Question

In the typical corporate form of organization shareholders elect the Board of Directors, which subsequently "hires"...

In the typical corporate form of organization shareholders elect the Board of Directors, which subsequently "hires" managers. In a brief essay, discuss the importance of choosing an external Board of Directors to oversee a firm's management when separating ownership (shareholders) and control (managers). Discuss the concerns of many shareholders with respect to 'chummy' Boards of Directors.

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Answer #1

Shareholders are provided with a privilege of voting for the Board of Directors of holding company. We'll discuss on why it is important in choosing an external Board of Directors which separates ownership from control by the management as below points:

  1. Management makes many decisions over corporation like share buyback, share consolidation, share repurchase, issuing debt or raising an IPO which will impact the stockholder's value and shareholder's will be obviously concerned about Board of Directors who will hire this management. Hence, choosing the Board of directors is indirectly choosing the controlling management of the company.
  2. In choosing and electing vote for a Board of Director, a shareholder will choose to elect someone who is experienced, who have had positive contribution in his past career, who has made sensible decisions and has competency to make financial decision ahead.
  3. Choosing board of directors who can network with financing could bring the market attractiveness to the company held by the shareholders.
  4. Directors of the Board represents the shareholder's interests, where management will regard the company's health on priority. At times, this may create a principal-agent conflict where both the parties may not agree, thus Directors of the Board supervises wisely with the management's decisions.

We'll discuss over the concerns of shareholders with respect to the friendly Boards of Directors..

  1. Shareholders may openly put their concern over corporate affairs management held responsible by the Board of directors. As the Board of Directors may not be able to create the independent decisions exclusively without company's management help.
  2. Board of directors whoever are friendly and maintain relationships with the management may not be able to have identical views shared with the shareholders since they may get influenced with the management's decisions or ideas.
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