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Chapter 09 - Strategic Control and Corporate Governance

Chapter 09
Strategic Control and Corporate Governance
True / False Questions

1. The "traditional" approach to strategic control is interactive; the "contemporary" approach
to strategic control is sequential.
True False

2. The traditional approach to strategic control relies on feedback from performance
measurement to strategy formulation.
True False

3. For firms competing in highly unstable and turbulent industries, "traditional" strategic
controls are most appropriate.
True False

4. Sales quotas, operating budgets, and production schedules are examples of "traditional"
controls.
True False


5. In "single loop" learning, the organization's assumptions, premises, goals, and strategies are
continuously monitored, tested, and reviewed.
True False

6. "Contemporary" strategic controls involve comparing actual performance to predetermined
goals.
True False

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Chapter 09 - Strategic Control and Corporate Governance

7. Informational control is primarily concerned with whether or not the organization is "doing
the right things."
True False

8. Continuous monitoring enhances an organization's ability to respond with speed and
flexibility.
True False

9. 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


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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

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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

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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

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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?

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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

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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.

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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.

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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.

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Chapter 09 - Strategic Control and Corporate Governance

55. 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.

56. 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.

57. 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.

58. 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.

59. 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

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Chapter 09 - Strategic Control and Corporate Governance

60. 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.

61. 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.

62. 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.

63. External control mechanisms include all of the following except
A. auditors.
B. analysts.
C. competitors.
D. the market for corporate control.

64. Managerial opportunism can take all of the following forms except
A. shirking.
B. job-hopping.
C. on the job consumption.
D. excessive product diversification.

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Chapter 09 - Strategic Control and Corporate Governance

65. 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.

66. 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.

67. 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.

68. 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 do
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.

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Chapter 09 - Strategic Control and Corporate Governance

69. 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.

70. 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.

71. 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.

72. 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.

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Chapter 09 - Strategic Control and Corporate Governance

73. 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.

74. 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 do not receive dividends.
D. minority shareholders are adversely affected by the actions of controlling shareholders.

Essay Questions

75. What are the advantages and disadvantages associated with using "traditional" approaches
to strategic control?

76. What are the advantages and disadvantages associated with using "contemporary"
approaches to strategic control?

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Chapter 09 - Strategic Control and Corporate Governance

77. What are the four characteristics of effective contemporary control systems? Give
examples of how firms apply these practices.

78. 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?

79. Discuss the benefits and risks of using reward and incentive systems as a means of
strategic control.

80. What are the characteristics of short-term objectives? Provide examples of practical
applications of these characteristics by organizations.

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Chapter 09 - Strategic Control and Corporate Governance

81. What are the three key means to align the interests of owners (shareholders) and managers
in a corporation?

82. What is meant by the term "market for corporate control?" How does the market for
corporate control act as an external control mechanism?

83. Identify at least three external control mechanisms. Discuss the role played by each of
these.

84. What is meant by principal-principal (PP) conflict? What are the implications for sound
corporate governance?

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Chapter 09 - Strategic Control and Corporate Governance

Chapter 09 Strategic Control and Corporate Governance Answer Key

True / False Questions

1. (p. 313 - 315) The "traditional" approach to strategic control is interactive; the "contemporary"
approach to strategic control is sequential.
FALSE

AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 09-2

2. (p. 313) The traditional approach to strategic control relies on feedback from performance
measurement to strategy formulation.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-2

3. (p. 313) For firms competing in highly unstable and turbulent industries, "traditional" strategic
controls are most appropriate.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-2

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Chapter 09 - Strategic Control and Corporate Governance

4. (p. 313) Sales quotas, operating budgets, and production schedules are examples of
"traditional" controls.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-2

5. (p. 313) In "single loop" learning, the organization's assumptions, premises, goals, and
strategies are continuously monitored, tested, and reviewed.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-2

6. (p. 314 - 315) "Contemporary" strategic controls involve comparing actual performance to
predetermined goals.
FALSE

AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 09-3

7. (p. 315) Informational control is primarily concerned with whether or not the organization is
"doing the right things."
TRUE

AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 09-3

9-19


Chapter 09 - Strategic Control and Corporate Governance

8. (p. 315) Continuous monitoring enhances an organization's ability to respond with speed and
flexibility.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-3

9. (p. 316 - 317) As firms downsize, a control system based on rewards and culture becomes
dysfunctional.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-4

10. (p. 317) 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

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-4

11. (p. 318) Once a strong and healthy organizational culture has been established, it becomes
self-sustaining.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-4

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Chapter 09 - Strategic Control and Corporate Governance

12. (p. 319) 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.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-4

13. (p. 319) An organization's reward system is typically a weak method of motivating
employees.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-4

14. (p. 319) Different functional areas within an organization often have different reward
systems.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-4

15. (p. 319) Rewards systems that reinforce an organization's core values and contribute to
organizational cohesiveness are the least effective type.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-4

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Chapter 09 - Strategic Control and Corporate Governance

16. (p. 319) For a reward system to be effective, it must be perceived as fair and equitable.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-4

17. (p. 320) Boundaries and constraints are just used to maintain order in an organization and
have little effect on the organization's strategic priorities.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-4

18. (p. 320 - 321) Short-term objectives and action plans are types of boundaries that channel the
efforts of employees toward goal accomplishment.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-4

19. (p. 320 - 321) 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.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-4

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Chapter 09 - Strategic Control and Corporate Governance

20. (p. 320 - 321) Action plans permit a degree of autonomy for managers who sometimes must
modify activities to achieve the desired outcome.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-4

21. (p. 321 - 322) Boundaries and constraints, when used properly, can minimize improper and
unethical conduct.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-4

22. (p. 324) Rule-based controls are appropriate in organizations where most of the employees
are unskilled.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-4

23. (p. 324) The primary participants in corporate governance, according to Monks and Minow,
are (1) the shareholders, (2) board of directors, and (3) employees.
FALSE

AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 09-5

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Chapter 09 - Strategic Control and Corporate Governance

24. (p. 326 - 327) Central to agency theory is the relationship between two primary players—the
principals (stockholders) and agents (management).
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-5

25. (p. 327) 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

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-5

26. (p. 327 - 328) 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

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-6

27. (p. 333) The risk of being acquired by hostile raiders is often referred to as the takeover
constraint.
TRUE

AACSB: Analytic
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 09-6

9-24


Chapter 09 - Strategic Control and Corporate Governance

28. (p. 334) Auditors are appointed by the Securities and Exchange Commission to audit a
company's financial statements.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-6

29. (p. 334) Stock analysts generally issue more "sell" recommendations than "buy"
recommendations.
FALSE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-6

30. (p. 335) Public companies are required by law to disclose information regarding executive
compensation packages.
TRUE

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-6

31. (p. 335) 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

AACSB: Analytic
Bloom's: Comprehension
Difficulty: Medium
Learning Objective: 09-6

9-25


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