Short review Q2

Question 1

why is it so hard to find a new ceo

Answer 1

• small labour pool for difficult position
• difficult/demanding high stakes position
• hard to evaluate skills through an internview

Question 2

CEO have higher what compared to the average population

Answer 2

cognitive, non-cognitive and emotional and psychological stability

Question 3

have internal candidates ever been ceo before?

Answer 3

no

Question 4

have external possibly been ceos

Answer 4

yes

Question 5

pros of an internal ceo

Answer 5

• known leadership style, culture and corporate fit
• less expensive
• great in times of stability
• can groom/train for the specific position by addressing weaknesses
• quicker onboarding
• shows contiuity and stability

Question 6

internal ceo tend to ____-perform external ceo

Answer 6

out

Question 7

cons of internal ceo

Answer 7

• no previous ceo experience
• need to commit to the plan long in advance
• more of the same thing

Question 8

what is heir apparent and list 2 negatives

Answer 8

candidate promoted to position of COO or president
- responsibilities but be clearly differentiated from ceo
- can be stuck in the position for too long

Question 9

what is the horse race and give 4 features of it

Answer 9

company promotes 2 or more candidates and lets them fight it out for the position
- no advance commitment to a candidate
- hiring is ublic
- different factions who support different candidates form
- losers will resign and company will suffer a brain drain

Question 10

when was an external ceo traditionally hired and what is going on now

Answer 10

was traditionally hired in time of underperofrmance, now hired even in good perfromance

Question 11

list 3 pros of an external hire

Answer 11

• best when company needs a diretion and strategic change
• might have previous ceo experince
• no previous work baggage to bring

Question 12

list 3 cons of an external hire

Answer 12

• very expensive
• high risk of poor fit
• longer onboarding and getting acquanted with new copmpany

Question 13

why is succession planning important

Answer 13

• reduces hiring costs
• reduces anxiety
• prepared for crisis
• shows tranparency in planning

Question 14

how is succession planning done

Answer 14

ongoing procces of having internal and external candidates

Question 15

who is responsible for finding new ceo

Answer 15

nominating nd compensating committee

Question 16

why fire a ceo

Answer 16

• failed m&a
• poor perfromance
• misconduct

Question 17

why might a ceo perfrom bad and not be fired

Answer 17

• small candidate pool
• very expensive
• comapny not prepared with succession plant
• committe/boad dont care
• planned retirement soon

Question 18

what is the purpose of compensation

Answer 18

• attract
• maintain
• motivate

Question 19

why are some board memebers not sufficiently effective at setting compensation

Answer 19

• lack of independance
• not engaged
• lack of power relative to ceo

Question 20

what is included in a compensation package and is it st or lt

Answer 20

salary s-t
bonus s-t
equity in company l-t
- stock options
- restricted stock
- perquisites

Question 21

what are the categories of bonus

Answer 21

• giaranteed bonus
• min/max amounts
• based on financial or non-fin amounts
• discretionary

Question 22

what are stock options

Answer 22

right to buy shares in the future at a fixed rate. price is usually what is is on grant date

Question 23

stock options v_____ and e______

Answer 23

vest and expire

Question 24

what is vesting

Answer 24

whne the stock is “earned” over time

Question 25

what is optimal contracting

Answer 25

Efficient process of pay competition and market foces. Efficient negotiation between Principal and candidates for CEO. Value that CEO creates is shared equitably among shareholders, stakeholders and CEO

Question 26

what is rent extraction

Answer 26

Choosing CEO compensation is not an efficient process. It is a market failure to be efficient and CEOs extort influence on Board of Directors

Question 27

what are the three steps in deciding on compensation

Answer 27

- comp. committee designs structure of compensation with amounts from BoD, and consults HR and Finance - package is voted on and approved by INDEPENDENT directors - shareholders must then approve salary and equity based comp. based on "say on pay"

Question 28

what is the target ownership plan

Answer 28

plan that dictates that a CEO must have a set amount of their salary as equity in the company

Question 29

what are three positives of the target ownershipp plan

Answer 29

- incluences risk taking - aligns interest - reduces agency costs `

Question 30

in what ways is an inclination in risk taking acted upon (4 wayss)

Answer 30

- increase spenidign on R&D - reduce diversification - more leverage - spend on expansions

Question 31

How can management act negatively in increased risk taking

Answer 31

- can manipulate accounting records

Question 32

how can manipulation of accounting happen

Answer 32

- inflate earings to achieve bonus - manipulate timing of grants - manipulate timing of sensitive info being released

Question 33

maniulation in accounting increases a_______ c_____

Answer 33

agency costs

Question 34

what is used to mitigate accouting maniulation

Answer 34

clawback provisions

Question 35

hedging allows for diversification without

Answer 35

immediate selling of your equity

Question 36

what causes the want for hedging

Answer 36

concentrated positions in the company such as your portfolio having a high % of the stock, which makes you want to diversify

Question 37

what are the positives of hedging

Answer 37

- might be tax advatageous - minimizes public outlash that would happen if selling

Question 38

what are negatives of hedging

Answer 38

- lowers inscentive to perform - giving too many S/O creates the opportunity for a CEO to be risk averse and hedge his position

Question 39

it is ______ to short sell

Answer 39

illegal

Question 40

it is _______ to buy puts

Answer 40

legal

Question 41

do all coampnies allow hedigng

Answer 41

no

Question 42

what is pledging

Answer 42

essentially using your equity in the company as collateral for a loan

Question 43

what are the posistives of pledging

Answer 43

- lower interest rates - can diversify while holding position in comapny - tax advantageous

Question 44

what are hte negatives of pledging

Answer 44

- chages inscentive structur

Question 45

pledging transactions deserve _________ considerations

Answer 45

special

Question 46

what is the difference between CEO and regualr e ployees when it comes to pledging

Answer 46

often ceo not allowed to pledge but employees can

Question 47

is the tipper punishable in an insider trade even if they dont trade

Answer 47

yes

Question 48

what is the blackout trading window

Answer 48

certain period, usually 50 days, where certain empoyees are not allowed to buy or sell any shares. this is done before earnings, product, acqusition annoucenemnts