If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it should design an executive compensation system whose focus is on the firm's long-term value.

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The question presents a claim about how a firm's board of directors should design executive compensation with the goal of maximizing value for stockholders in general, rather than for any specific stockholders, and ties this to focusing on the firm's long-term value.
Option 1: False. This statement would be incorrect if one argued that executive compensation should not emphasize long-term value or that it should instead target short-term results or skew benefits toward particular shareholders. However, in governance theory and practice, maximizing stockholders' wealth over the long run is typically achieved by aligning executives’ incentives with sustained firm performance, which is often best accomplished through long-term value focus rather than short-term boosts. Thus, saying it should not focus on long-term value would be at odds with the standard objective of maximizing shareholder value over time.
Option 2: True. This aligns with the principle of corporate governance that boards should design compensation to promote the firm’s long-run value creation, which generally benefits stockholders as a whole. Long-term pay plans, equity-based incentives, and performance metrics tied to durable value creation help align executives’ incentives with enduring firm performance and overall shareholder wealth, reducing incentives to pursue one-time gains or actions that boost near-term metrics at the expense of future prospects. The emphasis on long-term value is a common mechanism to balance risk, incentive alignment, and sustainable performance for the general shareholder base.
Additional nuance: If compensation were skewed toward short-term targets, it could encourage risky behavior or cost-cutting that harms future profitability, potentially harming the broad stockholder base. Therefore, a long-term orientation in compensation design is consistent with maximizing value for stockholders in general, rather than for a narrow subset of stakeholders.

Business Finance Chapter 01 Quiz

If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it should design an executive compensation system whose focus is on the firm's long-term value.

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