4. Corporate governance Aa Aa The management of Badger Corp. controls 58% of the

Question

4. Corporate governance Aa Aa The management of Badger Corp. 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? O 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. O They would want to change the corporate charter to allow cumulative voting instead of noncumulative voting. O They would want to ensure that the company's CEO is also the chairperson of the board of directors. 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 General Forge and Foundry Co.'s board of directors has decided to buy back 200,000 shares of the company's stock on the open market. The board believes that this stock repurchase will increase the firm's earnings per share. O The board's decision will help align management's interests with the shareholders' interests. The board's decision will give management the incentive to make decisions that are not in the shareholders' best interest. O A stock repurchase will not have an effect on the relationship between managers and shareholders.

Explanation / Answer

1. Institutional investors would want cumulative voting. By using cumulative voting they can vote proportionately to the number of shares they hold and caste all votes to take decisions that increase shareholder wealth.

2. Option 1. A buyback increases the value per share for shareholders and creates shareholder's wealth. Hence, the management interests and shareholders interests gets aligned.

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