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Business Government And Society A Managerial Perspective 13th Edition by Steiner – Test Bank
1. Change in the business environment is the work of 10 deep historical forces or streams of related
2. An environmental force of unknown origin and mysterious action that provides the energy for events is
known as a historical force.
3. Great Britain was the first society to usher in the Industrial Revolution.
4. Sustained economic growth arose in Western Europe and the United States during the first half of the
5. Global income inequality is measured by the Lorenz index.
6. In the Gini index, 0 percent stands for absolute inequality and 100 percent stands for perfect equality.
7. The number of children a woman must have on average to ensure that one daughter survives to
reproductive age is known as the replacement fertility rate.
8. Although the global population growth is slowing, it will be the highest in the most developed
9. Liberalization refers to the creation of networks of human interaction that span worldwide distances.
10. In the international arena, the nation state is an actor having a ruling authority, citizens, and a territory
with fixed borders.
11. The nation-state is the unit of human organization in which individuals and cultural groups can influence
their circumstances and future.
12. A set of reinforcing beliefs and values that constructs a worldview is known as an ideology.
13. The economic environment consists of forces that influence market operations, including overall
economic activity, commodity prices, interest rates, currency fluctuations, wages, competitors’ actions,
and government policies.
14. A Web site open to collaborative editing by multiple individuals is known as a blog.
15. Values based on assumptions of security and affluence are known as postmaterialist values.
16. A form of government requiring popular sovereignty, political liberty, and majority rule is the
17. Soft law refers to the voluntarily adopted guidelines for corporate behavior derived from emerging norms
and standards in international codes, declarations, and conventions.
18. Economic activity is a geophysical force with power to change the natural environment.
19. The Living Planet Index measures the human consumption of the renewable natural resources.
20. The employees of a business are a part of its external environment.
21. A plausible story of the future based on assumptions about how current trends might play out is known as
C. historical force.
22. _____ is an economic policy of lowering tariffs and other barriers to encourage trade.
23. An environmental force of unknown origin and mysterious action that provides the energy for events is
known as a:
C. historical force.
24. Which of the following statements about historical forces is true?
A. It is of known origin.
B. It is divided into six separate but related forces.
C. It is a social force.
D. It causes a distinct chain of events.
25. Which of the following statements about the Industrial Revolution is true?
A. It started in the late 1800s.
B. It first started in the United States.
C. It transformed the agrarian economies into industrial economies.
D. It did not require any specific conditions to be present.
26. Which of the following situations contributed to the Industrial Revolution?
A. Society that was low on capital and labor
B. Closed society
C. Society that encouraged individual initiative
D. Inadequate transportation
27. Using this statistical measure of global income inequality, inequality becomes greater as the percentage
figure rises toward 100.
A. Human Development Index
B. Robin Hood index
C. Gini index
D. Lorenz index
28. The Gini index ranges between:
A. 0 to -1.
B. 0 percent to 100 percent.
C. -1 to +1.
D. 1 percent to 50 percent.
29. Which of the following statements regarding the Gini index is true?
A. Zero percent stands for absolute equality.
B. It is a statistical measure of complexity.
C. Fifty percent represents absolute inequality.
D. Inequality reduces as the percentage figure rises toward 100.
30. According to the Gini index, the cause of most of the rise in world income inequality is a(n):
A. growing gap between the peoples of rich and poor nations.
B. increasing trend toward liberalization.
C. growing separation of rich and poor within nations.
D. transition from high to low fertility in nations.
31. The Human Development Index scale ranges from:
A. 0 to -1.
B. 0 to 1.
C. -1 to +1.
D. -5 to 0.
32. Which of the following is a category used by the HDI to measure the development of nations?
33. According to the 2010 United Nations Development Programme’s Human Development Report, which of
the following countries has the highest human development in the world?
A. The United States
34. _____ is calculated as the number of children a woman must have on average to ensure that one daughter
survives to reproductive age.
A. Sub-replacement fertility
B. Net reproduction rate
C. Total fertility rate
D. Replacement fertility rate
35. Which of the following is most likely to drive future population changes?
A. High fertility
B. Low mortality
C. Stable fertility
D. Zero migration
36. Which of the following is true regarding the implications of the current population trend?
A. The global population growth is rising.
B. The global population growth will be lowest in the least developed countries.
C. The wealth gap between the high-and-low-income countries will narrow down.
D. The global population growth will continue to strain the earth’s ecosystem.
37. Which of the following is true regarding the waves of innovation that have taken place since the
beginning of the Industrial Revolution?
A. The first wave of innovation started in 1685.
B. In the first wave of innovation, electricity came into general use.
C. The second wave of innovation began in 1845 and ended in 1900.
D. The second wave of innovation was powered by aviation.
38. Identify the correct statement regarding the waves of innovation that have taken place since the beginning
of the Industrial Revolution.
A. The first wave of innovation lasted for about 50 years.
B. The second wave of innovation had a time length of 65 years.
C. Thus far, the waves of innovation have been divided into seven distinct phases.
D. So far, the general trend has been the shortening of successive waves.
39. The invention of the _____ in the late 1700s and its widespread use beginning in the early 1800s
triggered the Industrial Revolution.
A. printing press
B. new iron-making method
D. steam engine
40. Globalization is:
A. an economic metamorphosis that started in England in the late 1700s.
B. the creation and maintenance of a disparate economic relationship between states.
C. the creation of networks of human interaction that span worldwide distances.
D. a philosophy in which nations promote trade by easing tariff and non-tariff barriers.
41. ____, especially a few hundred of the largest headquartered in developed nations, are the central forces of
current economic globalization.
A. Transnational corporations
B. Multinational corporations
D. International corporations
42. In the international arena, a _____ is an actor formed of three elements: a ruling authority, citizens, and a
territory with fixed borders.
A. pre-national state
C. citizen state
D. multinational state
43. Which of the following is true regarding the modern nation-state?
A. It is an independent entity which is not administered as part of a local government.
B. It is a sovereign state which is comprised of two or more nations.
C. It is the single dominant ethnic group in a state.
D. It arose in an unplanned way out of the wreckage of the Roman Empire.
44. The _____ is the unit of human organization in which individuals and cultural groups can influence their
circumstances and future.
A. multi-ethnic state
B. citizen state
D. pre-national state
45. A set of reinforcing beliefs and values that constructs a worldview is called a(n):
46. Which of the following is NOT an ideology that facilitated the Industrial Revolution?
A. Constitutional democracy
D. Social Darwinism
47. Herbert Spencer’s idea that evolutionary competition in human society, as well as the natural world,
weeded out the unfit and advanced humanity is known as:
B. neural Darwinism.
C. social Darwinism.
D. quantum Darwinism.
48. _____ is the belief that sacred authority called for hard work, saving, thrift, and honesty as necessary for
B. Protestant ethic
D. Confucian ethic
49. Which of the following fulfills the human need for concepts and categories of meaning that explain daily
D. Subjective beliefs
50. The _____ environment consists of forces that influence market operations, like commodity prices and
51. Which of the following is considered to be the bedrock of economic globalization?
B. Foreign direct investment
D. Trade liberalization
52. _____ is a philosophy in which nations promote trade by easing restrictions, including both tariff and
A. Foreign direct investment
B. Trade liberalization
53. _____ refers to capital investment by private firms outside their home countries.
A. Foreign direct investment
B. Foreign portfolio debt investment
C. Foreign portfolio equity investment
D. Capital transfers
54. Technology that is developed on the scale of one-billionth of a meter is known as:
55. A Web site open to collaborative editing by multiple individuals is known as a:
56. A system of shared knowledge, values, norms, customs, and rituals that are acquired by social learning is
A. value chain.
D. value network.
57. Values based on assumptions of security and affluence are known as _____ values.
58. _____ is a form of government requiring popular sovereignty, political liberty, and majority rule.
59. Which of the following is a characteristic of a democracy?
A. Single party rule
B. Universal suffrage
C. Enforced political authority
D. Country is ruled by famous citizens
60. Which of the following is a trend that works in the legal environment to constrain business behavior?
A. Laws and regulations steadily decline in number and complexity.
B. Legal duties to protect the rights of stakeholders have lessened.
Globalization has decreased the complexity of the legal environment by shielding corporations from
the laws of foreign nations.
Although requirements of ethical behavior and corporate social responsibility go beyond legal duty,
they are continuously encoded into law.
61. Voluntarily adopted guidelines for corporate behavior derived from emerging norms and standards in
international codes, declarations, and conventions are called:
A. diplomatic laws.
B. soft laws.
C. case laws.
D. traditional laws.
62. The _____ combines in one measure thousands of population trends among terrestrial, freshwater, and
marine vegetable species.
A. Living Planet Index
B. Ecological Footprint
C. Environmental Performance Index
D. Water Footprint
63. The _____ measures human consumption of renewable natural resources.
A. Living Planet Index
B. Environmental Performance Index
C. Water Footprint
D. Ecological Footprint
64. The _____ is calculated as the total land area, in hectares, required to maintain worldwide human
consumption of food, wood, fiber, energy, and water.
A. Living Planet Index
B. Environmental Impact Index
C. Ecological Footprint
D. Water Footprint
65. Which of the following is an internal business environment?
66. What is meant by a historical force?
67. What is the Industrial Revolution?
68. What is a Gini index?
69. What is replacement fertility rate?
70. Define the term “globalization.”
71. Why did the Industrial Revolution begin in Great Britain?
72. Discuss the problem of global income inequality.
73. What are the factors that will drive future population changes? Discuss the implications of these
74. How has technology impacted societies? What will be the impact of new technologies?
75. Discuss in brief the waves of innovation that have taken place since the beginning of the Industrial
76. Discuss the impact of globalization over the years.
77. Briefly discuss dominant ideologies.
78. What does the economic environment consist of? Define the terms “trade liberalization” and “foreign
79. How does the cultural environment create change in the relationships between business, governments,
80. Discuss the five trends in the legal environment that restrain business behavior.
1. (p. 24) FALSE
2. (p. 25) TRUE
3. (p. 25) TRUE
4. (p. 25) FALSE
5. (p. 26) FALSE
6. (p. 26) FALSE
7. (p. 29) TRUE
8. (p. 30) FALSE
9. (p. 32) FALSE
10. (p. 33) TRUE
11. (p. 33) TRUE
12. (p. 34) TRUE
13. (p. 36) TRUE
14. (p. 38) FALSE
15. (p. 40) TRUE
16. (p. 41) FALSE
17. (p. 42) TRUE
18. (p. 43) TRUE
19. (p. 43) FALSE
20. (p. 44) FALSE
21. (p. 22) B
22. (p. 22) A
23. (p. 25) C
24. (p. 25) D
25. (p. 25) C
26. (p. 25) C
27. (p. 26) C
28. (p. 26) B
29. (p. 26) A
30. (p. 27) A
31. (p. 28) B
32. (p. 28) A
33. (p. 28) C
34. (p. 29) D
35. (p. 30) B
36. (p. 30) D
37. (p. 31) C
38. (p. 31) C
39. (p. 31) D
40. (p. 32) C
41. (p. 32) A
42. (p. 33) B
43. (p. 33) D
44. (p. 33) C
45. (p. 34) A
46. (p. 34) B
47. (p. 34) C
48. (p. 34) B
49. (p. 34) C
50. (p. 36) A
51. (p. 37) D
52. (p. 37) B
53. (p. 37) A
54. (p. 38) C
55. (p. 38) B
56. (p. 39) C
57. (p. 40) C
58. (p. 41) A
59. (p. 41) B
60. (p. 42) D
61. (p. 42) B
62. (p. 43) A
63. (p. 44) D
64. (p. 44) C
65. (p. 45) B
66. (p. 25) Historical force is an environmental force of unknown origin and mysterious action that provides the energy for events. This force is
divided into nine separate but related forces causing distinct chains of events.
67. (p. 25) The Industrial Revolution was an economic metamorphosis in England in the late 1700s. It turned simple economies of farmers and
artisans into complex industrial societies, and increased their wealth and national power.
68. (p. 26) The Gini index is a statistical measure of inequality in which 0 percent is perfect equality and 100 percent is absolute inequality.
69. (p. 29) The number of children a woman must have on average to ensure that one daughter survives to reproductive age is known as the
replacement fertility rate. In theory, this number is sufficient to maintain a stable population.
70. (p. 32) Globalization occurs when networks of economic, political, social, military, scientific, or environmental interdependence grow to span
worldwide distances. In the economic realm, globalization occurs when nations open themselves to foreign trade and investment, creating world
markets for goods, services, and capital.
71. (p. 25) The Industrial Revolution of the late 1700s turned simple economies of farmers and artisans into complex industrial societies, greatly
increasing their wealth and national power. In thousands of years before this event, there had been no widespread, sustained economic growth to
raise living standards. The vast majority of the world’s population was mired in poverty. The Industrial Revolution required specific conditions,
including a sufficiency of capital, labor, natural resources, and fuels; adequate transportation; strong markets; and ideas and institutions that
support the productive blend of these ingredients. The right conditions first appeared in Great Britain. It was an open society that allowed social
mobility and encouraged individual initiative. Its parliament embodied values of political liberty, free speech, and public debate. Consequently,
Britain was the source of scientific advances and inventions such as the steam engine that liberated the energy in the nation’s massive coal
deposits. Its climate supported agriculture and its island geography put it at the hub of sea routes for world trade.
72. (p. 25-28) From time immemorial, status distinctions, class structures, and gaps between rich and poor have characterized societies. Inequality is
ubiquitous, as are its consequences. The basic political conflict in every nation, and between nations, is the antagonism between rich and poor. As
the Industrial Revolution accelerated the accumulation of wealth, it worsened the persistent problem of uneven distribution. Explosive economic
growth widened the gap between rich and poor around the globe. As the Industrial Revolution was spreading from England to Western Europe,
global income inequality was already very high. Economies in industrializing nations rapidly expanded. After that, the rise was slower, as Asian
countries holding the bulk of the world’s poor began to industrialize and catch up. The Gini index reached 64 percent in 1950 and continued its
decelerating rise to 67 percent in 2007. This represents an extreme level of inequality across the world population, so high it exceeds the inequality
within any single nation. The cause of this striking gap is the diverging economic fortunes of nations. Contrary to popular opinion, economic
growth itself does not increase income inequality within modernizing nations. During industrialization, the incomes of the poorest people rise
in proportion to the rise in average income for the country as a whole. The cause of most of the rise in world income inequality is a growing
gap between the peoples of rich and poor nations, not a growing separation of rich and poor within nations. Inequality is perpetuated by social
institutions such as caste, marriage, land ownership, law, and market relationships. Arrangements and rules in these institutions are resilient,
creating sinkholes of unequal opportunity. The vast majority of the world’s poor people live in nations not yet transformed by industrial growth
where entrenched inequities persist over generations. This situation creates expectations that ethical duties of global corporations include helping
the poor and equitably distributing the fruits of commerce.
These population trends have many implications. First, although global population growth is slowing, it will be highest in the least developed
regions, further widening the wealth gap between high-and low-income countries. Second, growth will continue to strain the earth’s ecosystems,
especially as industrial activity spreads. Third, the West is in demographic decline compared with other peoples. Shrinking, aging populations
may lead to slower GDP growth, putting more pressure on national welfare and pension policies. In the future, non-Western populations will be
stronger economically, militarily, and politically and will push to expand their influence. Although Western market values and business ideology
seem ascendant now, they may be less dominant in the future as the numerical basis of Western civilization declines. In such ways will population
trends alter the business environment and create new societal expectations for corporate behavior.
73. (p. 30) The factors that will drive future population changes are: falling fertility, low mortality, and migration.
New technologies foster the productivity gains that sustain long-term economic progress, and they promote human welfare. However, they also
can agitate societies. During the rise of industrial societies over more than two centuries, technology has altered human civilization by stimulating
economic and population growth to sustained rises unimaginable in previous recorded history. New things have created many benefits, including
higher living standards and longer life spans, but because technology changes faster than human beliefs and institutions, it also imposes strains.
74. (p. 30-31) Throughout recorded history new technologies and devices have fueled commerce and reshaped societies. In the 1450s the printing
press was an immediate commercial success, but its impact went far beyond the publishing business. The invention of the steam engine in the late
1700s and its widespread use beginning in the early 1800s, along with increased use of the waterwheel and new iron-making methods, triggered
the Industrial Revolution. This was the first of five waves of technological revolution. With each wave innovations spread, stimulating economic
booms of increased investment, rising productivity, and output growth. The shortening of successive waves reveals faster innovation.
With each wave innovations spread, stimulating economic booms of increased investment, rising productivity, and output growth. The shortening
of successive waves reveals faster innovation.
• The fifth and final wave of innovation started from 1990 and is expected to continue up to 2020. Digital networks, software, new media, and
biotechnology have already arrived.
• The fourth wave took place between 1950 and 1990, during which period petrochemicals, electronics, and aviation made their presence felt.
• The third wave took place between 1900 and 1950. In this period, electricity was discovered and put to use, chemicals were used, and the
internal-combustion engine was developed.
• The second wave of innovation took place between 1845 and 1900. This was when the power of steam was harnessed, railways were developed,
and steel was put to extensive use.
• The first wave of innovation took place between 1785 and 1845. This was the time when water power was harnessed, textiles were developed,
and iron was extensively used.
75. (p. 31) There are five waves of technological revolution.
There is a strong anticorporate movement that see the growing velocity of trade with alarm because it clashes with their values on the environment,
human rights, and democracy. These groups seek to restrain and regulate the activities of transnational corporations and they have had some
76. (p. 32-33) Globalization occurs when networks of economic, political, social, military, scientific, or environmental interdependence grow to
span worldwide distances. In the economic realm, globalization occurs when nations open themselves to foreign trade and investment, creating
world markets for goods, services, and capital. The current rise of such a system began after World War II, when the victor nations lowered trade
barriers and loosened capital controls. Over the next 50 years, international negotiations led more nations to open themselves to global flows of
goods, services, and investment until today no national economy of any significance remains isolated from world markets. Today’s economic
globalization is the leading edge of a long trend. By the late 1700s the world was knit together with the exchange of trade goods, currencies, and
ideas. The consequences of this initial globalization are similar to those arising from the current globalization. Economic activity rapidly increased,
trade expansion increased inequality among nations, cultures changed, and infectious diseases spread. Since this initial tying together of societies,
the trend toward integration has continued. Globalization has been accelerated by new technologies, particularly those based on electricity, but also
sometimes slowed by national rivalries and wars. Today, transnational corporations are the central forces of economic globalization. However,
globalization complicates their management. By operating in many countries they multiply the number and kind of stakeholders to which they
must respond. Their actions create strains and anxieties that lead to heightened expectations of responsible behavior.
77. (p. 34) Thought shapes history. An ideology is a set of reinforcing beliefs and values that constructs a worldview. Ideologies are more than
the sum of sensory perception and rational thought. They fulfill the human need for concepts and categories of meaning that explain daily life.
Ideologies in accord with experience and current conditions often spread widely. Their belief systems lead adherents to feel a collective identity
and to follow common norms that direct social behavior, thereby promoting cooperation and stability. They give institutions that represent them,
such as churches, governments, and corporations, the power to interpret events and resolve human problems.
Foreign direct investment is capital invested by private firms outside their home countries.
Trade liberalization is a philosophy in which nations promote trade by easing restrictions, including both tariff and nontariff barriers. This
philosophy, sometimes called simply liberalization, is the bedrock of economic globalization.
78. (p. 37) The economic environment consists of forces that influence market operations, including overall economic activity, commodity prices,
interest rates, currency fluctuations, wages, competitors’ actions, and government policies.
79. (p. 39-40) A culture is a system of shared knowledge, values, norms, customs, and rituals acquired by social learning. No universal culture
exists, so the environment of a transnational corporation includes a variety of cultures, each with differing peoples, languages, religions, and
values. On one level, this variation causes conflicts of business custom, and managers in foreign countries must absorb both subtle and striking
differences in employee loyalty, group versus individual initiative, the place of women in organizations, ethical values, norms of gift giving,
attitudes toward authority, the meaning of time, and clothing worn in business settings. On a deeper level, although no uniform world culture
exists, there is a fundamental divide between the culture of Western economic development and some other national cultures. The culture
of the advanced West promotes a core ideology of markets, individualism, and democracy. It is sustained by Western nations that dominate
international organizations, contain the most powerful corporations, and have the strongest militaries. Although developing nations tend to
adopt elements of Western culture, some are resistant. Over the last half of the twentieth century, some cultural values in developed nations
began to shift, creating changes in the global business environment. In these societies, traditional values based on historical realities of economic
scarcity were transformed. In their place came postmaterialist values. In older industrializing societies, the drive for survival and material welfare
dominated. However, the generations after World War II grew up surrounded by affluence and the protections of welfare states. Because they
felt material security, these generations began to rank individual autonomy over deference to authority, quality of life over mere survival, selfexpression
over conformity, and tolerance over prejudice. The rise of postmaterialist values has uniformly shifted the social, political, economic,
and sexual norms of rich countries. Postmaterialist values are a strong influence in the operating environments of multinational corporations.
They support a powerful global movement to promote fundamental human rights. This movement is energized by West-dominated coalitions of
individuals, advocacy groups, governments, and international organizations. Similar and interrelated movements have risen to promote sustainable
development and humanitarian assistance to poor regions. This global tide of morality elevates expectations about the behavior of multinational
corporations. Increasingly, they must follow proliferating codes and rules developed by moral reformers and must define their strategies to
promote both human welfare and net income.
Fourth, although requirements of ethical behavior and corporate social responsibility go beyond legal duty, they are continuously plucked from
the voluntary realm and encoded into law. Actions that once elicited debate over the nature of corporate responsibility continuously move into
regulatory regimes that squeeze out all expression of free will by managers. Finally, the law is constantly evolving.
Third, globalization has increased the complexity of the legal environment by exposing corporations to international law and the laws of foreign
nations. In addition, advocacy groups promoting human rights, labor, and environmental causes push corporations to adopt so-called soft law.
These guidelines can exceed requirements in the laws of some nations.
Second, legal duties to protect the rights of stakeholders, such as employees, consumers, and the public, have expanded. These rights derive from
the steady flow of laws and court decisions.
First, laws and regulations steadily grow in number and complexity. As governments become more active and more participatory they respond to
citizens’ calls for restraining corporate power with new statutes and heightened regulatory activity.
80. (p. 42-43) The legal environment consists of legislation, regulation, and litigation. Five enduring trends in this environment work to constrain
Category # of Question
Difficulty: Difficult 9
Difficulty: Easy 50
Difficulty: Medium 21
Steiner – Chapter 02 80
1. In the United States, company charters are granted by the federal government.
2. Corporate charters require the directors of the company to protect the financial interests of the company’s
3. According to corporate charters, the legal line of authority for a company runs from the state, to directors,
to managers, and to shareholders of the company in this sequence.
4. The Securities and Exchange Commission (SEC) regulations stipulate that a company must include a
shareholder’s proposal in its proxy statement if it meets specified requirements.
5. Most shareholders follow management’s voting recommendations.
6. Congress passed the Securities Act of 1933 requiring companies to register securities and provide
financial statements and other information to buyers before their sale.
7. The Sarbanes-Oxley Act requires that accounting firm auditors of a company be rotated every three
8. According to the Dodd-Frank Act, at least once every three years companies have to submit their
executive compensation packages to a stockholder vote, which is binding.
9. According to the Dodd-Frank Act, shareholders who want to run a board candidate have to contact other
shareholders at their own very high expense.
10. The average board of directors has five members and this has not changed for many years.
11. Directors who are employees of the company are called independent directors.
12. At most companies the chairman of the board is the CEO, giving him/her a dual role.
13. The pay of top corporate officers is set by the board of directors.
14. Stock options give an executive the right to buy the company’s stock at a variable price in the future and
under conditions determined by the board of directors.
15. With a restricted stock, the recipient receives dividends and can vote the shares but cannot sell them until
the restriction is lifted.
16. Usually, CEO pay is determined by managerial power.
17. When compensation committees base salaries and bonuses on median levels in a group of peer
companies, they often choose larger peers.
18. Backdating is granting options shortly before good news causes a share price rise.
19. Companies must disclose their compensation plans and the annual compensation of the top five executive
officers to shareholders.
20. Most companies now design their compensation discussions to satisfy regulators rather than as a
communication to the average shareholder.
21. The exercise of authority over members of a corporate community is called:
A. corporate performance management.
B. corporate sustainability.
C. corporate statism.
D. corporate governance.
22. Corporate charters specify the rights and responsibilities of all of the following EXCEPT:
23. The legal authority for corporate managers and directors is derived from the:
A. corporate charter.
B. board of directors.
24. A government document that creates a corporation and defines its authority is called a:
A. corporate charter.
B. state charter.
C. commerce charter.
D. director’s charter.
25. Which of the following are also called articles of incorporation?
A. Stock options
B. Share certificates
26. This is the legal duty of a representative to manage property in the interest of the owner.
A. Contributory liability
B. Fiduciary responsibility
C. Principal accountability
D. Ownership interest
27. Rules of corporate governance adopted by corporations are called:
B. articles of incorporation.
D. standing rules.
28. Which state charters the largest number of corporations in the United States?
B. New Jersey
D. New York
29. In reality, the sequence of the flow of authority of a corporation from the powers granted in the charter of
the corporation is from the:
A. CEO to the directors to the stockholders.
B. directors to the CEO to the stockholders.
C. stockholders to the directors to the CEO.
D. CEO to the stockholders to the directors.
A. cannot propose resolutions for votes.
B. are said to be owners of corporations.
C. own a fraction of the corporation as property.
D. are liable for the corporation’s actions.
31. A proxy card:
A. is also called a proxy statement.
B. is a form stockholders mark giving management the right to vote their shares as indicated.
C. is an inventory of information sent to stockholders before annual votes on directors.
D. contains rules of corporate governance to be adopted by corporations.
32. Name the document sent to shareholders before the annual meeting that sets forth matters requiring their
A. Proxy statement
C. Share certificate
D. Financial report
33. All of the following statements are true of the requirements of proxy statements EXCEPT:
A. the proposal cannot exceed 1,000 words.
B. a shareholder may submit only one proposal for a particular shareholder meeting.
C. stockholders must own $2,000 or more shares for at least one year.
a proposal should receive no less than 3 percent of vote to be presented at the next shareholder
34. Which of the following statements about the requirements of proxy statements is true?
The proposed resolution must be presented to the company for approval at least 100 days before the
B. Stockholders must own $3,000 or more shares for at least one year.
C. The proposal cannot exceed 1,000 words.
D. A shareholder may submit only one proposal for a particular shareholder meeting.
35. Identify the correct statement about shareholder influence.
A. Shareholders often exercise their voting power to replace management.
B. In corporate elections, stockholders cannot vote for another candidate.
C. If stockholders submit nominees to board nominating committees, the directors have to accept them.
D. Most shareholders do not follow management’s voting recommendations.
36. Which of the following was perhaps the greatest defect of state corporate governance laws?
A. Inability to control costs in emerging markets.
B. Inability to provide access to low-cost funding sources.
C. Inability to regulate litigation pertaining to fiduciary responsibilities.
D. Inability to prevent fraud and manipulation in national capital markets.
37. Which Act did Congress pass in 1933 that required companies to register securities and provide financial
statements and other information to buyers before their sale?
A. The Securities Act
B. The Securities Exchange Act
C. The Sarbanes-Oxley Act
D. The Uniform Securities Act
38. The Securities Exchange Act of 1934 Act:
A. required companies to file annual reports called 10-Qs.
B. obligated companies to file quarterly reports called 8-Ks.
C. entailed companies to file reports known as 10-Ks that quickly update investors on significant events.
D. established the Securities and Exchange Commission (SEC).
39. Identify the correct statement about the Securities and Exchange Commission (SEC).
A. SEC rules prohibit the dollar value of extra benefits from being disclosed to shareholders.
It is a limited regulatory commission with five members, one of whom serves as chairman, appointed
by the governor for five years.
C. It now has a staff of 3,500 and an annual budget of approximately $900 million.
D. Under SEC rules, a company can reject a proposed resolution for any of 30 reasons.
40. Which of the following enacted new regulations on auditing, financial reporting, and legal compliance?
A. The Bankruptcy Act
B. The Sherman Antitrust Act
C. The Sarbanes-Oxley Act
D. The International Emergency Economic Powers Act
41. What is the primary focus of the Sarbanes-Oxley Act of 2002?
A. Business bankruptcy
B. Pricing practices
C. Individual bankruptcy
D. Accounting rules
42. Which of the following is a major provision of the Sarbanes-Oxley Act?
Audit firms are prohibited from doing consulting work for corporations while also auditing their
It creates a Private Company Accounting Oversight Board to oversee accounting firms and improve the
accuracy of their audits.
Every board of directors must create audit committees consisting of independent directors who receive
consulting or advisory fees from the company other than their compensation.
Boards of directors are permitted to, at their discretion, approve personal loans for company
43. According to the Sarbanes-Oxley Act of 2002, criminal violations can lead to fines of up to:
B. $50 million and lengthy prison terms.
C. $5 million and a minimum of 20 years in prison.
D. $10,000 and a maximum of one year of imprisonment.
44. Which of the following refers to a financing transaction in which one firm lends assets to another firm in
exchange for cash with a simultaneous agreement to purchase the assets back?
A. Forward rate agreement
B. Swap agreement
C. Repurchase agreement
D. Future-forward agreement
45. Which of the following statutes was established to reform financial regulation and prevent a recurrence of
the 2007-2008 financial crisis?
A. The Sarbanes-Oxley Act
B. The Uniform Securities Act
C. The International Emergency Economic Powers Act
D. The Dodd-Frank Act
46. What is the main focus of the Dodd-Frank Act?
A. Financial reform
B. Protected speech
C. Racial harassment
D. Tort reform
47. Which of the following is a major duty that state incorporation laws impose on boards of directors?
A. To exercise due diligence in supervising shareholders.
To represent the interests of stockholders by conducting a profitable business that enhances share
C. To make day-to-day management decisions.
D. To put their own self-interests ahead of the shareholders.
48. Directors who are employees of the company are called:
A. independent directors.
B. inside directors.
C. lead directors.
D. outside directors.
49. Directors who are not employees of the company are:
A. inside directors.
B. independent directors.
C. lead directors.
D. outside directors.
50. These are outside directors who do not have business dealings with a corporation that would impair their
A. Intermediate directors
B. Independent directors
C. Internal directors
D. International directors
51. Compensation of these directors is determined by compensation committees on boards.
A. Inside directors
B. Internal directors
C. Outside directors
D. International directors
52. A nominating committee:
A. oversees auditing reports and assesses financial risks in the company’s strategy.
B. reviews the performance of top executives and sets their compensation.
C. sets the director’s pay.
D. identifies candidates for election to the board.
53. Which of the following statements about compensation of outside board members is true?
A. They are compensated as full-time employees of the firm.
B. They are provided perquisites and pensions.
C. They are usually paid an annual retainer supplemented with company stock.
D. They are paid a monthly salary.
54. This is an independent director who chairs regular board meetings of other independent directors.
A. Inside director
B. Lead director
C. Internal director
D. Vocational director
55. Which of the following statements about the components of executive compensation is true?
NYSE listing standards require that the compensation committee be composed of independent directors
as well as the CEO.
B. A compensation committee of expert consultants sets the pay of top corporate officers.
C. The annual base salary is usually set near the median salary for leaders at comparable firms.
D. Base salaries are often around $2 million, the amount that the IRS allows as tax deductible.
56. The right to buy a company’s stock at a fixed price and under the conditions set by the company’s board
of directors is called a:
A. stock grant.
B. stock option.
C. stock answer.
D. stock bid.
57. The right to purchase a specified number of shares of a company’s stock for a specified price at a future
date is called a:
A. stock bid.
B. stock option.
C. stock grant.
D. stock right.
58. A holder of stock options can buy shares from the company at a specified future date, called the _____
A. withdrawal expiration
59. Shares of company stock awarded after a fixed period of years if individual and company performance
goals are met are called:
A. time shares.
B. performance shares.
C. stock options.
D. restricted stock.
60. All of the following are frequently used types of stock awards EXCEPT:
A. time shares.
B. performance shares.
C. stock options.
D. restricted stock.
61. This is a grant of stock with restrictions on transaction that are removed when a specified condition is
A. Performance shares
B. Restricted stock
C. Stock options
62. These cannot be sold until certain conditions are met, most often the lapse of a time period or meeting a
A. Performance shares
C. Stock options
D. Restricted stock
63. Usually, CEO pay is determined by:
A. market forces in the competition for managerial talent.
B. managerial power.
C. assets under management.
D. their ability to set their own pay.
64. When annual CEO salary and bonus are based on ____, the CEO can take actions to maximize short-term
A. market forces
B. stock awards
C. net income
D. stock options
65. Setting the exercise price of stock options at the price on a date before the date they were granted is:
A. day trading.
D. overnight rating.
66. What is a proxy card?
67. Describe the maximum penalty directors and managers are subject to for civil and criminal violations as
specified in the Sarbanes-Oxley Act.
68. What are two major duties that state incorporation laws impose on boards of directors?
69. What is meant by grant price?
70. What is restricted stock?
71. Explain what is meant by “corporate governance” and what it includes.
72. Explain what a corporate charter allows a corporation to do.
73. Explain which state has chartered the largest number of U.S. industrial corporations and why this state is
so popular for this activity.
74. Explain the flow of authority granted by the powers of a charter of a corporation.
75. Discuss the advantages that management has over shareholders.
76. List three provisions that were set forth in the Sarbanes-Oxley Act.
77. Discuss some of the provisions of the Dodd-Frank Act.
78. Describe the typical duties of boards of directors for U.S. corporations.
79. Explain what is meant by stock options and how these options work and are typically used within a
80. What are the major shortcomings of CEO compensation?
1. (p. 634) FALSE
2. (p. 635) TRUE
3. (p. 636) FALSE
4. (p. 637-638) TRUE
5. (p. 639) TRUE
6. (p. 640) TRUE
7. (p. 645) FALSE
8. (p. 650) FALSE
9. (p. 651) FALSE
10. (p. 652) FALSE
11. (p. 653) FALSE
12. (p. 654) TRUE
13. (p. 655) TRUE
14. (p. 656) FALSE
15. (p. 657) TRUE
16. (p. 659) FALSE
17. (p. 660) TRUE
18. (p. 661) FALSE
19. (p. 662) TRUE
20. (p. 663) TRUE
21. (p. 633) D
22. (p. 633) D
23. (p. 634) A
24. (p. 634) A
25. (p. 634) C
26. (p. 635) B
27. (p. 635) C
28. (p. 635) A
29. (p. 636) A
30. (p. 636) B
31. (p. 637) B
32. (p. 637) A
33. (p. 638) A
34. (p. 638) D
35. (p. 639) B
36. (p. 640) D
37. (p. 640) A
38. (p. 640) D
39. (p. 640) C
40. (p. 645) C
41. (p. 645) D
42. (p. 645) A
43. (p. 645) B
44. (p. 647) C
45. (p. 650) D
46. (p. 650) A
47. (p. 652) B
48. (p. 653) B
49. (p. 653) D
50. (p. 653) B
51. (p. 653) C
52. (p. 653) D
53. (p. 653) C
54. (p. 654) B
55. (p. 655) C
56. (p. 656) B
57. (p. 656) B
58. (p. 656) C
59. (p. 656) B
60. (p. 657) A
61. (p. 657) B
62. (p. 657) D
63. (p. 659) A
64. (p. 661) C
65. (p. 661) B
66. (p. 637) A proxy card is a form stockholders mark giving management the right to vote their shares as indicated.
67. (p. 645) Civil violations can lead to fines of up to $100,000. Criminal violations can lead to fines of up to $50 million and lengthy prison terms.
68. (p. 652) State incorporation laws require boards of directors. They impose two lofty duties on them, first, to represent the interests of
stockholders by conducting a profitable business that enhances share value, and second, to exercise due diligence in supervising management.
69. (p. 656) A fixed or grant price is the price at which a specified number of shares can be purchased in the future by executives who hold options.
70. (p. 657) Restricted stock is a grant of stock with restrictions on transactions that are removed when a specified condition is met. Usually, the
recipient receives dividends and can vote the shares, but cannot sell them until the restriction is lifted. Any specified condition can be a restriction.
71. (p. 633) Corporate governance is the exercise of authority over the members of a corporate community based on formal structures, rules, and
processes. This authority is exercised in accordance with a body of rules that define the rights and powers of shareholders, boards of directors,
and managers. These rules come from multiple sources including state charters or articles of incorporation, state and federal laws, stock exchange
listing standards, and governance policies written by corporations. Fundamentally, they define how power is distributed among these parties and
how disputes are settled.
72. (p. 634-635) The corporate charter is the document that authorizes formation of a corporation. Charters are also called articles of incorporation.
U.S. corporations are chartered by the state in which they incorporate. At the Constitutional Convention of 1787, the Founders debated a federal
chartering power but decided that state controls were adequate to regulate the more geographically limited corporate activity of that time.
Corporate charters specify the rights and responsibilities of stockholders, directors, and officers.
73. (p. 635) Delaware charters about half of all public corporations in the United States. About 17 percent of its state tax revenues come from
chartering fees. The attraction of Delaware, although costs of incorporating there are higher than in most states, is that its corporate laws are
business-friendly. To maintain its addiction to corporate revenue, it has repeatedly innovated more flexible and enabling rules.
74. (p. 636) The legal line of power in state charters and incorporation laws runs from the state, to shareholders, to directors, to managers. However,
this legal theory of power in corporate governance diverges from the reality as widely practiced. The reality is that CEOs often dominate boards of
directors and both together dominate shareholders.
75. (p. 639) Although in theory shareholders have the voting power to influence or even replace management, they rarely exercise it. First,
corporate elections are not fully democratic. They have several elements of democracy. Shareholders are at liberty to vote. Their votes count
equally. The majority rules. However, there is often no contest. Directors usually run unopposed. Stockholders can vote for or against them (or
abstain), but they cannot vote for another candidate. Stockholders can submit nominees to board nominating committees, but the directors do not
have to accept them. Management also has other advantages. It is united, while stockholders are fragmented. Among such a large group of passive
individuals, it is hard for opposition to coalesce. Most shareholders follow management’s voting recommendations. And as proxies come in,
management can see how the vote is going and, if necessary, call on large shareholders, including brokers or pension funds, to change their votes.
In sum, the influence of shareholders is very weak.
• Accounting firm auditors must be rotated every five years and each company must create an audit committee composed of outside directors, one
of whom must be a finance “specialist.”
• It prescribes rules to improve auditing.
• It creates a Public Company Accounting Oversight Board, giving it authority over practices of accounting firms.
76. (p. 645) Some of the main provisions of the Sarbanes-Oxley Act are:
• If a company issues an accounting restatement, it must recoup any compensation paid to an executive based on financial performance.
• In proxy statements companies must disclose the relationship between executive compensation and their financial performance, including
changes in stock values. They must also disclose the ratio of the median pay of all the firm’s employees to that of the chief executive.
• All members of the board committee that sets executive’s compensation must be free of any conflict of interest coming from any paid connection
to the company apart from being a director.
• If an executive is entitled to special compensation in case of merger, buyout, or other change of control, the stockholders must have a chance to
vote their approval or disapproval. The vote is not binding.
• At least once every three years companies have to submit their executive compensation packages to a stockholder vote. The stockholders may
approve or disapprove; however, the vote is not binding.
77. (p. 650-651) While the Dodd-Frank Act’s main focus was financial reform, it did not neglect governance failures observed at companies that
survived the crisis only with government assistance. The public believed investment bankers were overpaid, and so the Dodd-Frank Act moved to
strengthen checks on executive compensation.
• Exercising oversight of ethics and compliance programs.
• Nominating candidates to be presented to the stockholders for election as directors.
• Evaluating the performance of individual directors, board committees, and the board as a whole.
• Creating governance policies for the firm, including compensation policies.
• Giving advice and counsel to management.
• Selecting the CEO, evaluating his/her performance, and removing the CEO if necessary.
• Reviewing and approving the corporation’s goals and strategies.
• Approving the issuance of securities and the voting rights of their holders.
78. (p. 652) All of the following are the typical duties of the board of directors of U.S. corporations:
79. (p. 656) Stock option is the right to buy the company’s stock at a fixed price in the future and under conditions determined by the board of
directors. Options are usually priced at the closing market price on the day they are granted. The holder of the options then can buy these shares
from the company at a specified future date called the vesting date, and must sell them before a later expiration date.
• Fifth, disclosures of compensation policy are difficult to understand. Companies must disclose their compensation plans and the annual
compensation of the top five executive officers to shareholders. They do this in the proxy statements mailed before annual meetings. The sections
on compensation are lengthy. Compensation discussions became more complex in 2006 when the SEC imposed more than 100 pages of new rules
for their contents. Although these rules were intended to give stockholders more “clear, concise and meaningful information,” they may have had a
reverse effect. Most companies now design their discussions to satisfy regulators rather than as a communication to the average shareholder.
• Fourth, executive compensation can be manipulated. When annual CEO salary and bonus are based on accounting measures such as net income,
the CEO can take actions to maximize short-term profits. When compensation is based on stock options, the CEO can delay taking profits until a
future year when options vest. Another problem with options is backdating.
• Third, some compensation committees fail to design and execute adequate compensation plans. Such plans are a complex mixture of art and
science involving many choices and judgments. Compensation tends to increase with company size. Some compensation committees fall under
the spell of a powerful CEO. If pay is to correlate with performance, compensation policies must not only be designed well, but they must be
• Second, compensation is not always aligned with performance. While total compensation is higher in larger firms and mostly follows share price
performance, there are notable exceptions.
• First, critics are outraged by extraordinary payouts. The source of outrage about CEO pay is a sense of unfairness. Usually, CEO pay is
determined by market forces in the competition for managerial talent. Most managers never get the dramatically high salaries that attract criticism.
Spectacular excesses define public perception of pay in corporate America.
80. (p. 659-663) There are multiple shortcomings of CEO compensation. Here are some of the most important:
Category # of Question
Difficulty: Easy 21
Difficulty: Hard 13
Difficulty: Medium 46
Steiner – Chapter 18 80