CHAPTER 12: Discussion Questions and Problems
1. Differentiate the following terms/concepts:
a. Obedience and loyalty
People who are obedient will sometimes disregard their conscience when a person of
b. Little white lies and cooperation
c. Herding and social learning
d. Outside director and independent board member
2. Discuss the merits of the following statement: Inside directors should
constitute the majority of a corporate board because insiders have superior
understanding of the firm’s business operations.
3. Your firm, which specializes in complex electronic products, has grown
rapidly and you are now incorporating. Even after incorporation, a large
percentage of the stock will be held by the founders, including you. Your
colleague recommends a large corporate board made up exclusively of outsiders.
She is very concerned about the sensationalized corporate scandals in recent
years. Do you agree with her recommendation? Explain.
Small boards can be more efficient than larger ones. See Yermack, D., 1996, “Higher
market valuations of companies with a small board of directors,” Journal of Financial
4. Describe the three types of professional financial analysts and identify actual
firms that employ each type.
5. The largest U.S. bankruptcy occurred in 2002 with the fall of Worldcom, Inc.
Its outside directors paid out of their own pockets to settle securities lawsuits, as
did Enron directors. While the Worldcom directors may not have played an
active role in the flagrant accounting fraud, they were criticized for other choices
they made. Research the events surrounding Worldcom and the role played by
its board. What do you think their biggest mistakes were?