Question 1

Poison pills have become rare because

Accepted Answer

To avoid being taken over against their consent, some firms put in place poison pills. With the rise of actively involved institutional investors, poison pills have become rare because they retard an effective function of equity markets.

Question 2

Kaito is the CEO of Henson and Fukui Consulting Inc.Kaito'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 Henson and Fukui Consulting.What does this scenario best exemplify?

Accepted Answer

This scenario best exemplifies a leveraged buyout. In a leveraged buyout (LBO), a single investor or group of investors buys, with the help of borrowed money (leveraged against the company's assets), the outstanding shares of a publicly traded company in order to take it private.

Question 3

All public companies listed on the U.S.stock exchanges must file a number of financial statements with the

Accepted Answer

All public companies listed on the U.S. stock exchanges must file a number of financial statements with the Securities and Exchange Commission (SEC), a federal regulatory agency whose task it is to oversee stock trading and enforce federal securities laws.

Question 4

What are poison pills?

Accepted Answer

To avoid being taken over against their consent, some firms put in place poison pills. These are defensive provisions that kick in should a buyer reach a certain level of share ownership without top management approval.

Question 5

The Securities and Exchange Commission (SEC)makes all financial reports filed by public companies available electronically via the _____ database.

Accepted Answer

As part of its disclosure policy, the SEC makes all financial reports filed by public companies available electronically via the EDGAR database. This database contains more than 7 million financial statements, going back several years.

Question 6

Which of the following do not serve as additional external-governance mechanisms?

Accepted Answer

"Auditors, government regulators, and industry analysts serve as additional external-governance mechanisms." All public companies listed on the U.S. stock exchanges must file a number of financial statements with the Securities and Exchange Commission (SEC), a federal regulatory agency whose task it is to oversee stock trading and enforce federal securities laws.

Question 7

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?

Accepted Answer

As mentioned in Strategy Highlight 12.1, arguments can be made both for and against splitting the roles of CEO and chairman of the board. On the one hand, the CEO has invaluable inside information that can help in chairing the board effectively. On the other hand, the chairperson may influence the board unduly through setting the meeting agendas or suggesting board appointees who are friendly toward the CEO.

Question 8

Outside directors are more likely to watch out for the interests of shareholders of their firm because

Accepted Answer

Outside directors frequently are senior executives from other firms or full-time professionals, who are appointed to a board and who serve on several boards simultaneously. Given their independence, they are more likely to watch out for the interests of shareholders.

Question 9

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

Accepted Answer

This situation best exemplifies the strong relationship between executive compensation and company performance. In some instances, the relationship between executive pay and firm performance is strong; in others it is nonexistent or even negative.

Question 10

Which of the following is a major issue at the forefront of CEO compensation in recent years?

Accepted Answer

Executive compensation-CEO pay, in particular-has attracted significant attention in recent years. Two issues are at the forefront: the absolute size of the CEO pay package compared with the pay of the average employee and the relationship between firm performance and CEO pay.

Question 11

Which of the following facts proves that GE's board is fairly diverse compared to other Fortune 500 companies?

Accepted Answer

As mentioned in Strategy Highlight 12.1, in general, women and minorities remain underrepresented on boards of directors across the U.S. and throughout most of the world. GE's board is actually fairly diverse when compared with other Fortune 500 companies, which averaged less than 16 percent women on their boards (versus 28 percent for GE).

Question 12

De Bruyne 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 De Bruyne's board to achieve board independence?

Accepted Answer

The stakeholders should appoint at least 7 outside directors for optimal functioning of the board. As mentioned in Strategy Highlight 12.1, to achieve board independence, experts in corporate governance recommend that two thirds of its directors be outsiders.

Question 13

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

Accepted Answer

The board of directors determines executive compensation packages. To align incentives between shareholders and management, the board may grant stock options as part of the compensation package.

Question 14

Which of the following best defines duality in a board of directors?

Accepted Answer

As mentioned in Strategy Highlight 12.1, in roughly one half of U.S. public firms, the CEO of the company also serves as chair of the board of directors. This practice of duality-holding both the role of CEO and chairperson of the board-has been declining somewhat in recent years.

Question 15

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

Accepted Answer

The scenario that best exemplifies a leveraged buyout of Telbok Inc. is that the owner of another company buys all outstanding shares of Telbok. In a leveraged buyout (LBO), a single investor or group of investors buys, with the help of borrowed money (leveraged against the company's assets), the outstanding shares of a publicly traded company in order to take it private.

Question 16

Which of the following proves that GE's board of directors is significantly independent?

Accepted Answer

As mentioned in Strategy Highlight 12.1, at GE, 16 of the 17 board members (94 percent) are independent outside directors. To achieve board independence, experts in corporate governance recommend that two thirds of its directors be outsiders. GE's board has only one inside director, Jeffrey Immelt, GE's CEO, who also acts as chairman of the board.

Question 17

A compensatory governance mechanism that allows executives to buy a company's stock at a predetermined price sometime in the future is called a(n)

Accepted Answer

Stock options are the most commonly used compensation means. This incentive mechanism gives the recipient the right to buy a company's stock at a predetermined price sometime in the future.

Question 18

What is a unicorn?

Accepted Answer

Private start-up companies valued at a billion dollars or more are called unicorns because they are as rare.

Question 19

Which of the following is an important internal corporate-governance mechanism?

Accepted Answer

Whereas the board of directors and executive compensation are internal corporate-governance mechanisms, the market for corporate control is an important external corporate-governance mechanism.

Question 20

Which of the following is an important external corporate-governance mechanism?

Accepted Answer