Question

Internal and external corporate governance provisions and activities can take many forms, including a classified board. Which of the following best describes this practice?

a. This practice encourages the classification of board members as insiders or outsiders, depending upon their role or relationship with the company.

b. This practice requires that only a fraction of a firm’s board of directors will be elected in each election.

c. This practice requires that 100% of the members of a firm’s board of directors be elected in each election.

If you were making recommendations to repair a dysfunctional board of directors, which of the following practices would you suggest be implemented? Check all that apply.

a. Senior management’s compensation should include cash and stock options.

b. The CEO should delegate the signing of the company’s federal income tax return to the CFO.

c. The company’s charter should make hostile takeovers easier to accomplish.

d. Members serving on the board’s audit committee should be “independent.”

Answer 1

PART A
To answer the question, first we have to understand what a "classified board" is.

A classified  board is a structure where some of the members serve for different time period depending upon the their respective classification which usually varies between 1 to 8 years.

The classified board consist of "classes", which categorize the positions and tenure of board of directors. In simple terms, we can say that during each year only a specific "class" of director's position is open for election.

Due to this arrangement, if any outside group wants to take over the company, they have to wait for a number of years to take over as only a specific class of director's position is open up for election in each year.

Therefore, we can say that classified boards are type of staggered boards, form with the intention to promote good governance and keep away the hostile takeovers.

As explained above, we can conclude that the best description of classified board is Option b.

PART B

In order to repair a dysfunctional board of directors the following practices should be implemented -:

Option a. Senior mangement compensation should include cash and stock options because by including stock option in the compensation, the senior management attention would be drawn to attain long term profitability.

Option d. Members serving on the board audit committee should be "independent", thereby ensuring that the shareholders are being provided with the complete, accurate, reliable and timely information in respect of financial position of the company.