Chapter 3—Corporate Governance

MULTIPLE CHOICE

1. How is corporate governance best defined?

a. The extent to which the content of workplace decisions is aligned with a firm's stated strategic direction
b. The formal system of oversight, accountability, and control for organizational decisions and resources
c. The philosophy that a board or CEO holds regarding accounting methods
d. The exercise of control and authority by those in mid-management positions
e. A system of decentralized mechanisms that assists a firm in meeting its goals
ANS:B PTS:1

2. As fiduciaries, members of a company's board of directors are fundamentally expected to

a. address conflicts about merging different corporate cultures.
b. resolve issues before they become reputation or legal risks.
c. reconcile differences in quality standards.
d. ensure that daily issues are addressed properly by management.
e. exercise both due diligence and due loyalty.
ANS:E PTS:1

3. On what basic precept is the shareholder model of corporate governance founded?

a. The problem created when ownership and control are not separated
b. Supply and demand found in the marketplace
c. Everyone should contribute to social welfare
d. The maximization of wealth for investors and owners
e. The customer is always right
ANS:D PTS:1

4. Which stakeholder is the primary focus of the shareholder model of corporate governance?
a. Employees
b. Suppliers
c. Customers
d. Investors
e. Community
ANS:D PTS:1

5. Which of the following best describes the stakeholder model of corporate governance?
a. The primary focus of this model is social welfare, to the exclusion of economic welfare.
b. A company has responsibilities to many stakeholders including investors, employees, suppliers,
government agencies, and the community.
c. A company's primary responsibility is to maximize the wealth of its most important stakeholder, the
owners.
d. Because corporations have many managers and resources, it is possible to equally and fully address the
needs of all stakeholders.
e. The stakeholder model is a more restrictive approach than the shareholder model approach to corporate
governance.
ANS:B PTS:1

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 6."Corporations are bound by the law, and by the rules of what you might call ordinary decency. Beyond
this however, they have no duty to pursue the collective goals of society." This statement exemplifies
which approach?
a. Stakeholder model of corporate governance
b. Ethical approach of corporate governance
c. Shareholder model of corporate governance
d. Efficiency maximization goal of the firm
e. Broader conceptualization of corporate governance
ANS:C PTS:1

7. Corporate governance requires a system of ____ similar to the distribution of power between the
executive, legislative, and judiciary branches of the U.S. government.
a. decision-making authorities
b. division of labor
c. checks and balances
d. priorities and divisions
e. goals and values
ANS:C PTS:1

8. Why was there little reason to focus on corporate governance in the late 1800s and early 1900s?
a. In most companies, the owner made the strategic decisions about the business, so little governance was
needed.
b. The stakeholders in organizations had the same views about decision making, so there was little need
for governance mechanisms.
c. There were no social, safety, or environmental problems at this time, so governance mechanisms were
unnecessary.
d. The government tightly controlled industries during this time period, thereby making a company's
attempt at governance futile.
e. Companies followed all laws, so there was little need for governance mechanisms.
ANS:A PTS:1

9. Who are the principals and agents of a corporation?

a. Employees and stockholders, respectively
b. Managers and employees, respectively
c. Owners and executives, respectively
d. Stockholders and employees, respectively
e. Customers and managers, respectively
ANS:C PTS:1

10. In response to the collapse of the U.S. financial system in late 2 008, the federal government has
become involved in corporate governance to a degree not seen since
a. the Great Depression.
b. the Sarbanes-Oxley Act.
c. the late 1800s and early 1900s.
d. the New York Stock Exchange reforms.
e. the mid 1950s.
ANS:A PTS:1

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 11. What is the primary concern of a board of directors?
a. To make decisions about how to run the day-to-day affairs of the business
b. To monitor the decisions made by managers on behalf of the company
c. To determine whether or not to pay dividends to stockholders
d. To watch out for the interests of the employees
e. To develop short-term goals for the company
ANS:B PTS:1

12. An "outside director" on a company's board of directors

a. worked for the company in the past, but is now retired or with another firm.
b. is unlikely to bring a diverse or unique perspective to board discussions and decisions.
c. can only serve on one board at a time.
d. cannot chair the board's audit or compensation committee.
e. has valuable expertise, but limited vested interest in the firm before assuming the role.
ANS:E PTS:1

13. According to reports published in Business Week and other sources, the best boards of directors
a. are not compensated.
b. rarely own stock in the company.
c. are generally more independent and more active than other boards.
d. rate high on independence but low on innovation.
e. are found in Japanese and European countries.
ANS:C PTS:1

14. Which of the following is not one of the responsibilities that will affect boards of directors in the
future?
a. The selection of board members will become increasingly formalized.
b. Boards will need to work more effectively as teams.
c. Serving on boards will require less of a commitment than in the past.
d. Annual reports and other company documents will include more nonfinancial information.
e. Boards will be responsible for developing company purpose statements that cover a range of aims and
stakeholder concerns.
ANS:C PTS:1

15. Effective shareholder activism could include all of the following activities except
a. submitting shareholder resolutions.
b. defacing company property.
c. using grassroots campaigns, such as letter writing.
d. attending annual meetings.
e. engaging in dialogue with management.
ANS:B PTS:1

16. Shareholder resolutions

a. are regulated by the Federal Trade Commission.
b. may be brought to a proxy vote by any stakeholder.
c. are the least effective type of shareholder activism.
d. can only be developed by large, institutional investors.
e. may prompt a company to change its practices.
ANS:E PTS:1

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 17.Social investing is best defined as
a. a strategy to ensure short-term return on investments.
b. the most profitable approach to investing in public companies.
c. the sole use of environmental criteria to determine the best companies in which to invest.
d. the integration of social and ethical criteria into the investment decision-making process.
e. a strategy to fund social entrepreneurs.
ANS:D PTS:1

18. When they refused to invest in, patronize, or partner with any business involved in the slave trade or
military concerns, the Quakers applied
a. investor confidence
b. social investment criteria
c. the stakeholder model
d. internal audits
e. the shareholder model
ANS:B PTS:1

19. When fundamental expectations about social responsibility are not met by publicly-traded companies,
a. the government is most likely to pursue a self-regulatory approach with these firms.
b. there is no effect on investors, customers, employees and business partners.
c. there is little that any stakeholder can do to remedy the situation.
d. stock markets perform better.
e. the confidence that investors have in corporations, mutual fund managers, market analysts, and others
will be severely tested.
ANS:EPTS:1

20. Which of the following is least likely to be a use of internal controls in an organization?
a. Ensuring compliance with laws
b. Safeguarding corporate assets and resources
c. Measuring the effects of advertising on sales
d. Allowing comparisons between actual and planned performance
e. Protecting the reliability of organizational information
ANS:C PTS:1

21. Which of the following internal control mechanisms would be the most difficult for a small company
to implement?
a. Limiting access to valuable inventory to as few employees as possible
b. Screening potential employees before hiring
c. Requiring all employees to take one week of vacation per year
d. Developing a code of conduct addressing ethical and legal issues
e. Having several employees involved with each transaction, decision, or organizational issue
ANS:E PTS:1

22. Which of the following does not describe how risk plays a role in organizations?
a. Minimizing negative situations, such as injury and fraud
b. Managing privacy issues related to new technology
c. Ensuring that no executive is paid more than 100 times the average employee
d. Creating opportunity for innovation
e. Dealing with uncertainty through quantitative models
ANS:C PTS:1

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 23. Perhaps the strongest argument against high levels of compensation for CEOs is
a. the discrepancy between the highest paid executives and the median employee wages.
b. that the job is relatively simple because most duties are delegated to other managers.
c. that the CEO has very little effect on the company's performance.
d. the high turnover of executives throughout most large corporations.
e. that the CEO is usually just a figurehead, and the board of directors makes the decisions.
ANS:A PTS:1

24. In 2007 and 2008, what happened for only the second time in U.S. history?
a. Executive compensation became a controversial topic.
b. CEOs were required to disclose their salary histories.
c. CEOs were paid only five times more than average workers.
d. Legislation that set rules for executive compensation passed.
e. Overall, CEOs took paycuts for two years in a row.
ANS:E PTS:1

25. How can a company align the interests of owners with managers through executive compensation?
a. By significantly reducing executive pay across the board
b. By linking compensation to company performance and achievement of goals
c. By setting executive compensation at a level equal to the industry average
d. By capping executive compensation at ten times that of the lowest paid employee
e. By basing salaries on seniority with the company in order to increase longevity
ANS:B PTS:1

26. What is the purpose of the Organisation for Economic Co-operation and Development's (OECD)
Corporate Governance Principles?
a. To override individual countries' practices and implement identical policies throughout the forum's
members
b. To formulate minimum standards of fairness, accountability, transparency, and responsibility in
business practice
c. To place most of the responsibility for corporate governance on the company's managers
d. To outline an optimal system of corporate governance techniques that every developed country should
strive to duplicate
e. To ensure the members of boards of directors are carefully selected to protect the interests of all
stakeholders
ANS:B PTS:1

27. Which of the following statements best describes the current trends in corporate governance?
a. Most companies are already using a shareholder orientation with formal governance.
b. Businesses are moving towards a stakeholder orientation with looser corporate governance.
c. Forces are driving businesses toward the stakeholder orientation and more formal governance.
d. Companies are turning to a shareholder orientation with a more informal corporate governance system.
e. Businesses are gravitating toward the stakeholder orientation because the costs involved are decreasing.
ANS:C PTS:1

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 28. Under the social responsibility philosophy, which of the following best describes what the
government's role in corporate governance should be?
a. Governments should dictate how businesses run their corporate governance systems to ensure equality
and fair competition.
b. Governments need to be actively engaged in affording both protection and accountability for corporate
power and decisions.
c. Governments should take a hands-off approach to regulating corporate governance and let the
corporations take care of it.
d. Governments should wait until after a crisis, such as the Asian economic crisis, before intervening with
corporate governance procedures.
e. Governments have influence on neither corporate governance nor the overall success of corporations on
a global level.
ANS:B PTS:1

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