ABC corporation suffers a declining of performance recently and shareholders are concerned that the executives might...

ABC corporation suffers a declining of performance recently and shareholders are concerned that the executives might not do their best to run the company. Therefore, the company consults its board directors and people put up the following suggestions for consideration:

Increase the percentage of executive compensation that comes in the form of cash and reduce the percentage coming from long-term stock options as managers prefer stable payment.
Consider to issue shares to institutional investors such as mutual funds, pension funds, and hedge funds to increase the institutional ownership from 30% to 60%.
Consider to hire more independent directors to sit on board.
Change the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period.
To grant the company's outside auditing firm a lucrative year-by-year consulting contract with the company.

Please go through each suggestion and briefly state your thoughts on how the suggestion could possibly solve the conflicts between shareholders and the executives, and conclude your recommendations to the shareholders of ABC corporation.

Expert Solution

"Increase cash compensation v/s stock options" - disagree with this. Providing stock options to the employees helps aligns goals of the organisation with goals of the employees. Hence, the same shouldn't be reduced ideally.
Issuing shares to institutional investors and having additional independent directors will help improve the corporate governance of the entity and will improve the internal processes, hence this should be implemented.
Reducing the vesting period will lead to higher and quicker dilution of the equity capital of the company. However, at the same time, it will lead to increase in morale of the employees. Hence, this may be implemented over the first suggestion i.e. reducing the % share of options in compensation.
Giving a lucrative consulting contract to the external auditors in addition to the audit requirement is not an advisable scenario as it may lead to biasness and will challenge the independence of the auditor.

jeff jeffy answered 2 years ago

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