CHAPTER 02

CORPORATE GOVERNANCE
True/False
1. The board of directors has an obligation to approve all decisions that might affect the
long-run performance of the corporation.
(p.26)
Answer: T
The lowest degree of involvement for a board of directors is the catalyst level of
interaction.
Answer: F
2.

3.

(p.28)

Outside directors may be executives of other firms but are not employees of the boards corporation.
(p.29)

Answer: T
4.

Population theory states that problems arise in corporations because the agents (top management) are not
willing to bear responsibility for their decisions unless they own a substantial amount of stock in the
corporation.
(p.29)
Answer: F
5.

Agency theory suggests that executives tend to be more motivated to act in the best interests of the
corporation than their own self-interests.
Answer: T
6.

A large firm may keep the firms recently retired CEO on the board for a year after retirement as a
courtesy.
Answer: T

(p.30)

(p.31)

7.
According to the text, codetermination has been used by companies such as United Airlines.
Answer: T

(p.32)

8.
One criterion used to choose a board member is low visibility in his or her field.
Answer: F

(p.33)

9.

Executive leadership is the directing of activities toward the accomplishment of corporate objectives.

(p.35)

Answer: T
10.

Usually, the strategic planning staff is charged with supporting only top management in the strategic
planning process.
(p.37)
Answer: F
11.

The theory of vital responsibility proposes that a private corporation has responsibilities to society that
extend beyond making a profit.
(p.37)
Answer: F
12.
Archie Carroll proposes that managers in companies have only a discretionary responsibility.
Answer: F

(p.38)

13.
Discretionary responsibilities are voluntary obligations a corporation assumes.
Answer: T

(p.38)

117

14.

A study concerning social responsibility indicates that socially-responsible firms are more likely to be
welcomed into another country.
(p.39)
Answer: T
15.

Corporation stakeholders are all constituencies that are affected by the achievement of the firms
objectives.
Answer: T

(p.39)

16.
Cultural norms and values can guide ethical behavior.
Answer: T

(p.41)

17.
Ethical relativism states that morality is relative to some personal, social, and cultural standard.
Answer: F

(p.41)

18.
Kohlbergs preconventional level is characterized by a persons adherence to an internal moral code. (p.42)
Answer: F
19.
A code of ethics denotes how employees should behave on the job.
Answer: T

(p.42)

20.

The law refers to formal codes that permit or forbid certain behaviors and may or may not enforce ethics
or morality.
(p.42)
Answer: T
Multiple Choice
21.
From the perspective of the public, the primary job of the board of directors is
a.
b.
c.
d.
e.
22.

23.

to lend credence to the decisions of the executive committee.

dictated solely by legal requirements.
to act as representatives for public identification.
to closely monitor the actions of management.
insulated from legal judgments because management actually makes the decisions.

The relationship among the board of directors, top management, and shareholders is referred to as
a.
b.
c.
d.
e.

(p.26)

(p.26)

corporate synergy.
corporate management.
corporate governance.
corporate strategy.
corporate responsibility.

More than _____ of outside directors surveyed that they had been named as part of a lawsuit against the
corporation.
(p.27)
a.
b.
c.
d.
e.

40%
50%
60%
70%
80%

118

24.

The requirements of a board of directors vary significantly by country and by state; however, there is a
developing consensus as to what the major responsibilities should be. Which of the following is NOT one
of the responsibilities?
(p.27)
a.
b.
c.
d.
e.

Reviewing and approving the use of resources.

Setting corporate strategy, overall direction, mission or vision.
Controlling, monitoring, or supervising top management.
Becoming directly involved in managerial decisions.
Hiring and firing the CEO and top management.

25.

By law, a board of directors is charged to act with __________. If a director or the board as a whole sales
to act with _______ and, as result, the corporation is in some way harmed, the careless director or
directors can be held personally liable for harm done.
(p.27)
a.
codetermination.
b.
figurehead role.
c.
cumulative voting.
d.
accountability.
e.
due care.

26.

Which of the following is NOT a task of the board of directors in strategic management?
a.
b.
c.
d.
e.

27.

monitoring
evaluating and influencing
initiating and determining
initiating and evaluating
monitoring and influencing

Catalyst-level board of directors typically

a.
b.
c.
d.
e.

29.

to monitor
to implement
to influence
to initiate and determine
to evaluate

Examining proposals, giving advice, and outlining alternatives are part of the _____ role of the board of
directors.
(p.28)
a.
b.
c.
d.
e.

28.

(p.27)

(p.28)

are less involved than active participation boards.

take leading roles in establishing and modifying the company mission.
are involved in a limited degree of key decision making.
are held to a greater degree of legal responsibility.
experience more financial success than less involved boards.

According to the text, most publicly owned large corporations today tend to have boards with what degree
of involvement in the strategic management process?
(p.28)
a.
b.
c.
d.
e.

passive to minimal
minimal to nominal
rubber stamp type
nominal to active
active to catalyst

119

30.

One study conducted by Korn/Ferry International of directors of large U.S. corporations found that more
than ______ directors indicated that they were deeply involved in the strategy setting process.
(p.29)
a.
b.
c.
d.
e.

31.

When a board of directors is involved to a limited degree in the performance or review of selected key
decisions, indicators, or programs of management, there is a _____ degree of involvement.
(p.28)
a.
b.
c.
d.
e.

32.

those individuals who scan the external environment.

individuals on the board who are not employed by the board's corporation.
those individuals with public relations responsibilities.
board members who are also officers or executives employed by the corporation.
individuals who organize and coordinate politically focused activities.

outside, inside
inside, inside
inside, outside
outside, outside
none of the above

Surveys of large U.S. and Canadian corporations found outsiders make up what percentage of total board
membership?
(p.29)
a.
b.
c.
d.
e.

35.

(p.29)

Some firms perceive _____ directors as more effective _____ directors spread their time and interest too
thin to actively fulfill their responsibilities.
(p.29)
a.
b.
c.
d.
e.

34.

rubber stamp
nominal participation
active participation
minimal review
phantom

Outside directors are defined as

a.
b.
c.
d.
e.

33.

80%.
95%.
60%.
70%.
99%.

2%
30%
50%
80%
98%

The percentage of directors of small, publicly-held U.S. corporations which are outsiders is approximately
(p.29)
a.
b.
c.
d.
e.

2%.
20%.
40%.
60%.
98%.

120

36.

The theory which states that problems arise in corporations because top management no longer is willing
to bear the brunt of their decisions unless they own a substantial amount of stock in the corporation is
called
(p.29)
a.
b.
c.
d.
e.

37.

Which of the following regions is the most globalized region of the world in terms of boards of directors
with 71% of companies having one or more nonnational directors?
(p.31)
a.
b.
c.
d.
e.

38.

active or retired CEOs.

professors.
former government officials.
bankers.
stockbrokers.

An agency problem can occur when

a.
b.
c.
d.
e.

40.

Asia.
Middle East.
North American.
Pacific Rim.
Europe.

According to the text, the majority of outside directors are members of all BUT ONE of the following
groups:
(p.31)
a.
b.
c.
d.
e.

39.
36

codetermination.
agency theory.
interlocking management theory.
strategic leadership theory.
ownership theory.

(p.30)

the desires and objectives of the owners and agents conflict.

it is difficult or expensive for the owners to verify what
the agent is actually doing.
when the owners and agents have different attitudes toward
risk.
Both a and b are correct.
Both b and c are correct.

_____ theory argues that senior executives over time tend to view the corporation as an extension of
themselves.
(p.30)
a.
b.
c.
d.
e.

Population ecology
Motivation
Stewardship
Agency
Goal setting

121

41.

Board members who are not employed by the corporation, but handle the legal or insurance needs of the
firm and are thus not a true "outsider" are what kind of directors?
(p.31)
a.
b.
c.
d.
e.

42.

Board members who are most likely to face a conflict of interest are known as
a.
b.
c.
d.
e.

43.

4%
20%
37%
73%
96%

decreased from 10 to 4%.

decreased from 40 to 37%.
remained constant over time.
increased from 9 to 60%.
increased from 40 to 96%.

A survey of U.S. corporations found that _______ of boards of directors had at least one African American
member.
(p.31)
a.
b.
c.
d.
e.

46.

(p.31)

Recent surveys found that from 1973 to today the number of boards of directors of large U.S. corporations
with minority directors
(p.31)
a.
b.
c.
d.
e.

45.

(p.31)

family directors.
affiliated directors.
interlocked directors.
retired directors.
management directors.

What percentage of large U.S. corporations had boards of directors with at least one woman
member?
a.
b.
c.
d.
e.

44.

Affiliated directors
Family directors
Retired directors
Management directors
Interlocked directors

3%.
39%
12%.
9%.
60%.

The New York Stock Exchange (NYSE) requires corporations to have

a.
b.
c.
d.
e.

a majority of the board be outsiders.

cumulative voting.
at least one employee director as a representative on the board.
at least two outside directors providing stockholder representation.
an audit committee composed entirely of independent, outside members.

122

(p.29)

47.

The vast majority of inside directors are from all BUT ONE of the following:
a.
b.
c.
d.
e.

48.

49.

(p.32)

Austria
Norway
Denmark
France
Sweden
(p.32)

When both management and the board establish corporate strategic management.
The inclusion of a corporation's employees on its board.
Occurs when one or more individuals on one board also serves on a board of a second firm.
Present when all board members are also employed by the corporation.
Occurs when two corporations have directors who serve on the board of a third firm.

Under what circumstances does an INDIRECT interlocking directorate exist?

a.
b.
c.
d.
e.

(p.32)

England
France
Sweden
Japan
Germany

Under what circumstances does a DIRECT interlocking directorate exist?

a.
b.
c.
d.
e.

52.

Process by which both management and the board establish corporate strategic management.
The inclusion of a corporation's employees on its board.
Occurs when one or more individuals on one board also serve on other boards.
Present when all board members are also employed by the corporation.
When minority shareholders concentrate their votes.

The country of _____ uses worker councils to work closely with management.
a.
b.
c.
d.
e.

51.

(p.32)

Which country pioneered the use of worker participation on corporate boards?

a.
b.
c.
d.
e.

50.

lower-level operating employee.

president of the corporation.
vice-president of operational units.
chief executive officer.
vice-president of functional units.

What is codetermination?
a.
b.
c.
d.
e.

(p.32)

When both management and the board establish corporate strategic management.
The inclusion of a corporation's employees on its board.
Occurs when one or more individuals on one board also serves on a board of a second firm.
Present when all board members are also employed by the corporation.
Occurs when two corporations have directors who serve on the board of a third firm.

123

(p.32)

53.

The U.S. Clayton Act and Banking Act of 1933

a.
b.
c.
d.
e.

54.

(p.32)

promotes interlocking directorates by U.S. companies to foster better communications and

working relationships.
prohibits acts or contracts tending to create a monopoly.
prevents unfair practices in interstate commerce.
promotes racial parity on the board of directors.
prohibits interlocking directorates by U.S. companies competing in the same industry.

Which of the following is NOT descriptive of interlocking directorates?

(p.32)

a.
Interlocking directorates occur because large firms have a large impact on other corporations.
b.
Interlocking directorates are more common in small, family-owned companies.
c.
Interlocking directorates are a useful method for gaining inside information.
d.
Interlocking directorates provide information about an uncertain environment.
d.
Interlocking directorates provide objective expertise about a firm's strategy.
e.
55. Despite the regulations governing interlocking directorates, both inside and outside directors serve on _____
boards.
(p.32)
a.
b.
c.
d.
e.
56.

The function of a nominating committee is to

a.
b.
c.
d.
e.

57.

(p.33)

find board members who have compatible viewpoints with management.

find outside board members for election by the stockholders.
search for internal employees who would provide valuable insight into the working operations of
the corporation.
search for candidates who could bring prestige to the board.
find inside board members for election by the stockholders.

The percentage of large U.S. corporations using nominating committees to identify potential new directors
is approximately
(p.33)
a.
b.
c.
d.
e.

58.

2
3
4
5
6

less than 6%.

31%.
50%.
74%.
over 94%.

The average large, publicly-held U.S. corporation has around

a.
b.
c.
d.
e.

7 directors.
11 directors.
19 directors.
25 directors.
30 directors.

124

(p.33)

59.

The percentage of CEOs of U.S. Fortune 500 corporations who also serve as chairman of the board is
(p.33)
a.
b.
c.
d.
e.

60.

The percentage of CEOs of British corporations who also serve as chairman of the board is
a.
b.
c.
d.
e.

61.

willing to challenge management when necessary.

expertise on global business issues.
understands firms key technologies and processes.
available outside meetings to advise management.
willing to always agree with executive decisions.
(p.34)

the United Kingdom.

the United States.
France.
Sweden.
Germany.

According to the text, which of the following is NOT a typical standing committee of boards of directors?
(p.34)
a.
b.
c.
d.
e.

64.

less than 10%.

20%.
46%.
68%.
over 90%.

The concept of the lead director originated in

a.
b.
c.
d.
e.

63.

(p.33)

All of the following criteria reflect survey findings of the characteristics of a good director EXCEPT (p.33)
a.
b.
c.
d.
e.

62.

less than 10%.

20%.
46%.
67%.
over 90%.

audit committee
compensation committee
executive committee
nominating committee
public relations committee

One of the current trends in corporate governance which is likely to continue for the foreseeable future is
that
(p.35)
a.
b.
c.
d.
e.

boards will be increasingly looking for international experience in board members.

board members will be expected to sell off any stock they may own in the corporation.
CEOs will increasingly hold the title of Chairman of the Board.
the percentage of inside directors will increase.
the lead director will typically be the CEO.

125

65.

According to the text, the primary responsibilities of top management in strategic management include
(p.35)
a.
b.
c.
d.
e.

66.

A description of what the company is capable of becoming is referred to as

a.
b.
c.
d.
e.

67.

d.
e.

69.

(p.36)

top-down strategic planning.

bottom-up strategic planning.
horizontal strategic planning
monopolistic strategic planning.
composite strategic planning.

The theory that proposes corporations have responsibilities to society that extend beyond making a profit
is known as
(p.37)
a.
b.
c.
d.
e.

70.

(p.36)

The CEO presents a role for others to identify with and to follow.
The CEO communicates high performance standards for all employees.
The CEO demonstrates confidence in the employees' abilities to meet the expressed high
standards.
The CEO energizes the board to formulate strategy.
The CEO articulates a strategic vision for the corporation.

In turbulent environments, the best type of planning is _____.

a.
b.
c.
d.
e.

(p.35)

strategic vision.
strategic concept.
strategic mission.
strategic flexibility.
strategic familiarity.

Which of the following is NOT a key characteristic of effective executive leadership?

a.
b.
c.

68.

ensuring that day to day operations are efficient and well run.
providing executive leadership.
balancing the budget.
managing the short-term planning process.
making all important decisions.

flexible responsibility.
social responsibility.
social flexibility.
managerial responsibility.
social management.

According to a survey of nearly 90 U.S. global corporations in what percentage of the firms were
strategies first proposed in subsidiaries and then sent to headquarters for approval?
a.
b.
c.
d.
e.

10%
30%
50%
70%
90%

126

(p.36)

71.

For many large corporations the typical strategic planning staff has just fewer than how many people?
(p.37)
a.
b.
c.
d.
e.

72.

5.
10.
7.
15.
3.

Which one of the following is NOT one of the arguments against social responsibility as used by
economist Milton Friedman?
a.
b.
c.
d.
e.

(p.37)

Spending money for social responsibility is spending the stockholder's money for a general social
interest.
Businesses can actually do very little in terms of social responsibility.
Spending money on social responsibility is acting from motives other than economic and may, in
the long-run, cause harm to the very society the firm is trying to help.
There is one and only one social responsibility of business -- to use its resources and engage in
activities designed to increase its profits so long as it stays within the rules of the game.
Through taking on the burden of social costs, the organization becomes less efficient, causing
price increases or postponement of growth.

73.

Who said that the social responsibility of business is a "fundamentally subversive doctrine" and that the
one social responsibility of business is "to use its resources and engage in activities designed to increase its
profits so long as it stays with the rules of the game..."?
(p.37)
a.
Adam Smith
b.
Edward Freeman
c.
Archie Carroll
d.
William C. Norris
e.
Milton Friedman

74.

Economist Milton Friedman has argued that a business's only responsibility is to

a.
b.
c.
d.
e.

75.

maximize profits and stay within the rules of the game.

sustain its market share.
promote the welfare of society.
satisfy its employees.
satisfy its customers.

(p.37)

According to Carroll, the responsibility that management of a business organization has to produce goods
and services of value to society so that the firm may repay its creditors and stockholders is called
(p.37)
a.
legal responsibilities.
b.
ethical responsibilities.
c.
financial responsibilities.
d.
economic responsibilities.
e.
discretionary responsibilities.

127

76.

According to Carroll, the responsibility that management of a business organization assumes which are
purely voluntary obligations are
(p.38)
a.
b.
c.
d.
e.

77.

The term "social responsibility" can be viewed as a combination of an

a.
b.
c.
d.
e.

78.

e.

(p.40)

when one region expands to engulf another region.

when one community takes work away from another community.
when a powerful community takes control over a smaller community and strips the resources.
when a community divests itself of valuable resources to pay its debt at the expense of long-term
survivability.
when a community absorbs and rescues failing businesses to support the local economy.

less than 1%.

21%.
48%.
76%.
over 98%.

Some people claim that morality is relative to some personal, social, or cultural standard and that there is
no method for deciding whether one decision is better than another. This is called
(p.41)
a.
b.
c.
d.
e.

82.

95%.
5%.
50%.
75%.
25%.

The Ethics Resource Center found that the percentage of employees who had engaged in one or more
unethical and/or illegal actions during the past two years was
(p.40)
a.
b.
c.
d.
e.

81.

organization's ethical and discretionary responsibilities.

organization's legal and ethical responsibilities.
organization's economic and ethical responsibilities.
organization's financial and economic responsibilities.
organization's legal and discretionary responsibilities.

"Community cannibalism" in the Maytag example refers to

a.
b.
c.
d.

80.

(p.38)

According to a recent Harris Poll what percentage of U.S. adults believe that U.S. corporations owe
something to their workers and the communities in which they operate and that they should sometimes
sacrifice some profit for making things better for their workers and communities?
(p.39)
a.
b.
c.
d.
e.

79.

legal responsibilities.
ethical responsibilities.
financial responsibilities.
economic responsibilities.
discretionary responsibilities.

ethical relativity.
moral philosophy.
comparative ethics.
cultural imperialism.
moral relativism.

All of the following reasons provide rationale for unethical behavior EXCEPT
a.
b.

the impact of cultural norms and values.

differences in values between business people and key stakeholders.

128

(p.41)

c.
d.
e.
83.

According to Kohlberg, the first level of moral development, characterized by concern for self, is called
(p.42)
a.
b.
c.
d.
e.

84.

(p.42)

principled.
conventional.
essential.
preconventional.
fundamental.

According to Kohlberg, the third level of moral development, characterized by a person's adherence to an
internal moral code, is called
(p.42)
a.
b.
c.
d.
e.

86.

principled.
conventional.
essential.
preconventional.
fundamental.

According to Kohlberg, the second level of moral development, characterized by considerations of

society's laws and norms, is called
a.
b.
c.
d.
e.

85.

relativity with regard to morality.

agreement among stakeholders and business people about what is ethical.
difficulty of one group to understand anothers actions.

principled.
conventional.
essential.
preconventional.
fundamental.

According to Kohlberg, in what stage of moral development do the majority of people in the U.S. occupy?
(p.42)
a.
b.
c.
d.
e.

principled stage
conventional stage
essential stage
preconventional stage
fundamental stage

87.

A report by The Business Roundtable studying CEOs from 200 major U.S. corporations, found that a code
of ethics was important for two reasons. The first reason is that it clarifies company expectations of
employee conduct in various situations, and the second reason is
(p.42)
a.
to reduce the burden on the judicial system.
b.
that it makes clear that the company expects its people to recognize the ethical dimensions
in decision and actions.
c.
to promote a high level of societal norms.
d.
that it encourages individuals to strive for good citizenship and corporations to contribute
positively to society.
e.
that it minimizes the possibility of mandatory regulations.

88.

Managers who want to improve ethical behavior should take actions such as
a.
b.
c.

communicate the code of ethics in training programs.

emphasize the code of ethics in performance appraisal
systems.
follow a code of ethical behavior themselves.

129

(p.42)

d.
e.
89.

Ethics is defined as
a.
b.
c.
d.
e.

90.

formal codes that permit or forbid certain behaviors.

a general rule of conduct of personal behavior, based on religious or philosophical grounds.
consensually accepted standards of behavior for an occupation, trade, or profession.
imposing one's morality upon another.
voluntary obligations assumed by an individual or organization.
(p.42)

formal codes that permit or forbid certain behaviors.

a general rule of conduct of personal behavior, based on religious or philosophical grounds.
consensually accepted standards of behavior for an occupation, trade, or profession.
imposing one's morality upon another.
voluntary obligations assumed by an individual or organization.

Law is defined as
a.
b.
c.
d.
e.

92.

(p.42)

Morality is defined as
a.
b.
c.
d.
e.

91.

communicate the code of ethics in policies and procedures.

all of the above

(p.42)

formal codes that permit or forbid certain behaviors.

a general rule of conduct of personal behavior, based on religious or philosophical grounds.
consensually accepted standards of behavior for an occupation, trade, or profession.
imposing one's morality upon another.
voluntary obligations assumed by an individual or organization.

The approach to ethical behavior which proposes that actions and plans should be judged by their
consequences, thus producing the greatest benefit to society with the least harm or the lowest cost is called
(p.43)
a.
b.
c.
d.
e.

individual rights approach.

mercantilism approach.
utilitarian approach.
justice approach.
moral imperialism approach.

130

93.

The approach to ethical behavior which proposes that human beings have certain fundamental rights that
should be respected in all decisions, thus avoiding interfering with the rights of others who might be
affected by a particular decision or behavior is called
(p.43)
a.
b.
c.
d.
e.

94.

According to the utilitarian approach, the ability to affect the company is known as
a.
b.
c.
d.
e.

95.

(p.43)

power.
legitimacy.
urgency.
stability.
utility.

According to the utilitarian approach, legal or moral claim on company resources can stand for
a.
b.
c.
d.
e.

96.

individual rights approach.

mercantilism approach.
utilitarian approach.
justice approach.
moral imperialism approach.

(p.43)

power.
legitimacy.
urgency.
utility.
stability.

Examining the justice approach, reverse discrimination is an example of the conflict that exists between
(p.43)
a.
b.
c.
d.
e.

power and urgency.

legitimacy and urgency.
power and legitimacy.
distributive and compensatory justice.
agency and legitimacy.

97.

The approach to ethical behavior which proposes that decision makers be equitable, fair, and impartial in
the distribution of costs and benefits to individuals and groups is called
(p.43)
a.
individual rights approach.
b.
mercantilism approach.
c.
utilitarian approach.
d.
justice approach.
e.
moral imperialism approach.

98.

A problem with the utilitarian approach is

a.
b.
c.
d.
e.

(p.43)

that it assumes all countries subscribe to the same definition of "fundamental rights."
that it imposes a set of mandatory values and behaviors on all entities in society.
that it encourages selfish behavior.
that it imposes one's morality upon others and judges them by standards they may or may not
accept.
that it is difficult to recognize all the benefits and costs of any particular decision.

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99.

People who are similar on relevant dimensions such as job seniority should be treated in the same way, is
an example of
(p.43)
a.
b.
c.
d.
e.

100.

The type of justice which proposes that punishment should be determined on a proportional basis to the
"crime" is called
(p.43)
a.
b.
c.
d.
e.

101.

compensatory justice.
retributive justice.
relevant justice.
distributive justice.
punitive justice.

Issues in affirmative action such as reverse discrimination are examples of conflicts between
a.
b.
c.
d.
e.

103.

compensatory justice.
retributive justice.
relevant justice.
distributive justice.
punitive justice.

The type of justice which argues that wrongs should be compensated in proportion to the offense suffered
is called
(p.43)
a.
b.
c.
d.
e.

102.

compensatory justice.
retributive justice.
relevant justice.
distributive justice.
punitive justice.

(p.43)

compensatory and punitive justice.

retributive and distributive justice.
distributive and compensatory justice.
retributive and distributive justice.
punitive and retributive justice.

When a private speculator purchases the right to a valuable corporate brand name domain and then sells it
to the company at an exorbitant price, this practice is referred to as
(p.44)
a.
b.
c.
d.
e.

cybersquatting.
cyberstealing.
cyberpatenting.
cybercopying.
cybertampering.

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