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Chapter 09 - Strategic Control and Corporate Governance Chapter 09 Strategic Control and Corporate Governance True / False Questions The "traditional" approach to strategic control is interactive; the "contemporary" approach to strategic control is sequential True False The traditional approach to strategic control relies on feedback from performance measurement to strategy formulation True False For firms competing in highly unstable and turbulent industries, "traditional" strategic controls are most appropriate True False Sales quotas, operating budgets, and production schedules are examples of "traditional" controls True False In "single loop" learning, the organization's assumptions, premises, goals, and strategies are continuously monitored, tested, and reviewed True False "Contemporary" strategic controls involve comparing actual performance to predetermined goals True False 9-1 Chapter 09 - Strategic Control and Corporate Governance Informational control is primarily concerned with whether or not the organization is "doing the right things." True False Continuous monitoring enhances an organization's ability to respond with speed and flexibility True False As firms downsize, a control system based on rewards and culture becomes dysfunctional True False 10 For young managers who see themselves as free agents, behavioral controls such as rewards and culture can be an effective way to enhance organizational loyalty True False 11 Once a strong and healthy organizational culture has been established, it becomes selfsustaining True False 12 The collective sum of individual behaviors of an organization's employees generally results in what is best for the organization; thus, individual rationality assures organizational rationality True False 13 An organization's reward system is typically a weak method of motivating employees True False 9-2 Chapter 09 - Strategic Control and Corporate Governance 14 Different functional areas within an organization often have different reward systems True False 15 Rewards systems that reinforce an organization's core values and contribute to organizational cohesiveness are the least effective type True False 16 For a reward system to be effective, it must be perceived as fair and equitable True False 17 Boundaries and constraints are just used to maintain order in an organization and have little effect on the organization's strategic priorities True False 18 Short-term objectives and action plans are types of boundaries that channel the efforts of employees toward goal accomplishment True False 19 Unexpected events (such as wildcat strikes or new government regulations) have little effect on short-term objectives that need to remain fixed to be effective True False 20 Action plans permit a degree of autonomy for managers who sometimes must modify activities to achieve the desired outcome True False 9-3 Chapter 09 - Strategic Control and Corporate Governance 21 Boundaries and constraints, when used properly, can minimize improper and unethical conduct True False 22 Rule-based controls are appropriate in organizations where most of the employees are unskilled True False 23 The primary participants in corporate governance, according to Monks and Minow, are (1) the shareholders, (2) board of directors, and (3) employees True False 24 Central to agency theory is the relationship between two primary players—the principals (stockholders) and agents (management) True False 25 Research has shown that executives who have large holdings of stock in their firm were more likely to have diversification strategies more consistent with shareholder interests— increasing long-term returns True False 26 One of the most critical roles of the board of directors is to create incentives that align the interests of the CEO and top executives with the interests of shareholders True False 27 The risk of being acquired by hostile raiders is often referred to as the takeover constraint True False 9-4 Chapter 09 - Strategic Control and Corporate Governance 28 Auditors are appointed by the Securities and Exchange Commission to audit a company's financial statements True False 29 Stock analysts generally issue more "sell" recommendations than "buy" recommendations True False 30 Public companies are required by law to disclose information regarding executive compensation packages True False 31 The Sarbanes-Oxley Act of 2002 requires that CEOs and CFOs of publicly-listed companies must reveal off-balance-sheet finances and vouch for the accuracy of information provided True False 32 The Sarbanes-Oxley Act of 2002 stipulates that executives of a firm will still be able to sell their shares in the firm when other employees cannot True False 33 In emerging economies and continental Europe, principal-principal conflicts are frequent These consist of conflicts between controlling shareholders and executives True False 34 Principal-principal (PP) conflicts frequently result in expropriation, which is defined as activities to enrich minority shareholders to assure their support True False 9-5 Chapter 09 - Strategic Control and Corporate Governance Multiple Choice Questions 35 The "traditional" approach to strategic control is sequential Which of the following is not one of the steps in the sequence? A Action plans are submitted by lower level managers B Performance is measured against the predetermined goal C Strategies are implemented D Strategies are formulated and top management sets goals 36 The primary drawback of "traditional" strategic control systems is A they are only appropriate when the environment is stable and simple B goals and objectives cannot be measured with a high level of certainty C they lead to complacency D they lack the flexibility needed to adjust to changes in the environment 37 For businesses facing complex and turbulent business environments A goals and objectives that are uncertain prevent opportunism B traditional strategic controls are usually inappropriate C complacency about predetermined milestones can prevent adaptability D detailed plans are needed to maintain order 38 Contemporary approaches to strategic control rely primarily on A feedback controls B single-loop learning C double-loop learning D comparative learning 39 Informational control systems ask A is the organization "doing things right"? B is the organization "doing the right things"? C are rules and regulations being followed as information is processed? D is the organization's environment a necessary and sufficient condition for success? 9-6 Chapter 09 - Strategic Control and Corporate Governance 40 The benefits of continuous monitoring include A enhancing the organization's ability to respond with speed and flexibility B replacing the time-consuming process of organizational learning C dramatically altering the organization's response to its competitive environment D all of the above 41 Which of the following is not one of the characteristics of a contemporary control system? A It is a key catalyst for an ongoing debate about underlying data, assumptions, and action plans B It must focus on constantly changing information that is strategically important C It circumvents the need for face-to-face meetings among superiors, subordinates, and peers D It generates information that is important enough to demand regular and frequent attention 42 Top managers at ABC Company meet every Friday to review daily operational reports and year-to-date data This is an example of A behavioral control B informational control C strategy formulation D strategy implementation 43 Complete the following sentence: "As firms simultaneously downsize and face the need for increased coordination across organization boundaries, a control system based primarily on is dysfunctional." A boundaries and constraints B culture and rewards C organizational loyalty D innovation and risk taking 9-7 Chapter 09 - Strategic Control and Corporate Governance 44 All of the following are examples of how organizational culture exerts behavioral control except A culture helps maintain control by creating behavioral norms B culture generates unwritten standards of acceptable behavior C culture encourages individual identification with the organization and its objectives D culture sets explicit boundaries 9-8 Chapter 09 - Strategic Control and Corporate Governance 45 The late Sam Walton, founder of Wal-Mart, used to give pep rallies at local Wal-Mart stores What purpose did this serve? A It was used to remind employees of Wal-Mart's rules and regulations B It helped reinforce and sustain Wal-Mart's culture C It demonstrated to employees the importance of articulating explicit goals and objectives D It made Wal-Mart's reward system very explicit 46 Which of the following is not one of the functions of reward and incentive systems? A They represent a poor means of influencing an organization's culture B They focus efforts on high-priority tasks C They motivate high levels of individual and collective task performance D They represent an effective control mechanism 47 Complete the following sentence: "Individual rationality organizational rationality." A is a good indicator of B will ensure C is often the opposite of D does not always guarantee 48 When countercultures emerge that have shared values opposite from the dominant culture of an organization A organizational cohesiveness increases B information is shared rather than hoarded C individuals begin working at cross purposes D individuals gain insights into overarching goals and objectives 49 All of the following are characteristics of effective reward and incentive systems except A performance measures are clear and highly visible B the structure is fixed to assure employees of consistency C the compensation system is perceived as fair and equitable D objectives are well understood, and broadly accepted 9-9 Chapter 09 - Strategic Control and Corporate Governance 50 The causes of counterproductive behavior in organizations include A lack of a clear understanding of organizational goals and objectives B motivated self-interest C outright malfeasance D all of the above 51 Effective boundaries and constraints A tend to inhibit efficiency and effectiveness B distract employees who are trying to focus on organizational priorities C minimize improper and unethical conduct D tend to limit organizational growth 52 Effective short-term objectives have all of the following priorities except A an emphasis on "do your best" goals B being achievable yet challenging C providing a specific time horizon for their attainment D being specific and measurable 53 Which of the following statements about action plans is true? A Action plans, though specific, should permit a degree of autonomy to managers and not be constrained by budgets B Action plans must be specific so that managers will have a clear understanding of the resource requirements necessary to implement the plan C Action plans should not be constrained by a time frame in order to allow for modification D Although managers must be held accountable for implementing action plans, this accountability often erodes the managers' motivation to implement the plan on a timely basis 54 Rules and regulations are examples of A implicit controls B informational controls C cultural norms D boundaries and constraints 9-10 Chapter 09 - Strategic Control and Corporate Governance 41 (p 315) Which of the following is not one of the characteristics of a contemporary control system? A It is a key catalyst for an ongoing debate about underlying data, assumptions, and action plans B It must focus on constantly changing information that is strategically important C It circumvents the need for face-to-face meetings among superiors, subordinates, and peers D It generates information that is important enough to demand regular and frequent attention AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-3 42 (p 315) Top managers at ABC Company meet every Friday to review daily operational reports and year-to-date data This is an example of A behavioral control B informational control C strategy formulation D strategy implementation AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-3 43 (p 316 - 317) Complete the following sentence: "As firms simultaneously downsize and face the need for increased coordination across organization boundaries, a control system based primarily on is dysfunctional." A boundaries and constraints B culture and rewards C organizational loyalty D innovation and risk taking AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 9-29 Chapter 09 - Strategic Control and Corporate Governance 44 (p 317 - 318) All of the following are examples of how organizational culture exerts behavioral control except A culture helps maintain control by creating behavioral norms B culture generates unwritten standards of acceptable behavior C culture encourages individual identification with the organization and its objectives D culture sets explicit boundaries AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 45 (p 318) The late Sam Walton, founder of Wal-Mart, used to give pep rallies at local WalMart stores What purpose did this serve? A It was used to remind employees of Wal-Mart's rules and regulations B It helped reinforce and sustain Wal-Mart's culture C It demonstrated to employees the importance of articulating explicit goals and objectives D It made Wal-Mart's reward system very explicit AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 46 (p 318 - 319) Which of the following is not one of the functions of reward and incentive systems? A They represent a poor means of influencing an organization's culture B They focus efforts on high-priority tasks C They motivate high levels of individual and collective task performance D They represent an effective control mechanism AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 9-30 Chapter 09 - Strategic Control and Corporate Governance 47 (p 319) Complete the following sentence: "Individual rationality organizational rationality." A is a good indicator of B will ensure C is often the opposite of D does not always guarantee AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 48 (p 319) When countercultures emerge that have shared values opposite from the dominant culture of an organization A organizational cohesiveness increases B information is shared rather than hoarded C individuals begin working at cross purposes D individuals gain insights into overarching goals and objectives AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 49 (p 318 - 319) All of the following are characteristics of effective reward and incentive systems except A performance measures are clear and highly visible B the structure is fixed to assure employees of consistency C the compensation system is perceived as fair and equitable D objectives are well understood, and broadly accepted AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 9-31 Chapter 09 - Strategic Control and Corporate Governance 50 (p 319) The causes of counterproductive behavior in organizations include A lack of a clear understanding of organizational goals and objectives B motivated self-interest C outright malfeasance D all of the above AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 51 (p 320 - 321) Effective boundaries and constraints A tend to inhibit efficiency and effectiveness B distract employees who are trying to focus on organizational priorities C minimize improper and unethical conduct D tend to limit organizational growth AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 52 (p 320 - 321) Effective short-term objectives have all of the following priorities except A an emphasis on "do your best" goals B being achievable yet challenging C providing a specific time horizon for their attainment D being specific and measurable AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 9-32 Chapter 09 - Strategic Control and Corporate Governance 53 (p 320 - 321) Which of the following statements about action plans is true? A Action plans, though specific, should permit a degree of autonomy to managers and not be constrained by budgets B Action plans must be specific so that managers will have a clear understanding of the resource requirements necessary to implement the plan C Action plans should not be constrained by a time frame in order to allow for modification D Although managers must be held accountable for implementing action plans, this accountability often erodes the managers' motivation to implement the plan on a timely basis AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 54 (p 321) Rules and regulations are examples of A implicit controls B informational controls C cultural norms D boundaries and constraints AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 55 (p 321) Cadbury Schweppes has a policy that all payments, no matter how unusual, are recorded in the company's books This rule is A overly cumbersome B aimed at encouraging managers to make better budgetary decisions C directed at protecting client confidentiality D designed to minimize improper and unethical conduct AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 9-33 Chapter 09 - Strategic Control and Corporate Governance 56 (p 324) Which of the following approaches to behavioral strategic control should be utilized least in an organization in which there is a great need for innovation and a high degree of autonomy? A culture B rewards C boundaries D All of the above are equally important AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 57 (p 323 - 324) Most successful organizations minimize the need for explicit rules, regulations, and other boundaries by A posting written statements of the organization's goals and objectives B discouraging the formation of subcultures that isolate work groups C designing effective reward systems D encouraging employees to see themselves as free agents AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 58 (p 324) Rule-based controls are most appropriate in organizations with all of the following characteristics except A environments are stable and predictable B employees are highly skilled and independent C consistency in product or service D the risk of malfeasance is extremely high AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 9-34 Chapter 09 - Strategic Control and Corporate Governance 59 (p 324) Rules and regulations, rather than culture or rewards, would be used for strategic control at which type of company? A software developer B stock brokerage firm C manufacturer of mass produced products D high tech research facility AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 60 (p 323 - 324) Most organizations with strong cultures and a sound system of rewards and incentives can eventually internalize boundaries rather than use explicit rules and regulations Which of the following is not a technique for moving in that direction? A Hire people that identify with the organization's dominant values B Develop managerial role models C Minimize training and indoctrination D Align reward systems with organizational goals and objectives AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 61 (p 324) The primary participants in corporate governance are all of the following except A the shareholders B key stakeholders such as financial institutions C management (led by the chief executive officer) D the board of directors AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-5 9-35 Chapter 09 - Strategic Control and Corporate Governance 62 (p 329) Intel's exemplary corporate governance practices include all of the following except A a mix of inside and outside directors B all outside directors to assure objectivity in decision-making C board presentations and access to employees D formal evaluation of officers AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-6 63 (p 332 - 336) External control mechanisms include all of the following except A auditors B analysts C competitors D the market for corporate control AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-6 64 (p 333) Managerial opportunism can take all of the following forms except A shirking B job-hopping C on the job consumption D excessive product diversification AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-6 9-36 Chapter 09 - Strategic Control and Corporate Governance 65 (p 333 - 334) If the market value of a firm becomes less than its book value, A it becomes an attractive takeover target B the firm will be delisted by the stock exchange C the Securities and Exchange Commission will not allow it to declare dividends until the market value once again exceeds the book value D the firm will be unable to service its debt AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-6 66 (p 333) By takeover constraint, we mean A constraints placed by the firm on raiders who want to takeover the firm B legal constraints that limit the ability of the raiders to acquire a firm C provisions in the charter of a company that prevents it from attempting a takeover of other companies D the risk of being acquired by a hostile raider AACSB: Analytic Bloom's: Knowledge Difficulty: Easy Learning Objective: 09-6 67 (p 333) It is generally argued that the takeover constraint A deters management from engaging in opportunistic behavior B deters management from considering acquiring other companies C deters management from declaring dividends D deters management from increasing a firm's level of borrowing AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-6 9-37 Chapter 09 - Strategic Control and Corporate Governance 68 (p 334) The failure of many auditing firms to raise red flags about accounting irregularities in companies such as Enron and WorldCom is generally attributed to all of the following factors except A the desire to get future auditing contracts from the company B the desire to get consulting work from the company because most audit firms also consulting work C the fact that auditors are appointed by the firm D the failure of U.S audit firms to hire technically qualified professionals AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-6 69 (p 334) The reasons analyst recommendations are often more optimistic than warranted by an objective analysis of a firm's prospects include all of the following except A many analysts fail to grasp the gravity of the problems facing a company B "sell" recommendations generate lower commissions than buy recommendations C the firms for which analysts work may have lucrative investment banking relationships with the firm D analysts are often pressured by their superiors to overlook negative information or tone down their criticisms of the firms they analyze AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-6 70 (p 335) All of the following are types of information that a firm is required to disclose except A quarterly and annual filings of financial information B stock trading by insiders C details of new products under development D details of executive compensation packages AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-6 9-38 Chapter 09 - Strategic Control and Corporate Governance 71 (p 336) In emerging economics and continental Europe, firms often can be characterized by all of the following except A concentrated ownership B low family ownership and control C business group structures D weak legal protection for minority shareholders AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-6 72 (p 336) In principal-principal conflicts (conflicts between controlling shareholders and minority shareholders), the ownership (of equity) is A widely dispersed (5-20% is considered "concentrated ownership") B controlled almost completely by management C concentrated—often greater than 50% of equity is controlled by controlling shareholders D often held by employee stock ownership programs AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-6 73 (p 337) Conditions for principal-principal (PP) conflicts (conflicts between controlling shareholders and minority shareholders) to occur include all of the following except A a dominant owner or group of owners who have interests that are distinct from minority shareholders B legislation that protects the interests of minority shareholders C a motivation for the controlling shareholders to exercise their dominant position to their advantage D few formal (such as legislation or regulatory bodies) or informal constraints that discourage or prevent the controlling shareholders from exploiting their advantageous positions AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-6 9-39 Chapter 09 - Strategic Control and Corporate Governance 74 (p 338) Expropriation of minority shareholders means that A minority shareholders must sell their shares upon demand B minority shareholders cannot own shares in foreign firms C minority shareholders not receive dividends D minority shareholders are adversely affected by the actions of controlling shareholders AACSB: Analytic Bloom's: Knowledge Difficulty: Easy Learning Objective: 09-6 Essay Questions 75 (p 313 - 314) What are the advantages and disadvantages associated with using "traditional" approaches to strategic control? Answers will vary AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-2 76 (p 314 - 315) What are the advantages and disadvantages associated with using "contemporary" approaches to strategic control? Answers will vary AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-3 9-40 Chapter 09 - Strategic Control and Corporate Governance 77 (p 315) What are the four characteristics of effective contemporary control systems? Give examples of how firms apply these practices Answers will vary AACSB: Analytic Bloom's: Application Difficulty: Hard Learning Objective: 09-3 78 (p 316 - 317) Why is it important to have a balance among the three behavioral controls culture, rewards, and boundaries? Is there a danger associated with emphasizing one behavioral approach more than another? Answers will vary AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 79 (p 316 - 317) Discuss the benefits and risks of using reward and incentive systems as a means of strategic control Answers will vary AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-4 9-41 Chapter 09 - Strategic Control and Corporate Governance 80 (p 320 - 321) What are the characteristics of short-term objectives? Provide examples of practical applications of these characteristics by organizations Answers will vary AACSB: Analytic Bloom's: Application Difficulty: Hard Learning Objective: 09-4 81 (p 327 - 332) What are the three key means to align the interests of owners (shareholders) and managers in a corporation? Answers will vary AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-6 82 (p 333 - 334) What is meant by the term "market for corporate control?" How does the market for corporate control act as an external control mechanism? Answers will vary AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-6 83 (p 332 - 336) Identify at least three external control mechanisms Discuss the role played by each of these Answers will vary AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-6 9-42 Chapter 09 - Strategic Control and Corporate Governance 84 (p 336 - 338) What is meant by principal-principal (PP) conflict? What are the implications for sound corporate governance? Answers will vary AACSB: Analytic Bloom's: Comprehension Difficulty: Medium Learning Objective: 09-6 9-43