You have been elected to Investment Management Corporation’s (IMC) board of directors. The board consists of five members. Recently, by a vote of four in favor and one opposed (you were the one opposed), the board voted to give annual college scholarships in the amount of $100,000 to local students. Last year, IMC made a profit of $2 million dollars, but the board did not vote to give shareholders dividends. You are concerned that some of the other board members have violated the business judgment rule in making their decision, based on the following additional facts about the four board members who voted in favor of the annual scholarships:
- Peter, who works as a guidance counselor, is newly elected to the board and has only been on the board for one month. Peter has made a cursory review of corporate records. Peter is very good friends with the CEO, who recommended in favor of the vote. Peter also has two children, ages 16 and 17.
- Paul, an advertising executive, is a very busy man and attends about four meetings a year. The board meets every month. Paul has been on the board for 10 years and stays in touch with the CEO whenever he is out of town.
- Mary, a CPA, has been a board member for three years. Mary just returned from a trip to Europe. After two hours of sleep, Mary reviewed all corporate records before voting.
- Janice, a retired high school teacher, serves on many corporate boards of directors. Some of the corporations are competitors of IMC.
- For your initial response, prepare an argument against one or more of the board members, suggesting that the member(s) has (have) violated the business judgment rule
- Be sure to discuss the member’s fiduciary duties and explain which duty or duties the member(s) may have violated and explain why
- Include any assumptions you have made
- Post replies to at least two other students
- You can politely agree or disagree
- You must include new information in your replies to further the discussion
- Doing more than the minimum will enhance your grade
- All posts are to be substantial, incorporate course concepts, and relate to the discussion issue
- You might also want to conduct some independent research to enhance your posts
4/11/2017 9:03 PM EDT | 347 words
The business judgement rule helps uphold the duty of due care by acting to protect the stability and ideally upward progression of the stock value of a business. Decisions that shareholders come to should be decisions that meet a shared rational business purpose.
I have voted against the IMC board’s decision to give annual collage scholarships in the amount of $100,000 to local students because the board did not vote to give shareholders dividends, a a decision which may have a negative effect on the stock value of the IMC: “A company that eliminates or reduces its existing dividend payment may be viewed unfavorably and its stock price may decrease” (Fontinelle, 2016). The IMC made a profit of $2 million dollars last year and is a well-established company that (presumably) has given shareholders dividends before. Stopping dividends may turn off potential investors because dividends are a sign of stable companies that may yield them much profit.
One of the people that voted in favor of the decision, Janice, is a retired high school teacher who may be biased because she may think purely through the college students’ eyes and how they could stand to benefit from a sum of money going towards college. As an employee of IMC, and as a fiduciary, however, and according to the business judgement rule, she should judge in such a way that would benefit the business – the beneficiary. Janice has fiduciary duties because she serves on many corporate boards of directors, and “[a] fiduciary is a person who acts on behalf of another (beneficiary) and is required to do so with great integrity” (McAdams, 2014, p.387). She has violated the fiduciary duty by acting in favor of a decision that may denigrate the stock value of IMC, especially since some of the boards of directions she serves are competitors of IMC. Janice should keep the IMC’s best interest in mind while making decisions on IMC’s board of directors.
Fontinelle, A. (2016, August 08). Why do some companies pay a dividend, while other companies do not? Retrieved April 11, 2017, from http://www.investopedia.com/ask/answers/12/why-do-…
McAdams, Tony (2014). Law, Business, and Society [Kindle for Mac edition.] Retrieved from
4/11/2017 8:25 PM EDT | 420 words
I believe that Peter, Mary, and Janice have violated the business judgment rule. The judgment rule states that a decision is made by a loyal and informed board and will not be overturned unless it cannot be attributed to any rational business purpose. The shareholder challenging the board decision must provide evidence that the directors breached any one of the triads of their fiduciary duty – good faith, loyalty or due care. Directors and officers also owe the corporation a duty of due care which requires that they act in good faith toward the corporation.
In Peter’s case, he has only been on the board for one month and is also very good friends with the CEO which he is violating the rule by not being a loyal and informed board member and there being a conflict of interest. He also has to children ages 16 and 17 which means he is favoring the outcome of the decision being made to not provide shareholders with dividends. Peter failed to act in the best interest of the company because it will save him money if his children are awarded scholarship money to go to college.
Mary just got back from vacation and only had a few hours of sleep before she reviewed the corporate records, therefore, did not have the mindset to make a decision that would be in the best interest of the company and just went in favor of the majority of the votes which is not an honest decision and is also not exercising due care because of the lack of sleep she has had.
Janice is a retired high school teacher and is on numerous corporate board of directors and one of the corporations is a competitor of IMC which also violates the judgment rule because loyalty is one of the factors of being on the board and by being on a board of a competitor of IMC it is not showing good faith and loyalty to IMC. It is Janice’s fiduciary duty to act in the company’s best interest and stay loyal to IMC. Janice may have voted against shareholders getting dividends because a competitor of IMC was against it. Page 388 under the legal briefcase for Shlensky v. Wrigley it talks about how the courts will not interfere with the honest business judgment of the directors unless there is a showing of fraud, illegality, or conflict of interest but I believe the conflict of interest here is Janice is on a board of directors with competitors of IMC.