not always work as intended
NAT: AACSB Analytic | Creation of Value KEY: Knowledge

49. Which of the following statements concerning stock-based compensation schemes for executives is
incorrect?
a. They are the most objective and unambiguous way to compensate executives.
b. They can align the interests of management and stockholders.
c. They can dilute the equity of stockholders.
d. The option strike price is typically the price that the stock was trading at when the option
was granted.
e. None of these choices are correct.
ANS: A PTS: 1 DIF: Moderate
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Ethics | Ethical Responsibilities
KEY: Comprehension

50. A takeover constraint
a. limits the extent to which managers pursue strategies that are inconsistent with shareholder
interest.
b. prevents a company from being taken over.
c. uses the threat of a takeover to cause the CEO to fear the loss of his or her job.
d. is reduced by corporate raiders.
e. is greatest when a company's stock price is significantly higher than book value.
ANS: A PTS: 1 DIF: Moderate
OBJ: 4 - Explain why these governance mechanisms do not always work as intended
NAT: AACSB Ethics | Ethical Responsibilities KEY: Knowledge

51. The takeover constraint
a. effectively limits the number of independent companies that a company can acquire.
b. limits the degree to which managers can pursue strategies that are at variance with
stockholder interests.
c. is a theoretical construct that can be ignored in practice.
d. limits the freedom that individual companies have to maximize their long-run return on
investment.
e. is imposed by corporate managers on errant business-level managers.
ANS: B PTS: 1 DIF: Easy
OBJ: 4 - Explain why these governance mechanisms do not always work as intended
NAT: AACSB Ethics | Ethical Responsibilities KEY: Knowledge

52. Which of the following governance mechanisms is regarded as the option of last resort?
a. Strategic control system
b. Takeover
c. Board of directors
d. Stock-based compensation system
e. Financial statements and auditors
ANS: B PTS: 1 DIF: Moderate
OBJ: 4 - Explain why these governance mechanisms do not always work as intended
NAT: AACSB Ethics | Ethical Responsibilities KEY: Knowledge

53. Pursuing strategies that maximize the long-run profitability and profit growth of a company benefits
which group(s) of stakeholders?
a. Employees
b. Creditors
c. Charitable organizations in the local community
d. The general public
e. All of these
ANS: E PTS: 1 DIF: Moderate
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Analytic | Creation of Value
KEY: Comprehension

54. Business ethics is concerned with
a. teaching people the difference between right and wrong.
b. ensuring that managers weigh the ethical implications of their decisions.
c. ensuring that employees obey the law.
d. replacing economics with social responsibility in the decision-making process.
e. increasing profits.
ANS: B PTS: 1 DIF: Easy
OBJ: 5 - Identify the main ethical issues that arise in business and the causes of unethical behavior
NAT: AACSB Ethics | Ethical Responsibilities KEY: Knowledge

55. When managers pay bribes to gain access to lucrative business contracts, they are engaging in
a. opportunistic exploitation.
b. utilitarian ethics.
c. self-dealing.
d. information manipulation.
e. corruption.
ANS: E PTS: 1 DIF: Easy
OBJ: 5 - Identify the main ethical issues that arise in business and the causes of unethical behavior
NAT: AACSB Ethics | Ethical Responsibilities KEY: Knowledge

56. When managers of a firm seek to unilaterally rewrite the terms of a contract with suppliers, buyers, or
complement providers in a way that is more favorable to their firm, they are engaging in
a. opportunistic exploitation.
b. ethical behavior.
c. corruption.
d. philosophical ethics.
e. self-dealing.
ANS: A PTS: 1 DIF: Easy
OBJ: 5 - Identify the main ethical issues that arise in business and the causes of unethical behavior
NAT: AACSB Ethics | Ethical Responsibilities KEY: Comprehension

57. To make sure that ethical issues are considered in business decisions,
a. a company should use a bottom-up approach.
b. a company should have a no-layoff policy.
c. top managers should articulate and model ethical behaviors.
d. a company should give seminars to teach people what is legal and not legal.
e. a company should hire and promote employees who do whatever it takes to achieve
organizational objectives.
ANS: C PTS: 1 DIF: Moderate
OBJ: 6 - Identify what managers can do to improve the ethical climate of their organization, and to
make sure that business decisions do not NAT: AACSB Ethics | Ethical Responsibilities
KEY: Knowledge

58. Which of the following is not something that managers can do to make sure that ethical issues are
considered in business decisions?
a. Hire and promote people who have a strong sense of personal ethics
b. Build an organizational culture that places a high value on ethical behavior
c. Adopt the Friedman doctrine
d. Act with moral courage
e. Put decision-making processes in place that require people to consider ethical dimensions
of business decisions
ANS: C PTS: 1 DIF: Moderate
OBJ: 6 - Identify what managers can do to improve the ethical climate of their organization, and to
make sure that business decisions do not NAT: AACSB Ethics | Ethical Responsibilities
KEY: Comprehension

59. The purpose of governance mechanisms in corporations is to
a. keep employees in line.
b. reduce the scope and frequency of the agency problem.
c. satisfy the requirements of the Securities and Exchange Commission (SEC).
d. limit corporate growth to manageable rates.
e. none of these choices.
ANS: B PTS: 1 DIF: Moderate
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Ethics | Ethical Responsibilities
KEY: Knowledge

60. What is the major purpose of a corporate board of directors?
a. To approve all decisions made by senior managers.
b. To monitor corporate strategy decisions and ensure that they are consistent with
stockholders' interests.
c. To protect a company's consumers.
d. To select additional board members.
e. To approve corporate compensation systems.
ANS: B PTS: 1 DIF: Moderate
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Ethics | Ethical Responsibilities
KEY: Comprehension

61. A typical board of directors is composed of
a. inside directors.
b. external directors.
c. inside directors and consumer advocates.
d. outside directors and union representatives.
e. inside and outside directors.
ANS: E PTS: 1 DIF: Easy
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Ethics | Ethical Responsibilities
KEY: Knowledge

62. 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. none of these choices.
ANS: C PTS: 1 DIF: Moderate
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Analytic | HRM
KEY: Knowledge

63. Sarbanes-Oxley, federal legislation enacted in 2002, requires
a. CEOs to endorse their company's financial statements.
b. CFOs to endorse their company's financial statements.
c. companies to use the same accounting firm for auditing and consulting services.
d. members of the board of directors to post a surety bond.
e. CEOs and CFOs to endorse their company's financial statements.
ANS: E PTS: 1 DIF: Moderate
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Ethics | Legal Responsibilities
KEY: Knowledge

64. The takeover constraint refers to the
a. opportunity to acquire competitors if they are smaller than the acquiring company.
b. risk of being acquired by another company.
c. drop in the price of a share of stock due to a rumored takeover of the company.
d. lack of resources required to acquire another company.
e. reluctance of a company's managers to acquire another company.
ANS: B PTS: 1 DIF: Easy
OBJ: 4 - Explain why these governance mechanisms do not always work as intended
NAT: AACSB Ethics | Ethical Responsibilities KEY: Knowledge

65. Thinking of it in its simplest terms, the balanced scorecard approach may be viewed as the
a. dashboard on an automobile.
b. touchpad on a cell phone.
c. keyboard for a computer.
d. dials and indicators in an airplane cockpit.
e. none of these choices.
ANS: D PTS: 1 DIF: Moderate
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Analytic | Creation of Value
KEY: Knowledge

66. Ethics may best be thought of as
a. legal prescriptions for conduct.
b. standards of right and wrong.
c. cultural mores.
d. desirable but unattainable behaviors.
e. all of these choices.
ANS: B PTS: 1 DIF: Easy
OBJ: 5 - Identify the main ethical issues that arise in business and the causes of unethical behavior
NAT: AACSB Ethics | Ethical Responsibilities KEY: Knowledge
67. CEO compensation packages are most frequently criticized because of their
a. apparent lack of relationship to company performance.
b. life insurance benefits.
c. features.
d. cost to the company.
e. lack of motivation.
ANS: A PTS: 1 DIF: Moderate
OBJ: 2 - Explain why maximizing returns to stockholders is often viewed as the preeminent goal in
many corporations NAT: AACSB Ethics | Ethical Responsibilities
KEY: Knowledge

68. Becca is a CEO at XYZ Company. She has recently invested corporate funds to take an exotic trip to
the Cayman Islands. This is an example of which of the following?
a. Corporate governance
b. On-the-job consumption
c. Self-dealing
d. Anticompetitive behavior
e. Information manipulation
ANS: B PTS: 1 DIF: Difficult
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance
NAT: AACSB Reflective Thinking | Ethical Responsibilities KEY: Application

69. 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. This is a form of which of the following
governance mechanisms?
a. Stock options
b. Self-dealing
c. The takeover constraint
d. Employee incentives
e. Greenmail
ANS: D PTS: 1 DIF: Difficult
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers
NAT: AACSB Reflective Thinking | Ethical Responsibilities KEY: Application

ESSAY

70. Identify and discuss the governance mechanisms that help align the incentives of stockholders and
managers and help monitor and control management.

ANS:
Agency problems in organizations are well documented and well understood. The four main types of
governance mechanisms to help address agency problems are discussed below.

The board of directors is the first governance mechanism. Board members are elected by shareholders
and have specific statutory responsibility, so this mechanism may break down primarily because of the
structure of the board. First, boards are often dominated by insiders who often have position authority
and access to information that outside directors do not have. In addition, many boards are chaired by
the CEO the ultimate insider.
A second governance mechanism is stock-based compensation. The idea behind this mechanism is that
it helps align the financial interests of shareholders and managers. When share price rises, both benefit;
when it falls, they both suffer. A problem with stock-based compensation is that many companies have
used stock options that distort their real cost and dilute the value of shareholders' holdings.

A third mechanism is financial statements and auditors. Good governance relies on accurate and timely
information about company performance. Transparency is the cornerstone of financial reporting.
Unfortunately, recent high-profile examples of companies (Enron, Computer Associates) that have
falsified reports to present an inaccurate picture of company performance indicate that this mechanism
has problems.

A final governance mechanism is the takeover constraint. When companies are mismanaged and not
creating the value that they should, the possibility of an outside party coming in, taking over control
(through a hostile raid), replacing existing management, and then turning the company around may be
the ultimate management punishment for poor performance. A problem with this mechanism is that
many companies (and states) have put in place takeover defenses that make it much more difficult to
take over a company.

PTS: 1 DIF: Difficult
OBJ: 3 - Describe the various governance mechanisms that are used to align the interest of
stockholders and managers NAT: AACSB Ethics | Ethical Responsibilities
KEY: Synthesis

71. 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.

ANS:
Internal stakeholders of a national chain of fast-food restaurants would include the managers and
employees of the firm and the firm's stockholders. External stakeholders would include customers,
who are probably young adults and young families; suppliers, such as wholesalers of food and paper
products; and banks and other creditors. Local governments regulate issues about food safety and
handling at food service establishments, and the federal, state, and local governments regulate a wide
variety of issues, from hiring practices to tax collection, to accessible restaurant design. Unions may be
a stakeholder if the restaurant workers are unionized. Local communities and society are also external
stakeholders.

Each of these groups can have a positive or a negative impact on profitability. Here is just one
example. If customers are satisfied that they are receiving value for their money, they will purchase the
firm's products, increasing the firm's profitability. But if the customers are not satisfied, they will
refrain from purchasing and may even give the firm bad word-of-mouth advertising, which will reduce
sales and profitability.

PTS: 1 DIF: Difficult
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance | 2
- Explain why maximizing returns to stockholders is often viewed as the preeminent goal in many
corporations NAT: AACSB Analytic | Creation of Value
KEY: Evaluation

72. 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?

ANS:
Agency theory addresses situations where one individual or group (the principals) relies on another
individual or group (the agents) to make decisions and take actions on their behalf. In many of these
situations, there are opportunities for mutual gain, but there are also opportunities for the agents to act
in their own best interests, to the detriment of the principals. Opportunities for exploitation exist
because agents have more access to information about the situation and to other resources than do the
principals. Therefore, the principals cannot fully monitor the actions of the agents and must trust the
agents to some extent.

One way to manage agency problems is to align the two parties' goals that is, to create opportunities
for mutual gain and reduce opportunities for one-sided gain. For example, if corporate managers are
compensated based on stock price, then they are more likely to work toward increasing stock returns,
which would also benefit stockholders. If managers are compensated based on the size of the firm,
then they will work toward increasing the size of the firm, which may not be beneficial for
stockholders. Another tactic is to reduce information asymmetry to the extent possible by overseeing
or monitoring the principals' actions closely. However, there will always be a need for the principal to
trust the agent to some extent.

PTS: 1 DIF: Difficult
OBJ: 1 - Understand the relationship between stakeholder management and corporate performance
NAT: AACSB Ethics | Ethical Responsibilities KEY: Synthesis

73. 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.

ANS:
Unethical behavior often occurs when people decide to put their own interests ahead of those of the
firm and its stakeholders. Common examples of unethical behavior include:

Self-dealing pursuing personal enhancements with company funds.

Information manipulation hiding or distorting information (usually negative) that would show how
the company is really performing. The information is usually financial but may be nonfinancial (data
that a company's products are harmful).

Anticompetitive behavior concerns a broad range of behaviors that limit competition and may harm
customers.

Opportunistic exploitation occurs when managers of a company seek to unilaterally rewrite the terms
of a contract with suppliers, buyers, or complement providers.

Substandard working conditions paying below-market rates or underinvesting in working conditions
to reduce costs; an important issue in international operations.

Environmental degradation actions that directly result in pollution or other forms of environmental
harm.

Corruption paying bribes to gain access to lucrative contracts or personal gain.

PTS: 1 DIF: Difficult
OBJ: 5 - Identify the main ethical issues that arise in business and the causes of unethical behavior
NAT: AACSB Ethics | Ethical Responsibilities KEY: Synthesis