Question

The management of Fuzzy Button Clothing Company controls 58% of the company’s stock. The firm did not meet any of its quarterly sales projections for the last year. Some of the firm’s institutional investors are worried that the firm’s poor performance is partly because management has not been focused on maximizing shareholder wealth. Which of the following measures would the institutional investors most likely want to see implemented?

-They would want to ensure that the company’s CEO is also the chairperson of the board of directors.

-They would want to change the corporate charter to allow cumulative voting instead of noncumulative voting.

-They would want to change the corporate bylaws so that one-third of the board seats are filled each year and each director serves a three-year term.

It is reasonable to assume that a firm’s management is going to be ultimately motivated to act in their own best interest. It can be a serious problem for shareholders if management’s self-interests do not align with shareholders’ self-interests. Select the statement that best describes the board of directors’ actions in the following scenario:

Cold Duck Brewing Company currently has $1.1 billion in cash on its balance sheet. The CFO thinks the firm will need $600 million in cash to finance operations for the next year. The CFO has recommended that the firm keep the excess cash in a marketable securities portfolio to allow for unexpected costs. However, the board of directors has decided that the firm will pay this money out to the shareholders in the form of a cash dividend.

-The board’s decision will give management the incentive to make decisions that are not in the shareholders’ best interest.

-The board’s decision is extremely risky and not very practical.

-The board’s decision will help align management’s interests with the shareholders’ interests.

Answer 1

1. Option , They would want to change the corporate charter to allow cumulative voting instead of noncumulative voting.

Explanation : Making the chairperson the CEO of the company will result in concentration of power in the same role and the chairperson will more likely focus on his personal goals than the organization goals. If the firm's charter is changed to cumulative voting then the shareholders can distribute his or her shares to whomever they would like to vote. This allows greater freedom and flexibility while choosing the board of directors. Having only a few seats up for election each year will make it difficult for unsatisfied shareholders to gain representation on the board.

2. Option, The board’s decision will help align management’s interests with the shareholders’ interests.