Question

In: Operations Management

Zaxxone Oil Company, Inc., headquartered in Mobile, Alabama, is a multinational corporation with 2012 annual profits...

Zaxxone Oil Company, Inc., headquartered in Mobile, Alabama, is a multinational corporation with 2012 annual profits of $45 billion. Zaxxone has 12 board members who serve the company on a part-time basis, with each board member receiving an average of $300,000 per year in compensation.

Emily Chanel, a pre-law student at the University of Alabama in Mobile, is quite familiar with Zaxxone, and she has studied her business law textbook material on corporations and their directors, officers, and shareholders very carefully. She recalls that a board of directors and its members owe a strict fiduciary duty to the corporation; as part of this fiduciary duty, the board must exercise oversight in monitoring the actions of corporate employees, including the executives and officers of the corporation.

Chanel ponders, "How can board members of a major corporation be truly objective when they are being paid such lavish sums of money? Wouldn't Zaxxone board members have a 'don't rock the boat' mentality in terms of exercising their oversight function?”

"Why, for example, would a Zaxxone board member question the practices of the company's high-ranking executives and officers when such an inquiry might jeopardize his or her $300,000 per year annual compensation? Make no bones about it—if I were a board member at Zaxxone, I would probably be a 'yes-woman' and approve of everything the chief executive officer, the chief financial officer, and the chief operating officer wanted to do!“

How would you respond to Chanel's questions and overall concerns about board members' compensation and objectivity?

Solutions

Expert Solution

Chanel's questions and concerns are perfectly valid as the huge compensation for board members will influence their decisions and they will be supporting the CEO and management most of the time. Board members have fiduciary duties and act as custodians of investors interest in the companies. Paying the board members compensation will definitely compromise the integrity of some of the board members who may not be willing to risk the compensation. They would rather wait of the time and if anything arises, then resign from the membership.

The best way to respond to channels allegations is to make changes in the pay structure having a fixed fee for board members attending board meetings and providing board members with incentives only when the firm makes a profit. A board membership is not income making post and should be kept it that way. All other fees and conveniences should be paid other than compensation.


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