Power Struggles and Corporate Governance Issues - Explained
How Power Struggles Lead to Corporate Governance Issues
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
Table of ContentsHow does competition for authority within the corporation give rise to issues in corporate governance?What are Internal Power Struggles?What are Friendly Takeovers?Discussion QuestionPractice QuestionAcademic Research
How does competition for authority within the corporation give rise to issues in corporate governance?
The corporate structure is designed to establish limited authority in shareholders, directors, and officers. While the general responsibilities of each are clearly established, the strength of influence on decision making is often distorted by the amount of authority demanded or exercised by each stakeholder. Various aspects of competition for authority are discussed below.
Next Article: What is a Hostile Takeover Back to: CORPORATE GOVERNANCE
What are Internal Power Struggles?
The most notable power struggles come between the board of directors and shareholders. These matters are often settled through shareholder votes or derivative actions by shareholders against the board. In this process, shareholders may seek to assert additional control over director decision making; while directors often seek to diminish shareholder input.
Note: Shareholders do not approve of a strategic course for the corporation as decided by the directors. Shareholders seek to exert influence over the directors to influence their decision making or request that certain actions be submitted to shareholder vote for approval. If the directors decline to follow shareholder urging and it leads to a corporate loss, shareholders have the option of bringing direct or derivative actions against the directors. Further, shareholders may seek to unseat uncooperative directors at election time.
What are Friendly Takeovers?
A common point of conflict may arise between the existing board of directors and prospective acquirers (purchasers of a controlling percentage of outstanding shares) of the corporation. This transaction is known as a corporate takeover or buyout. A takeover is where third parties purchase the outstanding shares of corporate stock and thereby gain control of the corporation. The prospective acquirer(s) may be unrelated third parties, managers, or existing shareholders. The acquirer may petition the board of directors to accept a takeover bid. If the board endorses the offer, it will submit the proposal to existing shareholders. If a majority (or supermajority) of shareholders approve the purchase, the board will repurchase all of the outstanding shares from shareholders at the proposed price. The shares are then surrendered to the acquiring firm. If, however, the board or shareholders reject the acquirers offer, the acquirer may seek alternative methods to acquire control over the corporation, such as through a hostile takeover.
Note: In some cases, a takeover can appear to be friendly but is really hostile. For example, a bear hug is a situation where an acquirer offers a purchase price to the board that is far above expected value. The board may be required to accept or endorse the offer in order to meet its obligations to represent the best interest of shareholders.
Example: I am an activist investor. I see opportunity for creating value in ABC Corp. I make a tender offer to the board to purchase all (or a majority) of outstanding corporate shares. Directors will evaluate the offer and either accept or reject it. In some case, directors are obligated to submit the offer to shareholders for approval or rejection.
- Hostile Takeover
- Power Struggles in Corporate Governance
- Tender Offer
- Proxy Contest
- White Knight and Pac Man Defenses
- Incentivizing Acquirer Defense
- Asset and Liability Defenses
- Shark Repellant Defense
- Poison Pill Defense
- Gray Knight Defense
- Macaroni Defense
- Kamikaze Defense
- Jonestown Defense
- What are the major causes of corporate governance issues?
- What are the access to information issues?
- What are decision-making structure issues?
- What are the power struggle or competition issues?
- What are hostile takeovers and defenses to hostile takeovers?
- Revlon Rule
- What are benefit-alignment issues?
Why do you think power struggles between shareholders and directors often lead to corporate governance issues? Do you believe that the default division of corporate responsibilities is efficient in avoiding or reducing these types of struggles? Why or why not? How do you feel about the concept of a takeover bid from prospective shareholders? Should directors be obligated to submit any offer to shareholders for approval or rejection? Why or why not?
Karl is an activist investor who regularly assumes a large ownership stake in corporations in order to make changes in the corporations that will drive value and produce a return on his investment. He looks at ABC Corp and believes that the CEO is causing a loss of corporate value. He believes that he could replace the CEO with a higher performer and instantly create significant value in the corporation. He could then sell his shares and make a hefty profit. What are Karl's first steps in achieving his objectives?