Question 1

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 statement is true because implementing international strategies involves operating in diverse cultural, legal and economic environments, which may make it difficult to design an appropriate executive compensation plan that satisfies stakeholders in all locations. Additionally, there could be differences in executive compensation regulations and tax laws across countries making it challenging to design a standard executive compensation plan.

Question 2

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...

Question 3

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 indeed a governance mechanism that is used to align the interests of managers and owners by offering them a variety of compensation options, including salaries, bonuses, and long-term incentive compensation such as stock awards and options. The idea is to encourage executives to act in the best interests of the company and its shareholders, while also attracting and retaining top talent.

Question 4

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 tend to have weak monitoring and control systems for managerial decisions as they may prioritize loyalty to the management team over objective decision-making.

Question 5

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 6

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

In order to be listed on the New York Stock Exchange, a majority of a company's board of directors must be independent outsiders. Therefore, DDD MetalWorks would need to restructure its board to have a majority of outside independent directors, not insiders and related outsiders.

Question 7

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 suggestion is mentioned in the chapter as a way to align the interests of agents and principals by incentivizing long-term thinking and performance.

Question 8

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 9

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 between the CEO and the board, thereby reducing the CEO's authority over the firm's governance practices.

Question 10

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

Accepted Answer

The statement indicates that board member evaluations are becoming more formal and thorough, which is a trend seen in many organizations.

Question 11

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 help align the interests of managers with those of common shareholders, thereby reducing agency problems.

Question 12

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 13

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 the creation of a lead director role with enhanced powers is a commonly cited change to improve the effectiveness of the board of directors.

Question 14

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 definition of the market for corporate control.

Question 15

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 the option strike prices set at or above the current stock prices to ensure that the options have value at the time they are granted. If the strike price is substantially lower than the current stock price, the options could be considered "in the money" at the time of grant, which may result in unfavorable tax consequences for both the company and the employee.

Question 16

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 option strike prices in an executive stock option-based compensation plan does not directly relate to a defense against a hostile takeover. It may be a way to incentivize executives and retain their loyalty, but it is not a typical defensive measure against a takeover attempt.

Question 17

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

This statement is true. While having independent directors on the board can provide greater accountability and transparency, they may not necessarily have the same level of strategic understanding and vision as insiders. This could result in a board that prioritizes financial metrics over long-term strategic planning, which may not be in the best interest of the company in the long run. Additionally, if financial controls are overemphasized, managers may be incentivized to prioritize short-term gains over long-term growth and stability.

Question 18

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 19

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 20

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 provision of the Frank-Dodd Act called "say on pay" does allow shareholders to approve the compensation packages for top managers.

Quiz 10: Corporate Governance

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

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

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.

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.

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.

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.

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

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

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.

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.

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.

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

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.

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

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

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.