Question

Suppose you decide (as did Steve Jobs and Mark Zuck- erberg) to start a company. Your product is a software platform that integrates a wide range of media devices, including laptop computers, desktop computers, digital video recorders, and cell phones. Your initial market is the student body at your university. Once you have estab- lished your company and set up procedures for operating it, you plan to expand to other colleges in the area and eventually to go nationwide. At some point, hopefully sooner rather than later, you plan to go public with an IPO and then to buy a yacht and take off for the South Pacific to indulge in your passion for underwater photog- raphy. With these issues in mind, you need to answer for yourself, and potential investors, the following questions.

g. What characteristics of the board of directors usu- ally lead to effective corporate governance?

h. List three provisions in the corporate charter that affect takeovers.

i. Briefly describe the use of stock options in a compensation plan. What are some poten- tial problems with stock options as a form of compensation?

j. What is block ownership? How does it affect cor- porate governance?

k. Briefly explain how regulatory agencies and legal systems affect corporate governance.

Answer 1

g

Characterisitics of Board of Directors that leads to effective Corporate Goverance

Decision making

The BOD should be capable of making the best decisions within a short span of time.

Commitment

The BOD should be committed to their word of mouth. And commitment to the work is also very important.

Acceptance to change

The BOD should be bold enough to accept a positive change.

Technical knowledge

The BOD should have the required expertise and relevant skill set for better understanding.

h

Three provisions in the corporate charter that affect takeovers

Shareholders right provisions

Restricted voter right plans

Targeted shareholder repurchases

i

Stock options in a compensation plan gives the owner the right to buy a share of the company’s stock at a specific price even if the actual stock price higher. This option is generally not available to be exercised for some years to come, which is referred to as the vesting period. And the option cannot be exercised after a certain number of years, referred to as the expiration period.

Some potential problems with stock options are management cannot perform to the highest potential of the market or peer group, but still reap the benefit if long as the prices of the stock is high and there is a specified price for the stock option, the manager is going into the purchase of stocks with more value than what the stock was purchased.

j

A block holder is the owner of a large amount of a company's shares and/or bonds, or block. In terms of shares, these owners are often able to influence the company with the voting rights awarded with their holding.

Block holders usually monitor the managers and take control, leading to better corporate governance.

k

Organizations that are affiliated in countries where there is strong protection for investors tend to have better access to financial markets, lower cost of equity, increased market liquidity, and less noise in stock prices.