Exam Questions Ch13 Corporate Governance and Ethics

Package Title: Chapter 13, Testbank

Course Title: Dyer, SM 2e

Chapter Number: 13

Question type: Multiple Choice

1) ________ is best described as the processes and structures that provide the ultimate decision making authority for a firm.

a) Strategic management

b) Corporate responsibility

c) Corporate governance

d) Corporate management

Difficulty: Easy

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

2) Antonia owns and runs a bakery in her neighborhood. She is the only person responsible for the liabilities of her bakery. Her bakery is an example of a(n) ________.

a) individual proprietorship

b) corporation

c) partnership

d) joint venture

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

3) A(n) ________ is a legal structure for organizing a business where the organization is a distinct and separate entity from its owners.

a) general partnership

b) proprietorship

c) corporation

d) limited partnership

Difficulty: Easy

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

4) Which of the following statements is true of an individual proprietorship?

a) It is owned by two or more partners.

b) It is run and owned by the same person.

c) It is considered a distinct and separate entity from its owners.

d) It is a rare form of business ownership in the United States.

Difficulty: Medium

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

5) Autumn Inc. is a company that functions on its own. It has the right to enter into contracts, hire employees, and also pay taxes. The shareholders of the company are entitled to its profits. Autumn Inc. is an example of a ________.

a) cooperative

b) limited partnership

c) general partnership

d) corporation

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

6) Fatima wants to start a small business. She does not want to share the profits of her business with anyone else. In this scenario, Fatima should most likely opt for which of the following types of business ownership?

a) A joint venture

b) An individual proprietorship

c) A partnership

d) A corporation

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Analysis

Standard 1 : AACSB || Analytic

7) Ria and Maria start an investment firm together that is not a separate legal entity. They have an equal share of the profits and the liabilities of the business. This type of business ownership can be best categorized as a(n) ________.

a) cooperative

b) partnership

c) corporation

d) individual proprietorship

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

8) Veltek Development Solutions was a company that existed in the nineteenth century. It was formed after obtaining a charter from the state legislature for the purpose of building a small bridge over a river. In this scenario, Veltek Development Solutions can be considered a ________.

a) cooperative

b) limited partnership

c) general partnership

d) corporation

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

9) How did the general-purpose corporations formed in the twentieth century grow?

a) By allowing investors to run the corporation

b) By relying on investors to run the corporation

c) By selling products and services to the investors at reduced prices

d) By offering investors a share of ownership in the company, or stock

Difficulty: Medium

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

10) Chang, the founder of a multinational corporation, believes that his business should mainly focus on the benefit of those people who own its stock. In this scenario, he most likely follows ________, a model of business management.

a) stakeholder model

b) shareholder primacy

c) customer value

d) stakeholder value

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

11) Anastasia, a student of business management, claims that since most businesses are primarily concerned with acquiring more assets, the shareholder primacy model is better than the stakeholder model of business management. Which of the following facts strengthens her claims?

a) Shareholders can easily trade the stock they own of an organization.

b) Shareholders exchange money with the corporation without a clearly specified payment in return.

c) Shareholder value creates negative consequences for firms.

d) Shareholders are the legal owners of all the material possessions of the corporation.

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Analysis

Standard 1 : AACSB || Reflective Thinking

12) ________ is a model of the corporation suggesting that a firm is the sum total of its contracts with different stakeholders.

a) Nexus of contracts

b) Shareholder primacy

c) Stakeholder model

d) Supplier contracts

Difficulty: Easy

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

13) Javier is the shareholder of a cellphone manufacturing company. Which of the following statements about him is true?

a) He does not have any claim to the residual earnings of the company.

b) He is the only person entitled to receive the profits of the company.

c) He is protected from being taken advantage of by the management team due to his oversight rights.

d) He is not able to exchange money with the corporation without a clearly specified payment in return.

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

14) Jiao, a student of business management, claims that the shareholder primacy model is better than the stakeholder model of business management. Which of the following statements best supports her claim?

a) The customers are the legal owners of the corporation’s assets.

b) The most important input into making a business successful is wealth.

c) The shareholders own stock of a corporation that they can easily trade.

d) The shareholders have different objectives for investing in a firm.

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

15) Salma owns stocks of an e-commerce business. In exchange for the money she has invested, she has received two property rights from the business. Which of the following is most likely to be one of the property rights given to her?

a) She will get a share of the residual earnings of the business.

b) She will be the only owner of the assets of the business.

c) She will get ownership of the private properties owned by other investors of the business.

d) She will be entitled to a higher percentage of the profits earned by the business.

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

16) Raj, a student of business management, claims that the shareholder primacy model is not a good model of business management. Which of the following statements should he use in order to best support his claim?

a) The shareholders are not the legal owners of the corporation’s assets.

b) Financial capital is the most important input into making a business successful.

c) The shareholders cannot not trade or own any stock of the corporation.

d) Managing for shareholder value creates negative consequences for firms.

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

17) Tinos Inc. is a company that manufactures toys. Which of the following would be its primary stakeholder?

a) Other local toy manufacturers

b) Foreign toy manufacturers

c) People who purchase its toys

d) People who purchase toys in foreign countries

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

18) TinyToys Inc. is a company that manufactures toys. Which of the following would be its secondary stakeholder?

a) Other local toy manufacturers

b) Companies that supply its raw materials

c) People who purchase its toys

d) People who work for the company

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

19) Kate, a business owner, is a proponent of the stakeholder model of business management. Which of the following is a reason she supports this model?

a) The stakeholders are the legal owners of the corporation’s assets.

b) Managers spend most of their time interacting with and managing the demands and needs of different stakeholder groups.

c) The stakeholders own stock of a corporation that they can easily trade.

d) Managers have no way to efficiently and effectively run their firms as they have no way to decide whose claims have priority.

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

20) Which of the following statements is true of the intrinsic stakeholder model of business management?

a) It is the belief that stakeholder groups have the right to be considered in decisions that will impact them.

b) It is the belief that giving importance to stakeholders makes it difficult for managers to effectively run their firms.

c) It is the belief that stakeholder interactions have longer-term consequences on a firm’s performance and competitive advantage.

d) It is the belief that financial capital is the most important input into making a business successful.

Difficulty: Medium

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

21) Abdul, a student of business management, claims that the stakeholder model is not a good model of business management. Which of the following would he most likely cite as a reason for his claim?

a) The shareholders are not the legal owners of the corporation’s assets.

b) Managers need to focus on the only objective of increasing shareholder value.

c) The stakeholder groups should be considered in decisions that will impact them.

d) Managers spend most of their time interacting with stakeholders.

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

22) Newe Chemicals Inc. is a company that manufactures household chemicals. Its customers consist of people who purchase its products. They will be affected by the business through the ___________.

a) wages it pays to its employees

b) payment it makes to its suppliers

c) earnings it generates for its investors

d) advertising campaigns it uses to promote its products

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

23) Agrolus Corp. is a company that manufactures fertilizers used in farming. Its customers consist of farmers who purchase its products. Its employees will be affected by the business through the _________.

a) working conditions of the company

b) payment it makes to its suppliers

c) earnings it generates for its investors

d) fertilizers sold by the company

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

24) HMR Inc. is a company that manufactures household chemicals and fertilizers used in farming. Its customers consist of farmers and other people who purchase its products. Its suppliers will be most affected by the business through the ________.

a) working conditions of the company

b) reputation of the company

c) earnings it generates for its investors

d) chemicals and other products sold by it

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

25) Yellow Moon Inc. is a company that manufactures consumer electronics. Its investors will be primarily affected by the business through the _________.

a) training and development provided to its employees

b) employees living in its community

c) earnings generated by the company

d) order consistency of the company

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

26) Chemica Corp. is a company that manufactures household chemicals and fertilizers used in farming. The government of the state in which it operates will be affected by the business through the _________.

a) effect its products have on environmental pollution

b) reputation of the company

c) earnings generated by the company

d) employment opportunities that the company generates

Difficulty: Hard

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Application

Standard 1 : AACSB || Analytic

27) Which of the following statements is true of the agency problem facing the modern public corporation?

a) It arises when a corporation hires a private agency to conduct audits of its business practices.

b) It arises when a government agency is assigned with the task of identifying corrupt practices by a corporation.

c) It arises as a consequence of the separation of ownership and control in the corporation.

d) It arises as a consequence of the managers of the corporation focusing on enhancing shareholder value.

Difficulty: Medium

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

28) Anastasia is one of the managers of Geller Technology Inc., an information technology firm. She will be considered the agent of the _________.

a) people who own stocks of the firm

b) people who purchase the software created by the firm

c) software engineers who work for the firm

d) businesses that use the software created by the firm

Difficulty: Hard

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Application

Standard 1 : AACSB || Analytic

29) DigiGo Inc. is a multinational corporation that manufactures and sells home appliances. Who among the following are its principals?

a) The people who own stocks of the company

b) The people who purchase the home appliances it manufactures

c) The electronics engineers who work for the company

d) The retailers that sell the home appliances it manufactures

Difficulty: Hard

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Application

Standard 1 : AACSB || Analytic

30) ShopEazy Inc. operates a chain of supermarkets. The managers and employees of the company have been on strike for months due to their differences with its owners. As a result, the share price of the company has fallen to a historic low. Zeltro Investments decides to purchase a majority of ShopEazy’s shares, confident that it can manage the company better. In this scenario, Zeltro Investments can be best categorized as a(n) ________.

a) corporate raider

b) venture capitalist

c) secondary stakeholder

d) angel investor

Difficulty: Hard

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Application

Standard 1 : AACSB || Analytic

31) RedMart Corp. operates a chain of supermarkets. The managers and other employees of the company have been on strike for months due to their differences with its owners. As a result, the share price of the company has fallen drastically. Pro Investments Inc. purchases a majority of the shares of RedMart, confident that it can manage the company better. The problem faced by RedMart Corp. as result of the separation of ownership and control can be termed as a(n) _________.

a) hostile takeover

b) proxy fight

c) agency problem

d) accountability problem

Difficulty: Hard

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Application

Standard 1 : AACSB || Analytic

32) YCL Inc. operates a retail chain. The managers and employees of the company have been on strike for months due to their differences with its owners. As a result, the share price of the company has fallen to a historic low. UltraPlus Investments decides to purchase a majority of the shares of YCL, confident that it can manage the company better. The board of directors of YCL refuses to sell the shares of the company to UltraPlus Investments. As a result, UltraPlus tries to place its own people on the YCL’s board of directors to change their decision. In this scenario, UltraPlus is involved in a(n) ________.

a) agency problem

b) proxy fight

c) employee buyout

d) friendly acquisition

Difficulty: Hard

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Application

Standard 1 : AACSB || Analytic

33) Peach Corp. operates a chain of supermarkets. The managers and employees of the company have been on strike for months due to their differences with its owners. As a result, the share price of the company has fallen to historic low. Globe Investments decides to purchase a majority of the shares of Peach Corp., confident that it can manage the company better. Globe Investments makes a public offer to purchase the shares of the investors who are dissatisfied with the performance of Peach Corp. The offer made by Globe Investments can be termed as a(n) ________.

a) proxy offer

b) tender offer

c) discount offer

d) private offer

Difficulty: Hard

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Application

Standard 1 : AACSB || Analytic

34) The ________ of a corporation have a legal fiduciary duty to act in the best interests of the corporation’s owners.

a) customers

b) suppliers

c) directors

d) distributors

Difficulty: Easy

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

35) Which of the following individuals has a legal fiduciary duty to act in the best interests of the owners of the corporation where he or she works?

a) Neehara, a nurse at a private hospital

b) Ivana, a senior executive at a financial corporation

c) Steve, a salesperson at an electronic store

d) Jamal, a technical support engineer at an IT firm

Difficulty: Hard

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Application

Standard 1 : AACSB || Analytic

36) ________ is the right to buy a certain number of the corporation’s shares at a specified future date for a specified price.

a) Pay for performance

b) Stock-based compensation

c) A stock grant

d) A stock option

Difficulty: Easy

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

37) Pick N Shop Inc. operates a chain of supermarkets. The company offers a bonus of $500 to its sales representatives if they can sell products worth $5,000 per month. It also offers bonuses and other benefits to its employees and managers. By offering such bonuses, Pick N Shop Inc. is primarily trying to avoid a(n) ________.

a) hostile takeover

b) proxy fight

c) agency problem

d) accountability problem

Difficulty: Hard

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Application

Standard 1 : AACSB || Analytic

38) Zygaton Corp. is a firm that offers its customers financial services. Which of the following members of its board of directors should ideally bring vast knowledge and a new perspective in order to ensure that the firm’s strategy will serve the financial interests of the shareholders?

a) Javier, an employee

b) Maria, an outside director

c) Cataleya, a senior executive

d) Esposito, a senior manager

Difficulty: Hard

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Application

Standard 1 : AACSB || Analytic

39) Monica is a senior interior designer who works at 360 Marks Inc. As part of her compensation package, she is entitled to 2,000 shares of the company at $30 each. In this scenario, the type of compensation offered can be termed as a(n) ________.

a) stock option

b) stock grant

c) tender offer

d) initial grant

Difficulty: Hard

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Application

Standard 1 : AACSB || Analytic

40) Which of the following statements is true of corporate culture?

a) An organization’s culture, by itself, can be regarded as good.

b) Culture proves to be very weak because it cannot inform action without the need for supervision.

c) Put simply, culture is just how things are done in any organization.

d) It consists of behavioral assumptions that are considered inappropriate for organizational members.

Difficulty: Medium

Section Reference 1: Corporate Ethics

Learning Objective 1: Identify major ethical challenges managers face at each stage of the value chain.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

41) Which of the following statements is true about the first 100 years of the history of the United States?

a) Many businesses operated as corporations.

b) General partnerships were very rare.

c) Most economic activity was carried out by partnerships.

d) Individual proprietorships were very common.

Difficulty: Medium

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

42) Identify a feature of corporations.

a) They allow entities to grow the larger economy.

b) They prohibit entities from industrializing.

c) They have sole ownership.

d) They have unlimited personal liability.

Difficulty: Medium

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

43) Which of the following is a characteristic of the shareholder primacy model?

a) It was advocated by Professor Merrick Dodd.

b) It holds that shareholders have a special type of contract with a corporation.

c) It holds that no group should enjoy primacy in decision making.

d) It is based on the belief that a corporation should be run for the benefit of the entire community.

Difficulty: Medium

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

44) Identify a feature of the stakeholder model.

a) It holds that the executive team should be legally and morally obligated to work for the owners of a corporation.

b) It holds that financial capital is the most important input into making a business successful.

c) It holds that no group should enjoy primacy in decision making.

d) It was advocated by Professor Adolf Berle.

Difficulty: Medium

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

45) Which of the following is an issue pointed out by critics of the shareholder primacy school as evidence against this model?

a) The absence of a financial capital makes it hard to hire employees, buy inventory or other needed inputs, and produce products for customers to buy.

b) Managers make difficult trade-offs to satisfy one shareholder group at the expense of others.

c) Corporations that run for other stakeholder groups often cause real damage to economies, communities, and the natural environment.

d) Shareholders actually own their corporation.

Difficulty: Medium

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

46) Identify an accurate statement about agency problems.

a) They are mostly faced by sole proprietorships.

b) The managers of a corporation are also called the principals.

c) They occur when the goals of principals differ from those of agents.

d) The shareholders of a corporation act as the agents of the principals.

Difficulty: Medium

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

47) Which of the following statements is true of the aspects of ownership and control in corporations?

a) Principals and agents have different goals.

b) Managers always want a corporation managed in a way that maximizes revenue and minimizes cost.

c) Shareholders usually want to maximize their own utility.

d) Shareholders have no right to monitor the performance of the managers of a corporation.

Difficulty: Medium

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

48) Identify a feature of takeover artists.

a) They help implement shareholder strategies once they convince other investors to sell their shares.

b) They make public offers called petition offers to purchase shares of dissatisfied investors.

c) They are investors who are attracted to the high share prices of firms.

d) They believe they can manage a corporation’s assets better than the current management team.

Difficulty: Medium

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

49) What do most businesses do when the principal’s investments are difficult to recover?

a) They get sunk-cost investments in equipment or knowledge.

b) They monitor their manager-agents through the board of directors.

c) They increase the compensation and incentives of their manager-agents.

d) They make investments in blue ocean strategies.

Difficulty: Medium

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

50) Identify a way in which principals usually salvage their businesses from agency problems that destroy value.

a) They make investments in blue ocean strategies.

b) They get greenfield investments in equipment or knowledge.

c) They monitor their manager-agents through the board of directors.

d) They reduce the compensation and incentives of their manager-agents.

Difficulty: Medium

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

51) Identify a true statement about fiduciary duties.

a) A fiduciary is obligated to work for the greatest advantage for stakeholders.

b) The executives of a corporation cannot be legally bound by fiducial obligations.

c) A fiduciary is obligated to maximize profits for managers.

d) Fiduciary duties include the duty of care.

Difficulty: Medium

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

52) Identify a primary characteristic of the inside directors of corporations.

a) They comprise people who are not employed by a corporation in any other role.

b) They should ideally bring independence to the board.

c) They should bring deep knowledge and a fresh perspective.

d) They have the working knowledge of a firm’s operations and strategies.

Difficulty: Medium

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

53) Which of the following is a feature of the outside directors of a corporation?

a) They bring their skills and working knowledge of the firm’s operations and strategies to the board.

b) They do not have to worry about losing their jobs if they offer opinions that the firm’s executives might not want to hear.

c) They are usually the executives or managers of a firm.

d) They ensure that a firm’s strategy serves the financial interests of all stakeholders.

Difficulty: Medium

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

54) Which of the following statements is true about compensations and incentives?

a) Bonuses are paid when employees meet certain performance objectives.

b) Bonuses are always discretionary in nature.

c) Salary usually includes stock-based compensation.

d) Nondiscretionary compensations are given for any reason a principal desires.

Difficulty: Medium

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

55) Identify an accurate statement about corporate ethics and culture.

a) Cultures that promote ethical behavior allow people to deny the ethical dimension of their actions.

b) Culture pilots an organization by helping each individual manager decide what to do.

c) An organization’s culture, by itself, is either good or bad.

d) The way people perceive and react to the ethical challenges they face as they do their jobs is rarely influenced by culture.

Difficulty: Medium

Section Reference 1: Corporate Ethics

Learning Objective 1: Identify major ethical challenges managers face at each stage of the value chain.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

Question type: Text Entry

56) A ___ is a formal declaration of a company’s core values, business objectives, and ethical aspirations.

Difficulty: Medium

Section Reference 1: Corporate Ethics

Learning Objective 1: Identify major ethical challenges managers face at each stage of the value chain.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

57) ___ are those values that define for an individual, group, or society things that are morally right or wrong.

Difficulty: Medium

Section Reference 1: Corporate Ethics

Learning Objective 1: Identify major ethical challenges managers face at each stage of the value chain.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

Question type: Essay

58) Who is a stakeholder of a business organization?

Difficulty: Easy

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

Solution: A stakeholder is anyone who can affect or is affected by the activities of a corporation.

59) In a company, who are called agents?

Difficulty: Medium

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

Solution: Agents are individuals or groups hired to administer the property or resources of principals. The managers of a corporation are considered to be agents of the shareholders. The managers who act as the agents of the principals in operating the firm want to maximize their own utility. That may mean maximizing the profit of the corporation or it may mean engaging in behaviors that increase their income, leisure, power, status, or any other thing they may care about.

60) Define ethical behavior.

Difficulty: Easy

Section Reference 1: Corporate Ethics

Learning Objective 1: Identify major ethical challenges managers face at each stage of the value chain.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

Solution: Ethical behavior is that which promotes human freedom of expression and development.

61) Explain the difference between the shareholder primacy model and the stakeholder model.

Difficulty: Medium

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

Solution: In the 1930s, two famous law professors, Adolf Berle and Merrick Dodd, held a very public argument about the purposes of the corporation. Professor Berle believed that the corporation should be run primarily for the benefit of the shareholders while Professor Dodd wrote that the corporation should be run for the benefit of the entire community. We know Berle’s position today as the shareholder primacy model, and Dodd’s as the stakeholder model.

The shareholder primacy model is the belief that a corporation should be run, primarily or exclusively, for the benefit of its shareholders. On the other hand, the stakeholder model is the belief that a corporation should be run for the benefit of its entire stakeholder set, with no group enjoying primacy in decision making.

62) Explain with examples how the engagement of a company with its key stakeholders can affect its overall performance and competitive advantage.

Difficulty: Medium

Section Reference 1: The Purposes of the Corporation

Learning Objective 1: Discuss the purposes of a corporation, including the shareholder primacy model and the stakeholder model.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

Solution: (Students’ answers will vary.)

How a company engages with its key stakeholders and manages those relationships affects the firm’s overall performance and competitive advantage. Many of the ways stakeholders interact with the firm are predictable and not difficult to understand. Other interactions, however, are less obvious and have longer-term consequences on a firm’s performance and competitive advantage, as well as on how stakeholders benefit (or are harmed) by the business. Companies can, and should, audit their performance in relation to stakeholder groups on a regular basis.

63) Briefly describe agency problems. How can they destroy value in an organization?

Difficulty: Medium

Section Reference 1: Governance: Boards and Incentives

Learning Objective 1: Explain the role of the board of directors in governing the corporation and their duties to shareholders and other stakeholders.

Bloomcode: Comprehension

Standard 1 : AACSB || Analytic

Solution: The agency problem arises as consequence of the separation of ownership (shareholders/principals) and control (managers/agents) in the corporation. The shareholders of a corporation, also called the principals, want to maximize the return on the dollars they have put into the firm; they want the corporation managed in a way that maximizes revenue and minimizes cost, leaving the most profit.

Agency problems destroy value in two particular situations. First, when the principal’s investments are sunk and difficult to recover and, second, when their ability to monitor and supervise the actions and decisions of the agents, the managers of the corporation, is limited.

64) Describe two of the arguments used by participants of debates about ethics.

Difficulty: Easy

Section Reference 1: Corporate Ethics

Learning Objective 1: Identify major ethical challenges managers face at each stage of the value chain.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

Solution: Philosophers have debated what constitutes ethics behavior for centuries. Debates about ethics are debates about what is right and wrong, but also which behaviors lead to the good or just society. Participants in these debates employ one of these arguments in making their case:


1) A good society creates the greatest good for the greatest number of people. Goodness is measured as utility, or the presence of pleasure and the absence of pain. Utilitarianism, the name for this position, suggests that we can calculate what’s right by looking at the benefits created by the action and then subtracting out the costs. Utilitarian moral philosophy provides the foundation for economics. Milton Friedman, for example, wrote that the ethical responsibility of a business is to maximize profits for shareholders as the money they make creates the most utility.


2) The good society ensures a basic set of rights for its citizens. While utility is good, people have fundamental rights that cannot be violated or traded away and duties they cannot ignore. This ethical tradition views people as ends in themselves and argues that it is immoral to use people in any way as merely a means to an end. For example, people have a right, and companies have a moral obligation, to provide full and fair information about the potential risks of products.

(Students’ answers should include any two of the four arguments or ethical orientations.)

65) Describe how style can help a company create a climate where ethical behavior becomes the expected norm.

Difficulty: Easy

Section Reference 1: Corporate Ethics

Learning Objective 1: Identify major ethical challenges managers face at each stage of the value chain.

Bloomcode: Knowledge

Standard 1 : AACSB || Analytic

Solution: The 7 S model identified shared values and style as the core of a company’s culture. These two elements can help a company create a climate where ethical behavior becomes the expected norm. Style comes last because it might be the most important of all the 7 Ss. The tone at the top matters, maybe more than any other factor! How individual executives behave provides the most important cue for employees to follow as they try and figure out how they should act at work. Enron’s Jeff Skilling received such a long prison sentence in part because prosecutors alleged that his behavior created and drove the reckless culture of greed that led to the company’s downfall. Moral strategic managers and executives not only walk the talk and act ethically themselves, they provide ethical leadership for others to follow.