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Linda owns and runs her own firm. She also serves on the boards of several companies. Although she does not work for these companies, she attends board meetings, analyzes information, and tries to act in the best interests of their shareholders. Linda is an example of an outside director.

A) True
B) False

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How do principal-agent problems cascade down the hierarchy in an organization? Describe an example of principal-agent problems. The example can be from your reading in this class, your reading outside of class, or your own experience.

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Student examples will vary. A sample ans...

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Megan is a graduate student pursuing a course in business. Presented with the case of a company's unethical behavior, Megan wonders if the company's board of directors should ask the CEO to step down. Having a strong belief in Michael Porter's idea of value creation, Megan is most likely to conclude that company's board of directors


A) should not ask the CEO to step down because doing so would cause a profit dip that would affect its shareholders.
B) should ask the CEO to step down because it has a greater obligation toward society.
C) should not ask the CEO to step down because he was responsible for an almost 90 percent appreciation of the company's stock.
D) should ask the CEO to step down because agents, unlike principals, are disposable.

E) B) and D)
F) B) and C)

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Landon is a senior manager for the firm Anderssen Inc. Because of his experience, he has been appointed to the board of EEC Inc., even though he doesn't work for this firm. He also serves on the boards of several other companies. Landon is a(n) ________ for Anderssen and a(n) ________ for EEC.


A) CEO; COO
B) COO; CEO
C) outside director; inside director
D) inside director; outside director

E) None of the above
F) A) and B)

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Which of the following best explains why a board of directors may grant stock options as part of a compensation package?


A) to reduce the transferability of stocks between stockholders
B) to bring about a separation of CEO/chair duality
C) to align incentives between shareholders and management
D) to change the liability of shareholders from limited to unlimited

E) C) and D)
F) A) and D)

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Shareholders of public companies need to appoint a board of directors to represent their interests because


A) of the separation of ownership and control.
B) employees of a company cannot be shareholders.
C) the board of directors itself is made up of shareholders.
D) the shareholders want tighter control over day-to-day operations of a company.

E) A) and D)
F) None of the above

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Describe moral hazard with an example.

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Student examples will vary. A sample ans...

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The board of directors of a public stock company consists of


A) managers appointed by the owners of a company to run its day-to-day operations.
B) individuals who formally represent the firm's shareholders and oversee the work of executives.
C) the legal owners of a publicly traded company that was purchased in a leveraged buyout.
D) employees of a company who belong to the senior management and directly report to the CEO of the firm.

E) None of the above
F) All of the above

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Corporate codes of conduct go beyond what the law requires, imposing higher standards of honesty and fairness.

A) True
B) False

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Which of the following statements best supports the view that GE's Ecomagination strategy is in line with the shared value creation framework?


A) The Ecomagination strategy is the brainchild of the founder of the company.
B) The Ecomagination strategy helps GE spend more on research and development than other similar companies.
C) The Ecomagination strategy generated $3 billion in revenues for GE during 2012.
D) The Ecomagination strategy allows GE to produce "green" products while increasing revenue and competitive advantage.

E) All of the above
F) C) and D)

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Discuss the implications for the strategist in the context of corporate governance and sustained competitive advantage.

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An important implication for the strateg...

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What is the connection between Rajat Gupta and insider trading?

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Rajat Gupta, a former McKinsey chief exe...

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Elvira is the CEO of a firm. She has an opportunity to increase the competitive advantage of her company but is not sure if accepting the opportunity is ethical. Which of the following questions would help her decide if accepting the opportunity is ethical?


A) What are the chances that her decision to accept the opportunity will be made public?
B) How much profit would be made if she decided to accept the opportunity?
C) How would the media report her decision to accept the opportunity if it were to become public?
D) How long lasting would the competitive advantage be if she decided to accept the opportunity?

E) C) and D)
F) A) and D)

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In public stock companies, which of the following expectations of principals is most likely to lead to principal-agent problems?


A) the expectation that the agent will follow the country's laws and regulations
B) the expectation that the agent will go above and beyond the call of duty
C) the expectation that the agent will reconnect economic and social needs
D) the expectation that the agent will act in the principal's best interest

E) B) and D)
F) A) and C)

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Which of the following is an implication for the strategist in the context of corporate governance and a company's success?


A) Very few corporate-governance mechanisms can be effective in addressing the principal-agent problem.
B) Effective corporate governance and solid business ethics are critical to gaining and sustaining competitive advantage.
C) Leading by ethical example often has a lesser effect on employee behavior than words do.
D) A firm that restricts its responsiveness to stockholders (and no other stakeholders) and keeps them committed to its vision will be successful.

E) B) and D)
F) A) and C)

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According to the perspective of shareholder capitalism, shareholders in public stock companies


A) are restricted from buying shares of two competing companies.
B) have the most legitimate claim on profits.
C) have significant decision-making power.
D) have unlimited financial liability.

E) None of the above
F) B) and C)

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Delores recently became a board member of a firm that has a history of reckless actions by senior employees. Which task would be appropriate for Delores to undertake to help safeguard the company's financial health?


A) Request and review a copy of the firm's risk assessment plan, if such a plan exists.
B) Take part in the annual reviews of employees in the financial department.
C) Draft and circulate a statement that the firm's board members serve at the pleasure of the CEO.
D) Determine how to postpone or evade the firm's compliance with local, regional, and national regulations.

E) A) and B)
F) None of the above

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Because of poor management, the stock price of Orange Dolphin Inc. falls and many investors sell their shares. Soon Orange Dolphin becomes the target of a hostile takeover, during which Hans buys enough shares to exert control over the firm. In this scenario, Hans performs the role of a(n)


A) inside director.
B) outside director.
C) corporate raider.
D) corporate consultant.

E) B) and D)
F) None of the above

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Discuss the agency problem of adverse selection.

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Adverse selection occurs when informatio...

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A company scientist at a biotechnology company decides to work on his own research project, hoping to eventually start his own firm, rather than on the project he was assigned. However, the company's stockholders are unaware of this situation. This is an example of a(n) ________ in the context of a principal-agent problem.


A) adverse selection
B) stakeholder strategy
C) moral hazard
D) shared value creation

E) All of the above
F) C) and D)

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