In order to minimize the temptation for managers to act in their own self-interest, governance mechanisms exist for implementation consideration. Which of the following is not a primary means for monitoring managerial behavior?

71.

In order to minimize the temptation for managers to act in their own self-interest, governance mechanisms exist for implementation consideration. Which of the following is not a primary means for monitoring managerial behavior?    A.  a board of directors that acts in the best interests of shareholders to create short-term value B.  shareholder activism in which owners view themselves as shareowners C.  a board of directors that acts in the best interests of shareholders to create long-term value D.  managerial incentives to align management interests with those of the stockholders First, there are two primary means of monitoring the behavior of managers which include: (1) a committed and involved board of directors that acts in the best interests of the shareholders to create long-term value and (2) shareholder activism, wherein the owners view themselves as shareowners instead of shareholders and become actively engaged in the governance of the corporation. Finally, there are managerial incentives, sometimes called contract-based outcomes, which consist of reward and compensation agreements. Here the goal is to carefully craft managerial incentive packages to align the interests of management with those of the stockholders.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

72.

Individual and institutional shareholders have the same rights that include all except one of the following. Which one is not a shareholder right?    A.  the right to sell stock B.  the right to vote the proxy C.  the right to bring suit for damages, if the economy declines D.  certain residual rights following the liquidation of the company, once creditors and claimants are paid Even an individual shareholder has several rights, including (1) the right to sell the stock, (2) the right to vote the proxy (which includes the election of board members), (3) the right to bring suit for damages if the directors or managers of the corporation fail to meet their obligations, (4) the right to certain information from the company, and (5) certain residual rights following the liquidation of the company (or its filing for reorganization under bankruptcy laws), once creditors and other claimants are paid off.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

73.

Shareholders rely on CEOs to adopt policies and strategies that maximize the value of their shares. To motivate CEOs to maximize the value of their companies, boards of directors can consider all of the following options except one. Which one is it?    A.  Boards can require that the CEOs become substantial owners of company stock. B.  Salaries, bonuses, and stock options can be structures to provide rewards for superior performance. C.  Salaries can be structured to provide penalties for poor performance. D.  Dismissal for poor performance is not an option. Shareholders rely on CEOs to adopt policies and strategies that maximize the value of their shares. A combination of three basic policies may create the right monetary incentives for CEOs to maximize the value of their companies: Boards can require that the CEOs become substantial owners of company stock; salaries, bonuses, and stock options can be structured so as to provide rewards for superior performance and penalties for poor performance; dismissal for poor performance should be a realistic threat.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

74.

Boards of directors have responded to financial crises, corporate scandals, regulator obligations, and investor requests for structural changes. In looking at the 2011 Harvard Business Review study of the changes in configuration of boards since 1987, which change has been brought about by government legislation?    A.  Percentage of boards that have an average age of 64 or older has increased. B.  Average pay for directors has increased. C.  Percentage of boards with 12 or fewer members has increased. D.  Percentage of the directors that are independent has increased. The Sarbanes-Oxley Act and pressure from investors have led to an increase in the number of independent directors. In fact, over half the S&P 500 firms now have no insiders other than the CEO on the board.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

75.

CEO duality refers to a situation in which the _____________.    A.  CEO formulates and implements strategies B.  CEO serves as both the CEO and the chair of the board of directors C.  CEO is responsible for acting as CEO and serving on the compensation committee D.  CEO is responsible for acting as CEO and Chief Operating Officer (COO) CEO duality is one of the most controversial issues in corporate governance. It refers to the dual leadership structure where the CEO acts simultaneously as the chair of the board of directors.

AACSB: Analytic Blooms: Remember Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 1 Easy Topic: The Role of Corporate Governance

76.

In choosing sides concerning CEO duality, two schools of thought exist. Which of the following would not be a consideration for the Unity of Command school of thought?    A.  One person holding both roles will be able to act more efficiently and effectively. B.  CEO duality provides smoother strategic decision making. C.  CEO duality creates unit across the board of directors and managers of a company. D.  CEO duality slows down decision-making. CEO duality is one of the most controversial issues in corporate governance. It refers to the dual leadership structure where the CEO acts simultaneously as the chair of the board of directors. Advocates of the unity of command perspective believe when one person holds both roles, he or she is able to act more efficiently and effectively. CEO duality provides firms with a clear focus on both objectives and operations as well as eliminates confusion and conflict between the CEO and the chairman. Thus, it enables smoother, more effective strategic decision making.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

77.

In choosing sides concerning CEO duality, two schools of thought exist. Which of the following would not be a consideration for the Agency Theory school of thought?    A.  CEO duality complicates the issue of CEO succession. B.  CEO duality reinforces popular doubts about the legitimacy of the system as a whole. C.  CEO duality can create conflicts of interest that can negatively affect the interests of the shareholders. D.  Firm performance always is improved under CEO duality. CEO duality is one of the most controversial issues in corporate governance. It refers to the dual leadership structure where the CEO acts simultaneously as the chair of the board of directors. Supporters of agency theory argue that the positions of CEO and chairman should be separate. The case for separation is based on the simple principle of the separation of power. Duality also complicates the issue of CEO succession. Duality also serves to reinforce popular doubts about the legitimacy of the system as a whole and evokes images of bosses writing their own performance reviews and setting their own salaries. When the positions are broken apart, there is a clear shift in the performance of the firm. If the firm has been performing well, its performance declines after the separation. If the firm has been doing poorly, it experiences improvement after separating the two roles.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

78.

External governance control mechanisms include all of the following except _____________.    A.  auditors B.  analysts C.  competitors D.  media External governance control mechanisms include the market for corporate control, auditors, governmental regulatory bodies, banks and analysts, media, and public activists.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

79.

In trying to assure that managerial actions lead to shareholder value maximization, a risk can come about if the market value of a firm becomes less than its book value. The risk is _____________.    A.  it becomes an attractive takeover target B.  the firm will be delisted by the stock exchange C.  the Securities and Exchange Commission will not allow it to declare dividends until the market value once again exceeds the book value D.  the firm will be unable to service its debt If the market value of the firm becomes less than the book value, a corporate raider can take over the company for a price less than the book value of the assets of the company, and would be likely to fire underperforming management.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

80.

The takeover constraint refers to _____________.    A.  constraints placed by the firm on raiders who want to take over the firm B.  legal constraints that limit the ability of the raiders to acquire a firm C.  provisions in the charter of a company that prevents it from attempting a takeover of other companies D.  the risk of being acquired by a hostile raider The risk of being acquired by a hostile raider is often referred to as the takeover constraint.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

81.

It is generally argued that the takeover constraint deters management from _____________.    A.  engaging in opportunistic behavior B.  considering acquiring other companies C.  declaring dividends D.  increasing the level of borrowing of a firm The risk of being acquired by a hostile raider is often referred to as the takeover constraint. The takeover constraint deters management from engaging in opportunistic behavior.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

82.

The failure of many auditing firms to raise red flags about accounting irregularities in companies such as Enron and WorldCom is generally attributed to all of the following factors except _____________.    A.  the desire to get future auditing contracts from the company B.  the desire to get consulting work from the company because most audit firms also do consulting work C.  the fact that auditors are appointed by the firm D.  the failure of U.S. audit firms to hire technically qualified professionals The failure of auditing leading to the bankruptcy of Enron and WorldCom likely had several causes. First, auditors are appointed by the firm being audited. The desire to continue that business relationship sometimes makes them overlook financial irregularities. Second, most auditing firms also do lucrative consulting work with the firms that they audit. Understandably, some of them tend not to ask too many difficult questions, because they fear jeopardizing the consulting business.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

83.

The reasons analyst recommendations are often more optimistic than warranted by an objective analysis of the facts include all of the following except that _____________.    A.  many analysts fail to grasp the gravity of the problems facing a company B.  sell recommendations generate lower commissions than buy recommendations C.  the firms for which analysts work may have lucrative investment banking relationships with the firm D.  analysts are often pressured by their superiors to overlook negative information Analyst recommendations are often more optimistic than warranted by facts. Many analysts failed to grasp the gravity of the problems surrounding Lehman Brothers and Countrywide until the very end. Most analysts work for firms that have investment banking relationships with the companies they follow. Otherwise competent analysts may be pressured to overlook negative information or tone down their criticism.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

84.

All of the following are types of information that a firm is required to disclose except _____________.    A.  quarterly and annual filings of financial information B.  stock trading by insiders C.  details of new products under development D.  details of executive compensation packages All public corporations are required to disclose a substantial amount of financial information by bodies such as the Securities and Exchange Commission. These include quarterly and annual filings of financial performance, stock trading by insiders, and details of executive compensation packages.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

85.

In emerging economies and continental Europe, firms often can be characterized by all of the following except _____________.    A.  concentrated ownership B.  low family ownership and control C.  business group structures D.  weak legal protection for minority shareholders In emerging economies and continental Europe there is often concentrated ownership, along with extensive family ownership and control, business group structures, and weak legal protection for minority shareholders.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

86.

In principal-principal conflicts (conflicts between controlling shareholders and minority shareholders), the ownership (of equity) is _____________.    A.  widely dispersed B.  controlled almost completely by management C.  concentrated D.  often held by employee stock ownership programs The ownership pattern typical of principal-principal conflicts is concentrated; often greater than 50 percent of equity is controlled by controlling shareholders.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

87.

Conditions that must be met for principal-principal (PP) conflicts to occur include all of the following except _____________.    A.  a dominant owner or group of owners who have interests that are distinct from minority shareholders B.  legislation that protects the interests of minority shareholders C.  a motivation for the controlling shareholders to exercise their dominant position to their advantage D.  few formal (such as legislation or regulatory bodies) or informal constraints that discourage or prevent the controlling shareholders from exploiting their advantageous positions In general, three conditions must be met for PP conflicts to occur: a dominant owner or group of owners who have distinct interests from minority shareholders; motivation for the controlling shareholders to exercise their dominant positions to their advantage; and few formal (such as legislation or regulatory bodies) or informal constraints to discourage controlling shareholders from exploiting their advantageous positions.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance

88.

Expropriation of minority shareholders means that minority shareholders _____________.    A.  must sell their shares upon demand B.  cannot own shares in foreign firms C.  do not receive dividends D.  are adversely affected by the actions of controlling shareholders Expropriation of minority shareholders is defined as activities that enrich the controlling shareholders at the expense of minority shareholders.

AACSB: Analytic Blooms: Understand Learning Objective: 09-06 The role of corporate governance mechanisms in ensuring that the interests of managers are aligned with those of shareholders from both the United States and international perspectives. Level of Difficulty: 2 Medium Topic: The Role of Corporate Governance