Question

In any firm, the balance of power between stockholders and managers is a function of a number of factors – internal as well as external. Events can cause the power to shift towards managers or towards stockholders or leave the balance unchanged. Evaluate how each of the following events would alter the balance of power: Management Power increases, Stockholder Power increases or No Effect. Briefly explain each answer.

1. The firm decides to expand its board of directors from 8 members to 15 members and allows the CEO to pick the additional directors. (2.5 points)
2. An activist investor manages to get three of his nominees elected to the board of directors at the expense of management nominees. (2.5 points)
3. A closely held firm (insiders hold 45% of the 200,000 shares) issues 500,000 new nonvoting shares to the public to raise fresh capital. (2.5 points)
4. The state passes a law restricting hostile takeovers. (2.5 points)

Answer 1

1. Expanding Board of Directors strength would help management to have stronghold in decision making.However, there would be increase management power as there are more directors to control the decisions of the management

2. The inclusion of 3 of the investor nominees always helps the investor to gain benefits in any critical voting processes. So the stock holder power increases

3. issuance of non voting rights doesn't secure any power to stockholders. There will be no effect

4. Law against hostile takeovers always benefit stockholders and increase their power by safeguarding stockholders rights and not allowing management to be changes without the consent of stockholders