Question 1

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 balance of power and limits the ability of the CEO to control the board, resulting in better corporate governance practices.

Question 2

One suggestion given in the Chapter 10 Strategic Focus for aligning agents' and principals' interests is to award stock options with a strike price that is the average of the last 90 days and that cannot be exercised for five years.

Accepted Answer

This statement is true according to the information provided in Chapter 10 Strategic Focus. By awarding stock options with a strike price that is based on the average of the last 90 days, it ensures that executives are not able to exercise their stock options based on short-term gyrations in the stock price. Additionally, by making the stock options only exercisable after a period of five years, this aligns executives' interests with the long-term success of the company.

Question 3

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

Outside directors may not have the same level of detailed knowledge about the company's internal operations and strategic initiatives as inside directors, who are more involved in the day-to-day management of the company.

Question 4

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 5

Long-term incentives facilitates the firm's efforts through the board of directors' pay-related decisions to avoid potential agency problems by linking managerial compensation to the wealth of common shareholders.

Accepted Answer

Long-term incentives, such as stock options or performance-based bonuses, align the interests of the managerial team with those of the shareholders. This incentivizes the executives to make decisions that benefit the company's future growth and profitability, as well as the shareholders' wealth, ultimately avoiding potential agency problems between the two parties.

Question 6

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

This is a correct definition of executive compensation.

Question 7

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 8

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

Accepted Answer

This statement is true. There has been a trend towards more formal and rigorous evaluations of board member and board performance in recent years. This is driven by a growing recognition of the importance of strong governance and the need for boards to deliver results in a rapidly changing business environment.

Question 9

A provision of the Frank-Dodd Act called "say for pay" (Chapter 10 Strategic Focus) allows shareholders to approve the compensations packages for top managers.

Accepted Answer

The "say on pay" provision introduced by the Frank-Dodd Act does allow shareholders to approve or reject the compensation packages of top managers.

Question 10

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. While having independent outside directors on a board is important, if they dominate the board, there is a risk of over-reliance on financial controls, potentially leading to self-interested managerial decisions.

Question 11

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

Accepted Answer

The answer of Well-designed stock option-based compensation plans should have...

Question 12

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

This statement is false. The New York Stock Exchange requires a majority of independent directors on the board of a publicly traded company.

Question 13

According to the Chapter 10 Strategic Focus, Walt Disney CEO Robert Iger believes that many CEOs are rewarded primarily for short-term rather than long-term performance.

Accepted Answer

According to the Chapter 10 Strategic Focus, Walt Disney CEO Robert Iger believes that many CEOs are rewarded primarily for short-term rather than long-term performance.

Question 14

Boards with many members from the firm's top management team tend to have weak monitoring and control systems for managerial decisions.

Accepted Answer

Boards with many members from the firm's top management team often have close ties and may not provide effective oversight and accountability for their own decisions. This can lead to a lack of checks and balances in the decision-making process.

Question 15

According to the Chapter 10 Strategic Focus, well-known compensation consultant Graf Crystal reported that there is a relationship between shareholder returns and CEO compensation; companies are paying CEOs for the performance they deliver.

Accepted Answer

The answer of According to the Chapter 10 Strategic Focus,...

Question 16

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

Accepted Answer

This is because executive compensation packages vary widely across countries, making it difficult for firms to create a uniform approach to governance using this mechanism. Additionally, cultural differences may impact how executive compensation is viewed and agreed upon, further adding to the complexity of using it as a governance mechanism in international settings.

Question 17

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 common defense to a hostile takeover. It may be seen as a way to retain key executives, but it is not a direct defense against a takeover bid. Other strategies, such as implementing a poison pill or seeking a white knight bidder, are typically used as defenses against hostile takeovers.

Question 18

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

This statement is true. The creation of a lead director role is a common practice in corporate governance to improve board effectiveness by ensuring there is a clear leadership structure within the board. The lead director has additional responsibilities and authority compared to regular board members, including setting the board agenda, overseeing committee assignments, and facilitating communication among board members.

Question 19

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 true statement. The market for corporate control refers to the buying and selling of ownership positions in corporations, often with the intention of making changes to improve the corporation's performance. This can include replacing the top managers if necessary.

Question 20

Generally, the board of directors can be classified as insiders, unrelated insiders, outsiders, and unrelated outsiders.

Accepted Answer

The answer of Generally, the board of directors can be...

Quiz 10: Corporate Governance

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

One suggestion given in the Chapter 10 Strategic Focus for aligning agents' and principals' interests is to award stock options with a strike price that is the average of the last 90 days and that cannot be exercised for five years.

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.

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

Long-term incentives facilitates the firm's efforts through the board of directors' pay-related decisions to avoid potential agency problems by linking managerial compensation to the wealth of common shareholders.

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.

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

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

A provision of the Frank-Dodd Act called "say for pay" (Chapter 10 Strategic Focus) allows shareholders to approve the compensations packages for top managers.

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

According to the Chapter 10 Strategic Focus, Walt Disney CEO Robert Iger believes that many CEOs are rewarded primarily for short-term rather than long-term performance.

Boards with many members from the firm's top management team tend to have weak monitoring and control systems for managerial decisions.

According to the Chapter 10 Strategic Focus, well-known compensation consultant Graf Crystal reported that there is a relationship between shareholder returns and CEO compensation; companies are paying CEOs for the performance they deliver.

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

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.

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.

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.

Generally, the board of directors can be classified as insiders, unrelated insiders, outsiders, and unrelated outsiders.