Classmate Exam 3 Set

what is the 1987 definition of sustainability?

meeting the needs of the present without compromising the ability of future generations to meet their own needs

what are the three main changes made in the Deloitte definition of 1992?

1. third party "stakeholders"
2. protecting, sustaining, and enhancing human and natural resources
3. "needed" in a general sense instead of from the view of an individual's "own needs"

what is the definition of normative ethics?

the branch of philosophical ethics that investigates the questions that arise regarding how one ought to act, in a moral sense (what is "right" and "wrong")

what is the underlying ethical stand of the 1987 definition of normative ethics?

society meeting its current needs is (morally) fine as long it also leaves enough for future generations to meet their own needs

(it is fair to say that most religious faiths, morals, and political ideologies have common ground with original definition, so it was not particularly controversial at that point)

what is the definition of normative ethics creep?

slowly evolving the components of a concept that has already been accepted as ethically sound (or virtuous) in order to inculcate new ideas under the existing ethical halo

*halo effect - type of cognitive bias about someone/something negatively influencing one's feelings about that thing/person in another area

What are the 17 sustainable development goals?
(35 years after original definition)

1. end poverty
2. zero hunger
3. good health & well being
4. quality education
5. gender equality
6. clean water & sanitation
7. affordable & clean energy
8. decent work & economic growth
9. industry, innovation, & infrastructure
10. reduced inequalities
11. sustainable cities & communities
12. responsible production & consumption
13. climate action
14. life below water
15. life on land - biodiversity
16. peace, justice, & strong institutions
17. public private partnerships

what is corporate social responsibility (CSR)?

is a business model by which companies make a concerted effort to operate in ways that enhance rather than degrade society and the environment

ps- I got this def from the internet because he never actually provided his own definition on the PowerPoint :/

what are the four steps in the corporate social responsibility pyramid?

1. economic responsibility (be profitable) --> base of pyramid

2. legal responsibility (obey the law)

3. ethical responsibility (be ethical)

4. philanthropic responsibility (be a good corporate citizen) --> top of pyramid

*toward the moral management of organizational stakeholders

what is the definition of economic responsibility?

these are the fundamental responsibilities of a business to be profitable. without economic sustainability, a business cannot sustain its operations or fulfill the other responsibilities.

what is the definition of legal responsibility?

involves complying with laws and regulations. businesses must operate within the legal framework set by society to ensure fair practices and avoid legal repercussions. (false dichotomy)

*you can't have business without laws, according to the 4 conditions of free market

what is the definition of ethical responsibility?

beyond legal requirements, business SHOULD engage in ethical practices. this means doing what is right, just, and fair, even if not explicitly required by law.

*this is where agency theory comes into play

what is the definition of philanthropic responsibility?

these are voluntary actions that businesses take to improve society (examples include: donations, community service, and other initiatives that promote human welfare and goodwill)

*this is where the divisiveness comes into play

what is the definition of environmental, social, and governance (ESG?)

a set of standards for measuring a company's impact on society and the environment, as well as its transparency and accountability

why is CSR and ESG controversial?

it is mandating of the pursuit of selective social issues and the withholding of capital if a company does not share or pursue the same social objectives

what are some examples of why mandating social objectives might cause controversy?

- green new deal
- abortion
- voting rights
- selective intersectionality requirements
- removal of "whiteness"
- on and on....

what are the four main pillars of the circular economy?

1. reduce --> mostly consumables
2. reuse --> retain basic form, used again
3. recycle --> converted to a new form
4. remanufacture -> refurbished to a new(ish) version of basically the same form

why is the circular economy gaining traction with the business community?

- because it is much more actionable; companies have more clarity about where they can (and can't) help

*focused more on improvements, and less on "absolutes"

what is the definition of negative externalities?

when the production or consumption of a product or service results in a net cost to a third party

examples- farming pesticides leaking into water supply

*classical economics already states that all costs, including negative externalities, of production or consumption should be borne by the entity that creates externality. markets can be used to reduce negative externalities.

what are the two main problems making sustainability issues feasible?

1. objectively measuring the extent of the problem
2. attributing an economically rational "valuation" to the cost from the externalities

what is the textbook definition of corporate-level core competencies?

are complex sets of resources and capabilities that link different businesses, primarily through managerial and technological knowledge, experience, and expertise

what is the textbook definition of corporate level strategy?

*this happens to be same definition as the lecture :)

specifies actions a firm takes to gain a competitive advantage by selecting and managing a group of different businesses competing in different product markets

*what business should we be in?

what is the textbook definition of corporate relatedness?

provides opportunities for transferring corporate level competencies across businesses of the firm

what is the textbook definition of economies of scope?

are economic factors that lead to cost savings through successfully sharing resources and capabilities of transferring one or more corporate level core competencies that were developed in one of a firm's businesses to another of its businesses

what is the textbook definition of financial economies?

are cost savings realized through improved allocations of financial resources based on investments inside or outside the firm

what is the textbook definition of market power?

exists when a firm is able to sell its products above the existing competitive price level or to reduce the costs of its primary and support activities below the cost level of competitors, or both

what is the textbook definition of operational relatedness?

provides opportunities to share resources among the operational activities of a firm

what is the textbook definition of synergy?

exists when the value created by business units working together exceeds the value that those same units create working independently

what is the textbook definition of vertical integration?

exists when a company produces its own inputs (backward integration) or owns its own source of output distribution (foward integration)

what is the lecture definition of levels (categories) of diversification?

how much your overall revenue comes from a single line of business, and how related are the activities of the various lines of business?

what are the reasons companies pursue diversification?

1. value creating reasons
2. value neutral reasons
3. value reducing reasons

what is the lecture definition of synergy?

the degree to which the businesses in the portfolio are worth more under the management of the firm than they would be under the ownership

corporate level strategy value = ?

ostencible value

what are the low levels of diversification?

single business & dominate business

single business :

95% or more of revenue comes from a single business

dominate business:

between 70% and 95% of revenue comes from a single business

what are the moderate to high levels of diversification?

related constrained & related linked

related constrained:

is when less than 70% of revenue comes from a single business and all businesses share product, technological and distribution linkages

examples- bic razors, pens, lighters

related linked:

is when less than 70% of revenue comes from the dominate business, and there are only limited competency links between businesses ; some activities in common, but mostly different

examples- the tailgate scenario (remember the lecture)

what is the very high level of diversification?

unrelated diversified (aka, conglomerate)

unrelated diversified

is when less than 70% of revenue comes from the dominate business, and there are no common links between businesses

example- GE

back to reasons of diversification...

value creating reasons?

1. economies of scope (related)
2. market power, the good kind (related)
3. financial economies (unrelated)

what is the lecture definition of economies of scope? (part of value creating reasons)

are cost savings that occur when a firm transfers capabilities and competencies developed in one of its businesses to another of its businesses

what is lecture definition of market power? (part of value creating reasons)

exists when a firm can a) sell its products at prices above the existing competitive level and/or b) reduce the costs of its primary and support activities below the competitive level

*basically, the book is saying that competitive advantages are a type of market power

what is the lecture definition of vertical integration? (part of market power, which is part of value creating reasons)

diversifying along the value chain

backwards- a firm produces its own outputs (upstream)

forwards- a firm moves into the adjacent line of business that is closer to the delivery to the end use (downstream)

what is the lecture definition of financial economies? (part of value creating reasons)

are risk-adjusted cost savings realized through improved allocations of financial resources

2 types:

1. internal capital allocations

2. purchase of other corporations and restructuring it (financial engineering)

*if you have conglomerate, and you don't have chances with economies of scale, how do you make it work? --> internal capital market

value neutral reasons?

1. anti-trust legislation (public choice economies)
2. tax laws (progressive and regressive)

what is lecture definition of progressive income tax

the more money you make the more you pay

ps- regressive is the opposite i.e. inflation

value reducing reasons?

1. managerial motives to diversify
2. increasing managerial compensation

what is the textbook definition of agency costs?

same as lecture definition :)

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

what is the textbook definition of agency relationship?

exists when one or more persons (the principal/s) hire another person or persons (the agent/s) as decision making specialists to perform a service

what is the textbook definition of board of directors?

is a group of elected individuals who oversee managers to ensure that the corporation operates in ways that will best serve stakeholders' interests

what is the textbook definition of corporate governance?

is the set of mechanisms used to manage the relationships among stakeholders and to determine and control the strategic direction and performance of the organization

what is the textbook definition of executive compensation?

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

what is the textbook definition of institutional owners?

same as lecture :)

are financial institutions, such as mutual funds and pension funds, that control large-block shareholder positions

what is the textbook definition of large-block shareholders?

same as lecture :)

typically owns at least 5% of a companies issues shared

what is the textbook definition of managerial opportunism?

is the seeking of self interest with guile (i.e. cunning or deceit)

what is the textbook definition for market for corporate control?

is an external governance mechanism that is active when a firm's internal internal governance mechanism fails

what is the textbook definition of ownership concentration?

same as lecture :)

defined by the number of large-block shareholders and the total percentage of the firm's shares they own

what is textbook definition of shareholder activism?

refers to actions shareholders take with the intent of influencing corporate policy and practice

what is lecture definition of corporate governance?

the set of mechanisms used to manage relationships among stakeholders and to determine and control the strategic direction and performance of organizations

what is the agency relationship?

shareholders (principals/owner) hire decision makers (agents) and create an agency relationship

*when you're an executive, it is NOT your money, you're an agent of the owners

what are some problems with agency relationships?

1. principals and agents have divergent interests/goals
2. shareholders lack direct control of large, publicly traded corporations
3. an agent may make decisions that result in the pursuit of goals that conflict with those of the principal (MAIN ISSUE)
4. it is difficult/expensive for principal to verify that agent has acted appropriately
5. agent falls prey to managerial opportunism

what are different terms for "owners"?

common, residual claimants, principals

what are the external governance mechanisms?

1. market for corporate control
2. regulators
3. creditors

what are the internal governance mechanisms?

1. the board of directors
1. ownership concentration
1. executive compensation

In free market countries, the primary goal of a publicly traded company is to maximize shareholder value. However, only the debt holders can put a company into default if they haven't received payments on the debt. In addition, as a reminder, the Government is not typically one of the major parties involved in "corporate governance." Corporate governance is usually focused on the relationship between managers (i.e., executives), boards of directors, and common shareholders

just know this, it was included on the review sheet :)

what is the board of directors composed of?

1. insiders (CEO, other top level executives)
2. related outsiders (not involved in day to day, but has relationship with company)
3. outsiders (independents from day to day operations)

what are the criticisms of the board of directors?

1. too ready to approve managers' self serving initiatives (rarer now because boards can't afford risk)

2. exploited by managers with personal ties to board members

3. not vigilant enough in hiring and monitoring CEO behavior

4. lack of agreement about the number of and most appropriate

extra 5th bullet - insufficiently educated about the job of being a director

what was the sarbanes oxley legislation?

US law to protect investors by preventing fraudulent accounting and financial practices at publicly traded companies

what are the three managerial defense strategies that will be on this exam?

1. golden parachute
2. greenmail
3. poison pill

what is the golden parachute?

a lump sum payment of cash that is given to one or more top level managers when the firm is acquired in a takeover bid

low success
negligible affect

what is greenmail?

The repurchase of the target firms shares of stock that were obtained by the acquiring firm at a premium in exchange for an agreement that the acquirer will no longer target the company for takeover

medium success
negative affect

what is poison pill?

an action the target firm takes to make its stock less attractive to a potential acquirer

high success
positive affect

what is the lecture definition of shareholder activism?

coordinating large-block shareholders to force changes to the board or strategic direction of the company

examples - atlantic power, elon musk twitter

low levels of ownership concentration?

diffuse ownership- numerous shareholders with small holdings and few, if any, large-block shareholders

*produces weak monitoring of managers' decisions

high levels of ownership concentration?

when large-block shareholders have a degree of wealth, they have power relative to minority shareholders to appropriate the firm's wealth

who are the board of directors elected by?

shareholders

what does "nose in, hands out" mean?

be nosy, ask questions, figure out what is going on but keep hands out <--> not your job

What is the Sarbanes-Oxley Legislation?

 Federal law established to improve corporate governance and accountability in response to the high-profile corporate scandals. It aims to protect investors by enhancing the accuracy and reliability of corporate disclosure 

Ex: Corporate Responsibility: Senior executives like CEO or CFOs ust certify the accuracy of financial statements 

how are stock options valued?

i also don't know if this is right, help me out if you know so I can update it for everyone else

intrinsic value and time value