GMAT Reading Comprehension
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Source: GWD
Level: 3
Although recent censure of corporate boards of directors as "passive" and "supine" may be excessive, those who criticize board performance have plenty of substantive ammunition. Too many corporate boards fail in their two crucial responsibilities of overseeing long-term company strategy and of selecting, evaluating, and determining appropriate compensation of top management. Attimes, despite disappointing corporate performance, compensation of chief executive officers reaches indefensibly high levels, Nevertheless, suggestions that the government should legislate board reform are premature. There are ample opportunities for boards themselves to improve corporate performance.
Most corporate boards' compensation committees focus primarily on peer-group comparisons. They are content if the pay of top executives approximates that of the executives of competing firms with comparable short-term earnings or even that of executives of competing firms of comparable size. However, mimicking the compensation policy of competitors for the sake of parity means neglecting the value of compensation as a means of stressing long-term performance. By tacitly detaching executive compensation policy from long-term performance, committees harm their companies and the economy as a whole. The committees must develop incentive compensation policies to emphasize long-term performance. For example a board's compensation committee can, by carefully proportioning straight salary and such short-term and long-term incentives as stock options, encourage top management to pursue a responsible strategy.
The passage suggests which of the following about government legislation requiring that corporate boards undergo reform?
- A Such legislation is likely to discourage candidates from joining corporate boards.
- B Such legislation is likely to lead to reduced competition among companies.
- C The performance of individual companies would be affected by such legislation to a greater extent than would the economy as a whole.
- D Such legislation would duplicate initiatives already being made by corporate boards to improve their own performance.
- E Corporate boards themselves could act to make such legislation unnecessary.