Question 1

The takeover market as a source of external discipline is used only when internal governance mechanisms are relatively weak and have proven to be ineffective.

Accepted Answer

The takeover market is often seen as a force that can hold companies accountable when internal governance mechanisms are not effective. In other words, it is used as a source of external discipline when internal governance is weak.

Question 2

Critics advocate reforms to ensure that independent outside directors represent a significant majority of the total membership of the board. But, outsider dominated boards may emphasize the use of financial as opposed to strategic controls. The risk of reliance on financial controls is that they may encourage managers to make decisions to maximize their interests and reduce their employment risk.

Accepted Answer

The statement is true, as outsider dominated boards may prioritize financial controls over strategic ones, and this can lead managers to prioritize their own interests over the long-term goals of the company.

Question 3

Stock options attempt to align managers' and owners' interests by tying managerial compensation and firm performance together.

Accepted Answer

Yes, stock options incentivize managers to work towards improving the firm's performance because the value of the options increases with the price of the company's stock. This aligns the interests of managers with those of the owners, who are also interested in seeing their company perform well.

Question 4

The performance of individual board members is being evaluated more formally and with greater intensity than in years past.

Accepted Answer

This statement is true as board member evaluations have become increasingly formalized and thorough in recent years. Companies and organizations are recognizing the importance of board effectiveness and are implementing more structured evaluation processes to ensure the board is functioning at its best.

Question 5

According to the chapter Strategic Focus, the recent crisis in the financial services sector was incorrectly attributed to weak boards of directors.

Accepted Answer

The answer of According to the chapter Strategic Focus, the...

Question 6

When the option strike prices in an executive stock option-based compensation plan have been lowered it is usually a defense to a hostile takeover.

Accepted Answer

Lowering the option strike prices in an executive stock option-based compensation plan is not a typical defense strategy to a hostile takeover.

Question 7

As discussed in the chapter Strategic Focus, Borders' decision to downsize its board was a bad one since research shows that larger boards are more effective at governing companies than smaller ones.

Accepted Answer

Research on board size effectiveness is mixed; larger boards can lead to inefficiencies, while smaller boards can be more agile and effective in decision-making.

Question 8

The use of executive compensation as a governance mechanism is more challenging to firms implementing international strategies than those strictly operating domestically.

Accepted Answer

Implementing international strategies involves dealing with different legal systems, cultural norms and business practices which can make it more challenging to establish a uniform executive compensation mechanism across all locations. This can make it harder for firms to effectively use executive compensation as a governance mechanism in an international context.

Question 9

One of the changes to enhance the effectiveness of the board of directors is the creation of a "lead director" role that has strong powers with regard to the board agenda and oversight of non-management board member activities.

Accepted Answer

The statement is true as creating a lead director role with strong powers is a known method to enhance the effectiveness of the board of directors.

Question 10

A board comprised primarily of outside directors will have better insights as to the firms intended strategic initiatives, the reasons for the initiatives, and the outcomes expected from them than will inside directors.

Accepted Answer

The answer of A board comprised primarily of outside directors...

Question 11

DDD MetalWorks plans to go public in the next two years. In order to be listed on the New York Stock Exchange, the firm will need to restructure its present board of directors which is made up of a majority outside independent directors to a board of directors that is dominated by insiders and related outsiders.

Accepted Answer

The statement is false. The New York Stock Exchange requires companies to have a majority of independent directors on their board, not a board dominated by insiders and related outsiders.

Question 12

A powerful CEO would oppose the appointment of a lead director on the board of directors.

Accepted Answer

The answer of A powerful CEO would oppose the appointment...

Question 13

The market for corporate control is composed of individuals and firms that buy ownership positions or take over potentially undervalued corporations and make changes to those corporations, including the replacement of the top managers.

Accepted Answer

This is a correct statement about the market for corporate control.

Question 14

The separation of the positions of CEO and chairperson of the board of directors reduces the power of the CEO over firm governance practices.

Accepted Answer

Separating the positions of CEO and chairperson of the board of directors creates a system of checks and balances to ensure that corporate governance practices are not solely determined by the CEO, reducing their overall power.

Question 15

Stock option repricing where the strike price value of the option has been lowered from its original position sometimes happens when firm performance is poor.

Accepted Answer

When a company's performance is poor, the value of the stock may decrease, making the option strike price too high for employees to exercise. In this case, the company may choose to reprice the options by lowering the strike price value.

Question 16

Some of the changes occurring on corporate boards as noted in the chapter Strategic Focus are changes to the balance of independent and inside members, renewed emphasis on audit and compensation committees, and ensuring that outside board members spend more time on board business so that they can make informed decisions.

Accepted Answer

These changes are noted in the chapter Strategic Focus.

Question 17

Because top management decisions are usually complex and nonroutine, determining the quality of executive performance is beyond the power of boards of directors.

Accepted Answer

The answer of Because top management decisions are usually complex...

Question 18

According to the chapter Strategic Focus, the weakness of corporate boards was exemplified by the fact that the President of the United States had to fire a highly ineffective CEO because the board of General Motors had failed to act in recent years.

Accepted Answer

The chapter refers to the firing of General Motors CEO by the President of the United States due to the board's failure to act, indicating the weakness of corporate boards.

Question 19

Well-designed stock option-based compensation plans should have the option strike prices substantially lower than the current stock prices.

Accepted Answer

Well-designed stock option-based compensation plans should have option strike prices that are not too low or too high. If the strike prices are substantially lower than the current stock prices, it could result in a very expensive and dilutive plan that is not in the best interests of the company or its shareholders. The strike prices should be set at a reasonable discount to the current market price to provide employees with a meaningful incentive to work towards the company's long-term goals.

Question 20

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

Accepted Answer

Executive compensation is designed to incentivize executives to prioritize the interests of the company's owners, or shareholders, by tying their compensation to the company's financial performance and stock price.

Quiz 10: Corporate Governance