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mgmt 493 ch. 11
na
76
Management
Undergraduate 4
05/07/2013

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Term
A major goal of most publicly held companies is the maximization of stockholder wealth.

a. True
b. False
Definition
a. True
Term
A union and the general public are examples of internal stakeholders.

a. True
b. False
Definition
b. False
Term
All stakeholders are in an exchange relationship with the company.

a. True
b. False
Definition
a. True
Term
Different stakeholders supply different resources to the company and, in exchange, they expect their interests to be satisfied.

a. True
b. False
Definition
a. True
Term
If a company fails to take stakeholder claims into account, stakeholders may withdraw their support.

a. True
b. False
Definition
a. True
Term
Through stock ownership plans, stockholders receive employee benefits.

a. True
b. False
Definition
b. False
Term
Stockholders receive a return on their investment in a company's stock from dividend payments and capital appreciation.

a. True
b. False
Definition
a. True
Term
Attaining future profit growth may require investments that reduce the current rate of profitability.

a. True
b. False
Definition
a. True
Term
Maximizing long-run profitability and profit growth is the best way to satisfy the claims of several key stakeholder groups as long as the company does so legally and in a manner consistent with societal expectations.

a. True
b. False
Definition
a. True
Term
Agency theory offers a way of understanding why managers do not always act in the best interests of stakeholders.

a. True
b. False
Definition
a. True
Term
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.

a. True
b. False
Definition
a. True
Term
While many agency relationships work well, problems arise when agents and principals have different goals.

a. True
b. False
Definition
a. True
Term
The term information asymmetry describes the difference in personal ethics that agents and principals have.

a. True
b. False
Definition
b. False
Term
One assumption of agency theory is that the principals have more information about the resources that are being managed than the agents do.

a. True
b. False
Definition
b. False
Term
If CEOs use their position to invest corporate funds in perks that enhance their status, they are engaging in illegal behavior.

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

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

a. True
b. False
Definition
a. True
Term
Ethical decisions are those that are made in accordance with accepted principles of right and wrong.

a. True
b. False
Definition
a. True
Term
While they do a good job of increasing employee satisfaction, positive incentive systems do little to maximize long-run profitability.

a. True
b. False
Definition
b. False
Term
Nike is no longer one of the leading marketers of athletic shoes and apparel in the world.

a. True
b. False
Definition
b. False
Term
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.

a. True
b. False
Definition
b. False
Term
An effective governance arrangement exists when the CEO is also the chair of the board of directors.

a. True
b. False
Definition
b. False
Term
Governance mechanisms help align the incentives between principals and agents and help monitor and control agents.

a. True
b. False
Definition
a. True
Term
Stock-based compensation schemes for senior executives are designed to align the interests of managers with those of stockholders.

a. True
b. False
Definition
a. True
Term
In the 1990s, Sotheby's and Christie's, the two largest fine-art auction houses in the world, faced several class-action lawsuits alleging collusion between the two houses to fix prices.

a. True
b. False
Definition
a. True
Term
According to an SEC investigation, Computer Associates, one of the world's largest software companies, backdated contracts to boost the company's reported revenues.

a. True
b. False
Definition
a. True
Term
Critics of Tyco, who claimed that the company was engaging in "accounting tricks," were later vindicated when the criticism was shown to have some validity.

a. True
b. False
Definition
a. True
Term
A company's stakeholders include which of the following?

a. Stockholders
b. Creditors
c. Employees
d. Customers
e. All of these choices
Definition
e. All of these choices
Term
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
Definition
a. Exchange
Term
Internal stakeholders of a company include

a. unions.
b. customers.
c. the board of directors.
d. suppliers.
e. local communities.
Definition
c. the board of directors.
Term
External stakeholders of a company include

a. unions.
b. the board of directors.
c. executive officers.
d. stockholders.
e. employees.
Definition
a. unions.
Term
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.
Definition
b. Stockholders are the legal owners of the company and are the providers of risk capital.
Term
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.

Definition
d. Boosting a company's profitability and profit growth rate is inconsistent with satisfying the claims of other key stakeholder groups.
Term
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.
Definition
a. they can use their authority over corporate funds to satisfy their desires for status, power, and income.
Term
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.

Definition
a. Growth results in large company size, and large size satisfies managers' needs for power, status, income, and job security.
Term
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
Definition
d. Identification of stakeholders and their interests and concerns
Term
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
Definition
d. Suppliers and customers
Term
Confronted with agency problems, which of the following is not one of the challenges 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 choices

Definition
e. All of these choices
Term
Which of the following is not an accurate statement about current levels of pay for CEOs of U.S.-based firms?

a. CEO pay since 2000 is at a historically high level.
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.
Definition
b. Most of CEO pay is in the form of salary.
Term
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.
Definition
a. on-the-job consumption.
Term
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.
Definition
e. stockholders.
Term
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.
Definition
c. managers at the same organizational level.
Term
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
Definition
d. When managers receive most of their compensation in the form of stock options
Term
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
Definition
a. Stockholder meetings
Term
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
Definition
d. Develop the company's competitive strategy
Term
The quest to maximize a company's profitability should be constrained by

a. law.
b. managers.
c. ethical obligations.
d. CEOs.
e. all of these choices.
Definition
e. all of these choices.
Term
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.
Definition
b. risk capital.
Term
The abbreviation IPO stands for

a. initial product output.
b. interim production output.
c. initial public offering.
d. inventory purchasing online.
e. none of these choices.
Definition
c. initial public offering.
Term
Members of the board of directors are supposed to be agents for

a. stockholders.
b. employees.
c. executive officers.
d. customers.
e. suppliers.

Definition
a. stockholders.
Term
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.
Definition
d. All directors are full-time employees of the company.
Term
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.
Definition
c. Outside board chairpersons are ineffective since the outside directors have no knowledge of company operations.
Term
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.
Definition
e. pushing for more effective governance structures.
Term
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.
Definition
d. Many board members are the nominees of the company CEO.
Term
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.
Definition
d. they dilute stockholders' equity.
Term
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.

Definition
a. They are the most objective and unambiguous way to compensate executives.
Term
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.
Definition
a. limits the extent to which managers pursue strategies that are inconsistent with shareholder interest.
Term
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.
Definition
b. limits the degree to which managers can pursue strategies that are at variance with stockholder interests.
Term
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
Definition
b. Takeover
Term
Over the past decade, maximizing returns to shareholders has

a. become less important.
b. taken on added importance.
c. remained the same as in the past.
d. been a minor corporate goal.
e. none of these choices.
Definition
b. taken on added importance.
Term
To satisfy stockholders, many companies seek to

a. increase the share value of a company's stock.
b. introduce as many new products as possible.
c. reward executives handsomely.
d. minimize global expansion.
e. reduce the number of custom-made products produced.
Definition
a. increase the share value of a company's stock.
Term
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 choices
Definition
e. All of these choices
Term
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.
Definition
b. ensuring that managers weigh the ethical implications of their decisions.
Term
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.
Definition
e. corruption.
Term
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.
Definition
a. opportunistic exploitation.
Term
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.
Definition
c. top managers should articulate and model ethical behaviors.
Term
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
Definition
c. Adopt the Friedman doctrine
Term
The basic principles of agency theory are

a. relatively straightforward.
b. somewhat obtuse.
c. of limited use in explaining the relationship between senior managers and stakeholders.
d. slanted in favor of managers as opposed to stakeholders.
e. mostly theoretical in nature.
Definition
a. relatively straightforward.
Term

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.

Definition
b. reduce the scope and frequency of the agency problem.
Term
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.
Definition
b. To monitor corporate strategy decisions and ensure that they are consistent with stockholders' interests.
Term
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.

Definition
e. inside and outside directors.
Term
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.
Definition
c. shares of the company's stock at a predetermined price at some point in the future.
Term
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.
Definition
e. CEOs and CFOs to endorse their company's financial statements.
Term
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.
Definition
b. risk of being acquired by another company.
Term
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.
Definition
d. dials and indicators in an airplane cockpit.
Term
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.
Definition
b. standards of right and wrong.
Term
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.
Definition
a. apparent lack of relationship to company performance.
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