GMAT Verbal Reasoning Practice Test 1
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the company underperforms than is a board dominated by senior managers of the company, because company underperformance jeopardizes outsider directors’ reputations as experts in decision control. Insider directors, on the other hand,
are disinclined to challenge a CEO because their careers are tied to the CEO’s.
Differences in their perceived self-interests also help explain insiders’ and outsiders’ differences concerning the choice of a new CEO. When the appointment of a particular CEO would significantly enhance their prestige, outsider directors
generally select the candidate, whether or not the candidate is an outsider. However, since directors represent the interests of shareholders, who tend to view the appointment of an outsider CEO more favorably than that of an insider,
especially when an incumbent CEO is forced to resign, a board dominated by outsider directors ordinarily appoints an outsider CEO. In contrast, a board with a large proportion of insider directors usually prefers an insider CEO both because
policies developed and implemented by the directors are less likely to be altered substantially and because there is usually less turnover of senior managers after the new CEO is appointed.
Directions for Q.No : 18 - 20
The status of directors as company insiders or outsiders is crucial to the choices they make regarding chief executive officers (CEO’s). A board of directors dominated by company outsiders is more likely to force out the company’s CEO whenthe company underperforms than is a board dominated by senior managers of the company, because company underperformance jeopardizes outsider directors’ reputations as experts in decision control. Insider directors, on the other hand,
are disinclined to challenge a CEO because their careers are tied to the CEO’s.
Differences in their perceived self-interests also help explain insiders’ and outsiders’ differences concerning the choice of a new CEO. When the appointment of a particular CEO would significantly enhance their prestige, outsider directors
generally select the candidate, whether or not the candidate is an outsider. However, since directors represent the interests of shareholders, who tend to view the appointment of an outsider CEO more favorably than that of an insider,
especially when an incumbent CEO is forced to resign, a board dominated by outsider directors ordinarily appoints an outsider CEO. In contrast, a board with a large proportion of insider directors usually prefers an insider CEO both because
policies developed and implemented by the directors are less likely to be altered substantially and because there is usually less turnover of senior managers after the new CEO is appointed.
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