Question

Suppose the management of a corporation has a choice of several different projects to choose from due to excess profits. One-third of the shareholders want the management to pursue Project A, about one-third want the management to pursue Project B, and about one-third want the corporation to declare a dividend for the shareholders. How should the corporation decide which course of action to take?

Answer 1

In this scenerio as the management of the corporation has different choice of projects to choose from excess profits and the shareholders of the company have equal viewpoint of all the decisions to be analysed, So it become difficult for the management to reach at any decison.

As we know that the Shareholders are the true owners of the company and have the right to influence any decision in the company, however the company has to evaluate each and every decision properly before implementing it. In the present situation where

a) 1/3rd of the shareholders are in favour of Project 1

b) 1/3rd of the shareholders are in favour of project 2

c) 1/3rd of the shareholders are in favour of dividend to be declared.

The management of the company cannot approve any decision as the majority of the shareholders should agree to a decision but here there is no majority for any decision. In this situation the company has to focus on taking the decision which satisfies all the shareholders because if the company takes decision to pursue project 1, the shareholder's who were in favour of project 2 and the one's who favoured dividend declaration will be unhappy with the company.

Therefore the company has to take a wise decision as it effects the shareholders as they are the ones who invest in the company and keeping them sattisfied is the main motive of any organisation. Moreover the company has to focus on the future ventures as well. So it can take the decisions which can favour the future prospects of growth in the shareholders wealth. If any decision is taken against the shareholder's interest, it can lead to shareholders selling off their holdings which can lead to financial risks for the organisation and the valuation of the company can decrease which is not a good sign for any company.