Corporate Governance Corporate Governance 2 — Questions and Answers
Question 1: Which committee is primarily responsible for setting executive compensation in a publicly traded U.S. company?
- Audit Committee
- Compensation Committee (Correct answer)
- Nominating Committee
- Risk Committee
Correct answer: Compensation Committee
The Compensation Committee of the board sets and oversees executive pay packages to align management incentives with shareholder interests.
Question 2: What does the 'say-on-pay' provision under Dodd-Frank require?
- Board members must disclose personal compensation
- Shareholders vote on executive pay packages at least every three years (Correct answer)
- CEOs must cap pay at 100 times median employee salary
- Compensation committees must be fully independent
Correct answer: Shareholders vote on executive pay packages at least every three years
Dodd-Frank's say-on-pay provision gives shareholders a non-binding advisory vote on executive compensation at least once every three years.
Question 3: A 'poison pill' defense mechanism is formally known as a:
- Leveraged buyout provision
- Shareholder rights plan (Correct answer)
- Staggered board election
- Golden parachute clause
Correct answer: Shareholder rights plan
A shareholder rights plan (poison pill) dilutes an acquirer's stake by allowing existing shareholders to buy additional shares at a discount if a hostile takeover is attempted.
Question 4: Under the Business Judgment Rule, courts will generally defer to board decisions if directors acted:
- In their personal financial interest
- With gross negligence but good intentions
- On an informed basis, in good faith, and in the honest belief it served the corporation (Correct answer)
- Only after shareholder approval was obtained
Correct answer: On an informed basis, in good faith, and in the honest belief it served the corporation
The Business Judgment Rule protects directors who made decisions on an informed basis, in good faith, and with the honest belief the action was in the corporation's best interest.
Question 5: Which of the following best describes a 'dual-class share structure'?
- Two separate classes of preferred and common stock with equal voting rights
- A structure where some shares carry more votes per share than others (Correct answer)
- An arrangement where insiders and outsiders hold equal board seats
- A capital structure requiring two separate IPOs
Correct answer: A structure where some shares carry more votes per share than others
A dual-class share structure grants different voting rights to different share classes, often allowing founders to retain control despite holding a minority economic interest.
Question 6: What is the primary governance concern with interlocking directorates?
- They reduce board size below legal minimums
- Directors serving on multiple competing boards may face conflicts of interest (Correct answer)
- They require SEC registration of all board members
- They prevent independent directors from serving on the audit committee
Correct answer: Directors serving on multiple competing boards may face conflicts of interest
Interlocking directorates occur when directors serve on boards of competing companies, creating potential conflicts of interest and reducing competitive independence.
Question 7: Which governance principle is most directly supported by requiring a separation of the CEO and Board Chair roles?
- Transparency
- Accountability
- Independence (Correct answer)
- Sustainability
Correct answer: Independence
Separating the CEO and Board Chair roles enhances board independence by ensuring the person overseeing management is not also the head of management.
Corporate Governance Corporate Governance 2
Which committee is primarily responsible for setting executive compensation in a publicly traded U.S. company?