solution

Corporate governance

The management of Demo You Inc. 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?

They would like to see that the company has an interlocking board of directors with one of the company’s strategic partners.

They would like to see that the majority of the company’s board of directors is composed of true outsiders.

They would like to see the size of the board of directors increased, because larger boards usually implement a higher degree of corporate governance.

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:

Spordyne Inc.’s optimal capital structure calls for the firm to have 20% debt and 80% equity financing. The firm’s board of directors has decided to include only 10% debt in the firm’s capital structure. The reason for using less than the optimal amount of debt is that the board wants to ensure they can borrow at a reasonable rate if a good investment opportunity arises.

The board’s decision will help to align management’s interests with the shareholders’ interests.

The board’s decision will give management an opportunity to make decisions that may not be in the shareholders’ best interest.

The firm’s amount of debt will not have an effect on the relationship between managers and shareholders.