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    Do officers and directors in public companies place their own self-interest above those of its shareholders? Explain your answers.

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    1. Do officers and directors in public companies place their own self-interest above those of its shareholders? Explain your answers.

    2. Is shareholder value the only proper concern for corporate management? Should the interests of other stakeholders (employees, customers, community, etc.) be considered independently or only to the extent necessary to enhance the long-term interests of the shareholders?

    3. Mechanically speaking, the shareholders elect the directors who elect the officers. In small businesses, this is the way it really works. However, in big business, the officers have practical control over the nomination and proxy solicitation process. Discuss the distribution of power between the Board and Management. Is increasing the power of the Board at the expense of the power of the Chief Executive always in the best interest of the shareholders?

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    Solution Preview

    1. Do officers and directors in public companies place their own self-interest above those of its shareholders? Explain your answers.

    Shareholders and managers have the principal-agent relationship. In practice, there may arise a conflict between the interests of shareholders and managers. This is referred to the agency problem and the associated costs are called agency costs. Management may not work for maximization of wealth due to following reasons:

    1. Lack of Motivation
    2. Satisfying behavior of Managers
    3. Goal of self survival and survival
    4. Playing safe

    This is known as agency problem. Thus this can lead to the directors placing their own interest above than its shareholders. This type of problem can be solved when employees/management also becomes or shares the ownership of the company.

    2. Is shareholder value the only proper concern for corporate management? Should the interests of other stakeholders (employees, customers, community, etc.) be considered independently or only to the extent necessary to enhance the long-term interests of the shareholders?

    Shareholder's wealth maximization is the prime concern for the corporate management. It involves maximization of cash flows. Benefits of cash flow as criteria:

    ? Maximizes the net present value of a course of action to shareholders.
    ? Accounts for the timing and risk of the expected benefits.
    ? Meets ...

    Solution Summary

    About 200 words with some of the discussion in bullets rather than paragraph format.

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