Reference no: EM132208745

Corporate Governance Tyco International Ltd. was a manufacturer of electronics and medical supplies whose annual sales exceeded $36 billion in 2004. In the wake of a $600 million accounting scandal involving two of the company’s former chief financial officers, its shareholders had won the right to review and approve compensation packages for the company’s executives. At an upcoming shareholder meeting, the compensation package of Edward Breen, chairman and chief executive, would be put to a vote. Breen’s current compensation included a contractually guaranteed base salary, a $3.8 million bonus, and stock options. Consider the following fictitious situation. In addition to a motion by the company board to renew this package (Proposal 1), a small group of shareholder activists had submitted an alternative proposal that added only a $1.5 million bonus to the base salary (Proposal 2). To prepare a compromise, an institutional investor had introduced an amendment to the board’s original motion, combining Green’s base salary with a $1.5 million bonus as well as stock options (Amendment). Suppose also that informal discussions between the board and the shareholders indicated that about 20% of the shareholders opposed the use of stock options (which the company’s current accounting practices did not expense). For that reason alone, the group would opt for Proposal 2, even though it largely favored a higher, rather than lower, level of compensation. The remaining shareholders were split into two different camps, and it was hard to say which camp was larger. One camp preferred Proposal 1 but viewed the Amendment as a good compromise, while the Strategy Exercises 4 other camp also preferred the Amendment over Proposal 2, but considered the original package to be unacceptably generous. Suppose, finally, that the company’s bylaws allowed different voting procedures at the chairman’s discretion. A plurality vote would adopt the option with the largest number of votes. Alternatively, the agenda could include a series of votes by simple majority on whether to accept or to reject a proposal or on which of two options to choose. For instance, the agenda could include a vote on whether or not the original proposal was accepted and then provide for a second vote—should the original proposal fail—on whether to adopt Proposal 2 or the Amendment. Finally, a straw vote could qualify the two options with the largest number of votes for a final majority vote on which of the two qualified options to accept. Assignment: Presiding over the shareholder meeting, how should the chairman try to set the agenda? How should the activists react? If the company were to change its bylaws, what the provisions for voting procedures would you recommend?