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MGMT Chapter 12

Terms in this set (71)

Which of the following occurrences was NOT an event that facilitated HP's sordid "soap opera"?


A. Patricia Dunn, then chairman of the board, launched a covert investigation where she conducted surveillance on HP's board members, selected employees, and some journalists.

B. Mark Hurd, newly appointed CEO, oversaw large-scale layoffs and a pay cut for all remaining employees as he reorganized the company.

C. Jodie Fisher, an independent contractor, worked as a hostess at HP-sponsored events and personally ensured that Mr. Hurd spent time with the most important clients.

D. Leo Apotheker, who came to HP after being let go from SAP, proposed a new corporate strategy for HP.
B. Mark Hurd, newly appointed CEO, oversaw large-scale layoffs and a pay cut for all remaining employees as he reorganized the company.
What was Leo Apotheker's role in the downfall of HP's market value?


A. Mr. Apotheker leaked sensitive internal information to an online magazine.

B. Mr. Apotheker was involved in a sexual harassment lawsuit with Jodie Fisher, an independent contractor.

C. Mr. Apotheker appointed Meg Whitman as the interim head of HP.

D. Mr. Apotheker was instrumental in acquiring the overvalued British software company Autonomy.
D. Mr. Apotheker was instrumental in acquiring the overvalued British software company Autonomy.
Which of the following statements is true of shareholders in a public stock company?


A. They directly supervise and coordinate the manufacture of products and delivery of services.

B. They are granted a charter of incorporation by the state and legally own company stock.

C. They are the centerpiece of corporate governance.

D. They are appointed by a board of directors to oversee the company's management.
B. They are granted a charter of incorporation by the state and legally own company stock.
What does "limited liability for investors" imply in a public stock company?


A. Shareholders are liable for their invested capital and personal wealth and not for any other investments made.

B. Shareholders who provide the risk capital are liable only to the capital specifically invested.

C. Shareholders are liable for all the decisions made by the board of directors of the company.

D. Shareholders have financial but not legal responsibilities toward the public stock company.
B. Shareholders who provide the risk capital are liable only to the capital specifically invested.
Which of the following is a characteristic of a public stock company?


A. Shareholders who provide risk capital are liable for all losses incurred by the company.

B. Investor ownership cannot be transferred easily between investors.

C. Legal personality allows a firm's continuation beyond the founder or the founder's family.

D. In publicly traded companies, professional managers are the legal owners of the company.
C. Legal personality allows a firm's continuation beyond the founder or the founder's family.
What best describes transferability of investor ownership in a public stock company?


A. Investors can give out company stocks as a gift.

B. Investors are allowed to trade shares of stocks.

C. Investors are allowed to participate in strategy formulation.

D. Investors can be hired as employees.
B. Investors are allowed to trade shares of stocks.
Which of the following statements best supports the separation of ownership and control in publicly traded companies?


A. Shareholders are liable only for the capital they invest and not for their personal wealth.

B. Shareholders can freely trade the company stocks.

C. Shareholders own stocks but do not run the company.

D. Managers control the company but may also have stock ownership.
C. Shareholders own stocks but do not run the company.
According to Michael Porter, which of the following is a problem with many publicly traded companies?


A. Shareholders of publicly traded companies do not have a legitimate claim on profits.

B. Many publicly traded companies have defined value creation too narrowly in terms of financial performance.

C. There is no transferability of stock ownership in publicly traded companies.

D. The legal owners of publicly traded companies also make management decisions for the company.
B. Many publicly traded companies have defined value creation too narrowly in terms of financial performance.
What is the result of managers' pursuit of strategies that define value creation too narrowly in public stock companies?


A. It gives the managers greater control of the performance of the organization in the long term.

B. It reduces the trust of shareholders in the organization as a vehicle for value creation.

C. It helps companies increase firm profits by creating shared value.

D. It enables companies to create social value by addressing society's needs but prevents them from creating economic value for shareholders.
B. It reduces the trust of shareholders in the organization as a vehicle for value creation.
According to the perspective of shareholder capitalism, _____.


A. shareholders in public stock companies are restricted from buying shares of two competing companies

B. shareholders in public stock companies have the most legitimate claim on profits

C. shareholders in public stock companies have significant decision-making power

D. shareholders in public stock companies have unlimited financial liability
B. shareholders in public stock companies have the most legitimate claim on profits
Which of the following perspectives best supports the Shared Value creation framework?


A. Markets are more often than not defined by societal needs rather than economic needs.

B. Failing to create value for society almost always reflects on the bottom line.

C. A firm's competitive advantage depends on pitting economic and societal needs in a trade-off.

D. Externalities such as pollution, wasted energy, and costly accidents actually create internal costs.
D. Externalities such as pollution, wasted energy, and costly accidents actually create internal costs.
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.
D. The ecomagination strategy allows GE to produce "green" products while increasing revenue and competitive advantage.
If the board of directors at GE decides to pursue a stakeholder strategy, should they change the ecomagination strategy?


A. Yes, they should change the strategy because it provides benefits to the society.

B. No, they should not change the strategy because the strategy already helps them save costs while generating huge revenues.

C. No, they should not change the strategy because the change would necessitate making tough ethical decisions.

D. Yes, they should change the strategy because creating value for society is against the principles of stakeholder strategy.
B. No, they should not change the strategy because the strategy already helps them save costs while generating huge revenues.
Why does Michael Porter recommend expanding the customer base of an organization in terms of the Shared Value creation framework?


A. Doing so could yield significant business opportunities that could improve the standard of living of the poor.

B. Doing so is the best way to ensure that shareholders have the most legitimate claim on profits made by the organization.

C. Doing so could be the only way to meet stockholder expectations in a highly competitive market.

D. Doing so will help to prevent the inclusion of more nontraditional partners into internal firm value chains.
A. Doing so could yield significant business opportunities that could improve the standard of living of the poor.
Grameen Bank in Bangladesh was founded to provide microcredit to impoverished farmers who wanted to start their own entrepreneurial ventures that would help themselves climb out of poverty. This best exemplifies Michael Porter's suggestion that:


A. managers need to keep economic needs and societal needs disconnected from each other.

B. a firm should expand its internal value chain to include nontraditional partners.

C. businesses should focus on creating regional clusters such as Silicon Valley in the U.S.

D. the largest but poorest socioeconomic group can yield significant business opportunities.
D. the largest but poorest socioeconomic group can yield significant business opportunities.
Which of the following could most likely have prevented the accounting scandals of the early 2000s and the global financial crisis?


A. Adopting a narrow shareholder perspective

B. Separating economic interests and social needs

C. Practicing effective corporate governance

D. Adopting the principles of shareholder capitalism
C. Practicing effective corporate governance
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
D. The expectation that the agent will act in the principal's best interest
Which of the following is the source of the principal-agent problem in publicly traded companies?


A. The law of legal personality

B. The separation of ownership and control

C. Limited liability for investors

D. Transferability of investor ownership
B. The separation of ownership and control
The conflict in a principal-agent relationship arises when:


A. the company has more outside directors than inside directors.

B. the strategy adopted by the company's agents tries to emulate the mission statement created by the principals.

C. stockholders and agents are involved in the day-to-day operations of the company.

D. the goals of the principals and agents are not aligned with each other.
D. the goals of the principals and agents are not aligned with each other.
The informational advantage that agents possess over principals is often based on the fact that:


A. the information is extremely secure and protected from exposure to anyone outside the company.

B. public stock companies are characterized by information symmetry.

C. insiders are the first to learn about important developments before the information is released to the public.

D. agents are legally permitted to freely trade the information in exchange for benefits, unlike principals.
C. insiders are the first to learn about important developments before the information is released to the public.
Which of the following is NOT true of corporate governance in public stock companies?


A. Corporate governance seeks to benefit multiple stakeholders, not just shareholders.

B. Corporate governance provides rules for making decisions on corporate affairs.

C. Corporate governance attempts to address the principal-agent problem.

D. Corporate governance seeks to create a separation between ownership and control.
D. Corporate governance seeks to create a separation between ownership and control.
Which of the following acts in the Goldman Sachs-Galleon Group insider trading scandal is an egregious exploitation of information asymmetry?


A. Galleon Group's decision to trust Rajat Gupta's information as accurate

B. Rajaratnam receiving information regarding Warren Buffet's impending multibillion-dollar injection into Goldman Sachs

C. Warren Buffet's decision to inject a huge amount of money into Goldman Sachs based on its financial reports

D. Rajat Gupta providing information regarding Warren Buffet's impending multibillion-dollar injection into Goldman Sachs
D. Rajat Gupta providing information regarding Warren Buffet's impending multibillion-dollar injection into Goldman Sachs
Travis, the CEO of Riplon Corp., used company funds to buy a car worth $1 million and a house for $6 million in Santa Fe. This is an example of _____.


A. corporate governance

B. on-the-job consumption

C. adverse selection

D. shared value creation
B. on-the-job consumption
According to the agency theory, _____.


A. conflicts that arise in corporations should be addressed in the legal realm

B. corporations are more than a set of contracts between parties

C. companies should focus on generating profits for stockholders

D. principals and agents have interchangeable roles
A. conflicts that arise in corporations should be addressed in the legal realm
In a public stock company, senior executives, such as the CEO, face agency problems when:


A. they delegate authority of strategic business units to general managers.

B. they decide to get involved in the day-to-day operations of a company.

C. the board of directors possesses more information about the company than they do.

D. the firm designs work tasks, incentives, and employments that minimize opportunism.
A. they delegate authority of strategic business units to general managers.
The root cause of the principal-agent problem between senior executives and lower-level employees can be explained by the:


A. informational advantage of the lower-level employees.

B. higher number of lower-level employees than senior executives.

C. knowledge of employees regarding day-to-day tasks.

D. operational expertise of lower-level employees in concentrated areas of a particular field.
A. informational advantage of the lower-level employees.
Adverse selection in a public stock company occurs when:


A. information asymmetry increases the likelihood of selecting inferior alternatives.

B. a firm's work tasks, incentives, and employment contracts minimize opportunism by agents.

C. a principal is not aware of the context from which information from an agent is derived.

D. an agent manipulates information to benefit stockholders.
A. information asymmetry increases the likelihood of selecting inferior alternatives.
_____ is illustrated by a situation in which the principal cannot determine the value created by individual members of a team.


A. Moral hazard

B. Adverse selection

C. Information asymmetry

D. Shareholder capitalism
B. Adverse selection
Rajat Gupta's role in providing inside information to Galleon Group for the benefit of Galleon Group's stockholders and Rajat Gupta himself is an example of _____.


A. shareholder capitalism

B. adverse selection

C. shared value creation

D. moral hazard
D. moral hazard
Which of the following is true of the board of directors in a public stock company?


A. Votes at shareholder meetings determine whose representatives are appointed to the board of directors.

B. Because shareholders generally have uniform interests, the composition of the board is generally a unanimous decision.

C. The board of directors acts as a facilitator to convey interests of the stockholders to the management without any real authority.

D. The functions of the board of directors are limited to ensuring the hiring and firing of CEOs.
A. Votes at shareholder meetings determine whose representatives are appointed to the board of directors.
Why do shareholders of public companies need to appoint a board of directors to represent their interests?


A. Because of the separation of ownership and control

B. Because employees of a company cannot be shareholders

C. Because the board of directors itself is made up of shareholders

D. Because they want tighter control over day-to-day operations of a company
A. Because of the separation of ownership and control
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.
B. individuals who formally represent the firm's shareholders and oversee the work of executives.
Which of the following is NOT true about the members of the board of directors in a public stock company?


A. They represent the shareholders' interests.

B. They may hire and fire top management.

C. They oversee the firm's operations.

D. They are not responsible to shareholders.
D. They are not responsible to shareholders
Outside directors are more likely to watch out for the interests of shareholders of their firm because:


A. they are more likely to benefit from using inside information to trade stocks.

B. they do not have the safety of serving on the boards of other firms.

C. they are part-time employees of the firm.

D. they have more independence than inside directors.
D. they have more independence than inside directors.
Which of the following functions did HP's board of directors fail at following the unexpected departure of Mark Hurd?


A. Providing guidance to the CEO in the selection and compensation of other executives

B. Evaluating and compensating the CEO

C. Overseeing the company's CEO succession plan

D. Appointing a new CEO
C. Overseeing the company's CEO succession plan
Which of the following proves that GE's board of directors is significantly independent?


A. 26 percent of the board members at GE are female.

B. The CEO of GE is also the chairman of the board.

C. 16 of the 17 board directors are from outside the organization.

D. GE's board has five committees, each with its own chair.
C. 16 of the 17 board directors are from outside the organization.
Which of the following best defines duality in a board of directors?


A. A person holds both the role of CEO and chairperson of the board.

B. A person holds both the role of inside director and outside director of the board.

C. A person holds both the role of director and shareholder of the company.

D. A person holds the role of CEO on the boards of two companies.
A. A person holds both the role of CEO and chairperson of the board.
GE's board has only one inside director, Jeffrey Immelt, GE's CEO, who also acts as chairman of the board. This is known as duality. Which of the following statements represents the best argument for this duality in GE?


A. The CEO is likely to be more responsible because he is setting his own performance targets.

B. The CEO might be able to influence the board through setting the meeting agendas.

C. The CEO possesses invaluable inside information that can help chair the board effectively.

D. The CEO will suggest board appointees who are friendly toward him or her.
C. The CEO possesses invaluable inside information that can help chair the board effectively.
Which of the following facts proves that GE's board is fairly diverse compared to other Fortune 500 companies?


A. GE's board is composed of 94 percent outside directors, compared to less than 70 percent for the others.

B. GE's board is chaired by its CEO while other companies have outside directors.

C. GE's board is composed of 28 percent women, compared to less than 16 percent for the others.

D. GE's board has five committees, each with its own chair, compared with less than three for the others.
C. GE's board is composed of 28 percent women, compared to less than 16 percent for the others.
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
C. To align incentives between shareholders and management
Which of the following is a major issue at the forefront of CEO compensation in recent years?


A. A comparison of the performance of the organization before and after the CEO's tenure

B. The performance of the CEO as an employee versus the performance as a board member

C. The absolute size of the CEO pay package compared with the pay of the average employee

D. A comparison of the compensation of senior management hired during and before the CEO's tenure
C. The absolute size of the CEO pay package compared with the pay of the average employee
John Hammergren, the CEO of McKesson, received an annual compensation of $50 million. The compensation was closely tied to the performance of McKesson's stock, which appreciated considerably during his tenure. This situation best exemplifies _____.


A. the strong relationship between executive compensation and company performance

B. the public's perception of a company's stock value based on executive compensation figures

C. the avoidance of control mechanisms to guide performance

D. the inversely proportional relationship between CEO compensation and the pay of the average employee
A. the strong relationship between executive compensation and company performance
What are poison pills?


A. They are used by shareholders to prevent the founder of a company from taking the company private through a leveraged buyout.

B. They are unspecified conditions in the contract between stakeholders in an organization.

C. They are used by companies in a bid to perform a hostile takeover of competing firms.

D. They are defensive provisions that kick in should a buyer reach a certain level of share ownership.
D. They are defensive provisions that kick in should a buyer reach a certain level of share ownership.
Poison pills have become rare because:


A. leveraged buyouts can effectively skirt the measures put in place by poison pills.

B. the market for corporate control is dead.

C. federal laws prevent hostile takeovers.

D. they retard an effective function of equity markets.
D. they retard an effective function of equity markets.
Which of the following is true of business ethics?


A. Certain notions such as fairness, honesty, and reciprocity are universal norms.

B. Business ethics is an agreed-upon code of conduct in business, based on laws.

C. The perception of what is ethical and what is not is similar across different cultures.

D. Business ethics needs to be codified into law in order to be followed.
A. Certain notions such as fairness, honesty, and reciprocity are universal norms.
What helps notions such as fairness, honesty, and reciprocity to be codified into law?


A. The notions are synonymous with law.

B. The notions differ to some degree in different cultures around the globe.

C. The notions are universal norms.

D. The notions are characteristics inherited by each person irrespective of the culture.
C. The notions are universal norms.
Ethics is:


A. not synonymous with law.

B. impossible to codify into law.

C. always universal and cannot differ between cultures.

D. the minimum acceptable standard in business practice.
A. not synonymous with law.
Which of the following is true of the codes of conduct of an organization?


A. They detail how the organization expects an employee to behave and to represent the company in business dealings.

B. They are a reiteration of the laws pertaining to business dealings in a corporate environment.

C. They are a guide to determine what is lawful and what is unlawful.

D. They help the board of directors and the CEO implement shareholder capitalism.
A. They detail how the organization expects an employee to behave and to represent the company in business dealings.
Which of the following best supports the fact that Goldman Sachs was unethical in the Abacus deal?


A. It was given a "triple A" rating for Abacus.

B. It made no effort to ascertain the stability of the real estate market.

C. It knew that Paulson had bundled high-risk mortgages into the collateralized debt obligation.

D. It lost $100 million in the Abacus fiasco.
C. It knew that Paulson had bundled high-risk mortgages into the collateralized debt obligation.
One of the ways to foster ethical behavior in employees is to:


A. avoid codifying organizational culture.

B. create a control system that encourages desired values.

C. view clients as counter parties to transactions.

D. align the vision statement of the organization with its informal culture.
B. create a control system that encourages desired values.
Which of the following is an implication for the strategist in the context of corporate governance and a company's success?


A. Very few and specific 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 less strong effect on employee behavior than words.

D. A firm that restricts its responsiveness to stockholders (and no other stakeholders) and keeps them committed to its vision will be successful.
B. Effective corporate governance and solid business ethics are critical to gaining and sustaining competitive advantage.
Jamiro Inc. is a public stock company. Which of the following statements about the company best illustrates the fact that its investors have limited liability?


A. Employees of Jamiro are legally permitted to invest their capital in the company's stock.

B. Employees of Jamiro are also the owners of the company.

C. Shareholders of Jamiro are responsible to the company only for the capital they have invested.

D. Shareholders of Jamiro are not permitted to trade their company stock at the New York Stock Exchange (NYSE).
C. Shareholders of Jamiro are responsible to the company only for the capital they have invested.
Roman owns shares in a company called Copnay Telecom Inc. The company's financial performance has been declining over the past few months, and the value of its stock has been decreasing. Roman wants to proactively cut his losses and therefore sells his shares. Jeremy, a trading enthusiast, buys shares in Copnay Telecom because he believes that the share prices cannot go anywhere but up. Which of the following characteristics of a public stock company does this scenario best exemplify?


A. Separation of legal ownership and management control

B. Legal personality

C. Limited liability for investors

D. Transferability of investor ownership
D. Transferability of investor ownership
Hoptin Inc. is a public stock company. Which of the following best exemplifies the legal personality of the company?


A. Rosa can legally sell shares of Hoptin in the stock market.

B. John is a shareholder of Hoptin but does not have any managerial duties.

C. Kevin, an employee at Hoptin, is not responsible for any losses that Hoptin incurs.

D. Jessi Hoptin, the company's founder, died a few years ago, yet the company is doing well.
D. Jessi Hoptin, the company's founder, died a few years ago, yet the company is doing well.
Mario founded Tapoz Communications Inc. in 1993. Ten years later, the company went public. Despite Mario's death in 2005, the company reported a 75 percent increase in revenue in 2006. Which of the following characteristics of a publicly traded company does this scenario best exemplify?


A. Transferability of investor ownership

B. Legal personality

C. Limited liability for investors

D. Separation of legal ownership and management control
B. Legal personality
Rehman is a firm believer in Milton Friedman's view of a firm's social obligations. With which of the following statements is Rehman most likely to agree?


A. Businesses can use their resources to create profit as long as they do so within the rules of the game.

B. Firms should not go beyond their economic responsibility to increase profits.

C. Firms should define value creation more narrowly in terms of financial performance.

D. Businesses should engage in open and free competition without deception or fraud, only as long as their competitors do so.
A. Businesses can use their resources to create profit as long as they do so within the rules of the game.
Leila is a graduate student pursuing a course in international business. Presented with the case of HP's "soap opera," Leila wonders whether it was the right decision to ask the CEO of HP, Mark Hurd, to step down after he was accused of sexual harassment. Having a strong inclination toward Michael Porter's idea of value creation, Leila is most likely to conclude that:


A. HP was wrong in asking Mark to step down because it did not consider the profit dip that would affect its shareholders.

B. HP was right in asking Mark to step down because it has a greater obligation toward society.

C. HP was wrong in asking Mark Hurd to step down because he was responsible for an almost 90 percent appreciation of the company's stock.

D. HP was right in asking Mark Hurd to step down because agents, unlike principals, are disposable.
B. HP was right in asking Mark to step down because it has a greater obligation toward society.
Which of the following real-world events would act as the most likely deterrent against adopting a purely stakeholder strategy approach to business?


A. The nonsustainable debt levels incurred by sovereign governments to fund social programs

B. The financial crisis in Europe brought about by money lenders seeking to make quick money

C. The collapse of the economy in the U.S. brought about by the housing crisis

D. The rise of GDP in countries that do not believe in Milton Friedman's philosophy
A. The nonsustainable debt levels incurred by sovereign governments to fund social programs
Clare, the CEO of Femica Inc., reports to the board of directors appointed by the shareholders of Femica. Based on shareholder suggestions, the board ties Clare's compensation to the performance of Femica. Due to this pressure, Clare begins devoting extra time to projects and undertakes other activities to ensure that she has job security and that she receives adequate compensation. This conflict between Clare's interests and the board's interests best illustrates a(n) _____.


A. shareholder capitalism scenario

B. inside director-outside director conflict

C. fiduciary responsibility oversight

D. principal-agent problem
D. principal-agent problem
Saul is a manager at Holden Apparels Inc. and is friends with the company's CEO. This privilege gives Saul the information that Holden Apparels is in the midst of talks to take over a leading rival. Saul buys stocks of Holden with the expectation that its stocks will appreciate. But the deal falls through and the stocks of Holden depreciate in the following months. Are Saul's actions unethical? Why?


A. Yes, because it is unethical to trade stocks based on insider information irrespective of the final outcome.

B. Yes, because it is illegal and unethical for Saul to possess any kind of insider information.

C. No, because Saul did not ask the CEO to disclose such information to him.

D. No, because Saul did not make any profits from trading stocks using this information.
A. Yes, because it is unethical to trade stocks based on insider information irrespective of the final outcome.
Which of the following real-world scenarios best exemplifies information asymmetry in a public stock company?


A. Based on a tipoff by a Goldman Sachs employee, the Galleon Group was able to sell its holdings in Goldman Sachs' stocks prior to the announcement.

B. GE knew that it could create a profitable venture out of producing green products, so it rolled out the ecomagination strategy.

C. Mark Hurd, CEO of HP, was unaware of the sexual harassment allegations, and the board's demand for him to resign caught him by surprise.

D. Goldman Sachs was party to the Abacus deal despite knowing its shortcomings.
A. Based on a tipoff by a Goldman Sachs employee, the Galleon Group was able to sell its holdings in Goldman Sachs' stocks prior to the announcement.
Neville and Andre are customer care employees at JPN Care. In between calls, Neville and Andre spend time on Facebook and YouTube. The relaxed guidelines at JPN allow them to do that. However, sometimes, they knowingly avoid answering calls or keep customers on hold, while they check their social networking accounts. Such behavior:


A. is neither unlawful nor unethical; hence, Neville and Andre cannot be reprimanded.

B. typically exemplifies the agency problem of adverse selection.

C. goes against the principles of shareholder capitalism.

D. can be stopped by implementing performance incentives and strict control mechanisms.
D. can be stopped by implementing performance incentives and strict control mechanisms.
Johan is a recent graduate who states that he has interned at a major accounting firm so that his value as a candidate for employment increases. A startup recruits Johan based on his stated credentials without verifying them. Two days into the job, Johan's team lead realizes that Johan does not know much of what he claimed to know during the interview. This scenario best exemplifies _____.


A. moral hazard

B. adverse selection

C. shared value creation

D. corporate governance
B. adverse selection
At Opnic Corp., a cross-functional team is formed to work on a project for a new client. The team consists of Darius and four other members. At most of the team's presentations to senior management, Darius takes the lead and discusses project specifics with the management, while others chip in with additional information. At the completion of the project, Darius is recommended for promotion, while the other team members receive little recognition for their hard work. The reality is that Darius did very little actual work but spent some time compiling the project report based on different documents submitted by the others. This scenario at Opnic Corp. is a typical consequence of _____.


A. moral hazard

B. adverse selection

C. shared value creation

D. corporate governance
B. adverse selection
Hashim is a board member at Kluster Motors Inc. He is also a senior executive of the firm. On the other hand, the board is chaired by Compton Smith, the CEO of Jensen Electronics. According to this scenario, Hashim _____.


A. cannot serve on the board of any other organization

B. is more likely than Compton to take care of stockholder interests

C. is an inside director of Kluster Motors

D. can use information from board meetings to trade stocks of Kluster Motors
C. is an inside director of Kluster Motors
Serena is the CEO of Pedalo Inc., a publicly traded company. The shareholders want Serena on the board of directors despite her recent appointment as the CEO. This decision of the shareholders is most likely because Serena:


A. is a board member of a major client.

B. is more likely than other board members to take care of the stockholders.

C. is also the CEO of other companies.

D. is likely to provide the board with valuable inside information.
D. is likely to provide the board with valuable inside information.
Frank is a board member at Lofloy Greens Inc., a publicly traded company. In addition to his duties on the board, Frank is also a full-time employee as a senior manager at Spinson Locomotives Inc. Which of the following is most likely to be true of Frank?


A. Frank is a part-time employee at Lofloy Greens.

B. Frank cannot serve as a director on Spinson Locomotives' board.

C. Frank is an outside director on Lofloy's board of directors.

D. Frank is a stockholder of Lofloy Greens.
C. Frank is an outside director on Lofloy's board of directors.
Postrupe Inc., a publicly traded company, has ten members on its board. Of the ten members, six members are employees of the company and includes the CEO, who also chairs the board. The board has been failing in its responsibilities toward the shareholders who now want a new board. Assuming that the total number of board members remains constant, how many outside directors should the shareholders appoint to Postrupe's board to achieve board independence?


A. 1

B. 3

C. 5

D. 7
D. 7
Which of the following scenarios best exemplifies a leveraged buyout of a telecommunications firm, Telbok Inc.?


A. The owner of another company buys all the outstanding shares of Telbok.

B. A private equity firm, Rainbow Inc., buys a large amount of shares of Telbok.

C. Telbok sells all its shares and declares bankruptcy.

D. Telbok buys back a large amount of its own shares from the stock market.
A. The owner of another company buys all the outstanding shares of Telbok.
Ramadin is the CEO of Brownback Consulting Inc. Ramadin's efforts to persuade the board of directors to pursue a new business strategy fail. He borrows money from different sources and purchases all the outstanding shares of Brownback Consulting. What does this scenario best exemplify?


A. Buy back

B. Merger

C. Leveraged buyout

D. Initial public offering
C. Leveraged buyout
A bank, YPC, offers a customer a personal loan. In which of the following circumstances will this decision most likely be considered unethical?


A. The bank knows that the customer will be unable to pay the loan if the interest rate rises.

B. The bank is not aware of the investments made by the customer.

C. The bank has the financial statements of the customer, but it is not aware of each source of income.

D. The bank is depending on the customer to pay back the loan before term completion.
A. The bank knows that the customer will be unable to pay the loan if the interest rate rises.
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