Week 6

Question 1

What is corporate governance?

Answer 1

Set of mechanisms used to manage the relationship between stakeholders and to determine and control the strategic directions and performance of organizations.

Concerned with identifying ways to ensure that strategic decisions are made effectively

Question 2

What are two critical issues family-controlled firms face in corporate governance?

Answer 2

THey may not have access to all of the skills needed to effectively manage the firm and maximize its returns for the family

As they grow, they may need to seek outside capital and thus give up some of the ownership

Question 3

What’s an agency relationship?

Answer 3

An agency relationship exists when one or more people hire another person or people as decision-making specialists to perform a service.

Question 4

Why can the separation between ownership and managerial control be problematic?

Answer 4

Problems can surface because the principal and the agent have different interests and goals, or because shareholders lack direct control of large publicly traded corporations.

Sep. of ownership and control potentially allows divergent interests to surface, which can lead to managerial opportunism

Question 5

Shareholders (firm owners) _____ managers and _____ an Agency relationship

Answer 5

Hire; create

Question 6

Whats Managerial opportunism

Answer 6

Managerial opportunism is the seeking of self-interest with guile. Opportunism is both an attitude, and a set of behaviors

Question 7

Product diversification can result in two benefits to managers that shareholders do not enjoy

Answer 7

1. Diversification usually increases the size of a firm, and size is positively related to executive compensation
2. Product diversification and the resulting diversification of the firms portfolio of businesses can reduce top executives employment risk.

Question 8

Define agency costs

Answer 8

Agency costs are the sum of incentive costs, monitoring costs, enforcement costs, and individual financial losses incurred by the principals because governance mechanisms cannot guarantee total compliance by the agent.

Question 9

If a firm is diversified, agency costs _____ because it is more difficult to monitor what is going on inside the firm.

Answer 9

Increase

Question 10

Define Ownership concentration

Answer 10

Both the number of large-block shareholders and the total percentage of shares they own define ownership concentration.

Question 11

How much percent to Large-block shareholders typically own of a corporations issued shares?

Answer 11

5%

Question 12

Define Institutional owners

Answer 12

Institutional owners are financial institutions such as stock mutual funds and pension funds that control large-block shareholder positions.

Question 13

Define ‘board of directors’

Answer 13

The board of directors is a group of elected individuals whose primary responsibility is to act in the ownrs’ best interests by formally monitoring and controlling the corporations top-level managers.

Question 14

Board members can be classified into one of three groups. Name them.

Answer 14

1. Insiders: active top level managers in the corporation.
2. Related outsiders: have some relationship with the firm that may create questions about their independence, but are not involved with the corporations day-to-day activities.
3. Outsiders: Provide independent counsel. Individuals who are independent of the firm in terms of day-to-day operations and other relationships

Question 15

Define executive compensation

Answer 15

Executive compensation is a governance mechanism that seeks to align the interests of managers and owners through salaries, bonuses, and long-term incentive compensation, such as stock awards and options.

Question 16

What does the use of a long-term incentive plan prevent?

Answer 16

Prevents major stockholders from pressing for changes because they assume that the long-term incentives will ensure that top executives will act in shareholders best interests.

Question 17

Why is executive compensation complicated?

Answer 17

1. The strategic decisions made by top-level managers are complex and non-routine
2. The decision often affects a firms financial outcomes over an extended period
3. Several factors affect a firms performance like unpredictable economic, social, or legal changes.

Question 18

Explain the market for corporate control

Answer 18

The market for corporate control is an external governance mechanism that becomes active when a firm’s internal controls fail. The market for corporate control is often viewed as a “court of last resort’.

Question 19

Define strategic leadership

Answer 19

Strategic leadership is the ability to anticipate, envision, maintain flexibility and empower others to create strategic change as necessary.

Question 20

What are the 3 primary factors that determine the amount of decision-making discretion help by a manager?

Answer 20

1. External environment sources
2. characteristics of the organization
3. characteristics of the manager

Question 21

Whats the ‘top management team’?

Answer 21

The top management team is composed of the key individuals who are responsible for selecting and implementing the firm’s strategies.

Question 22

What’s a heterogeneous top management team?

Answer 22

A heterogeneous top management team is composed of individuals with different functional backgrounds, experiences, and education.

Question 23

Organizations select managers and strategic leaders from two types of managerial labor markets:

Answer 23

• An internal managerial labor market consists of a firm’s opportunities for managerial positions and the qualified employees within that firm.
• An external managerial labor market is the collection of managerial career opportunities and the qualified people who are external to the organization in which the opportunities exist

Question 24

Why might a firm want to select an outsider as its new CEO?

Answer 24

Long tenure with a firm seems to reduce the number of innovative ideas top executives can develop to cope with conditions facing their firm.

Question 25

What does determining the strategic direction involve in the strategic leadership action?

Answer 25

Specifying the image and character the firm seeks to develop over time.

Two parts:

a Core ideology; an envisioned future

Question 26

What does effectively managing the firms resource portfolio involve in the strategic leadership action?

Answer 26

The firm’s resources are categorized as financial capital, human capital, social capital, and organizational capital.

• Exploiting and maintaining core competencies
• Developing human and social capital.

Question 27

Define Social capital

Answer 27

Social capital involves relationships inside and outside the firm that help the firm accomplish tasks and create value for customers and shareholders.

Question 27

Five dimensions characterize a firm’s entrepreneurial mindset. Name those 5 dimensions:

Answer 27

• Autonomy
• Innovativeness
• Risk-taking
• Proactiveness
• Competitive aggressiveness

Question 27

Strategic leaders can take several actions to develop an ethical organizational culture (6 in total). Name them.

Answer 27

1. Establishing and communicating specific goals to describe the firm’s ethical standards
2. continuously revising and updating the code of conduct, based on inputs from people throughout the firm and from other stakeholders
3. disseminating the code of conduct to all stakeholders to inform them of the firms ethical standards and practices
4. Developing and implementing methods and procedures to use in achieving the firms ethical standards
5. Creating and using explicit rewards systems that recognize acts of courage
6. Creating a work environment in which all people are treated with dignity

Question 28

What’s the balanced scorecard?

Answer 28

The balanced scorecard is a framework firms can use to verify that they have established both strategic and financial controls to assess their performance.