Carpet Co was founded 10 years ago as a shareholding company, manufacturing carpets for business premises such as offices and shops. Last year the board of management decided that the company should diversify by selling its products through retail outlets to both personal and business customers. The board has recently entered into contracts on behalf of the company to purchase five shops. The new shops will be opened over the next few months, supported by a high profile advertising campaign.

The proposed entry of Carpet Co into retailing has angered several shareholders, who believe that the company is taking unnecessary risks that will reduce profitability in the short-term, thereby threatening dividends and the capital value of their shares. Some shareholders have expressed a view that the board has acted unlawfully by purchasing the shops, as the objective of the company as set out in the Charter specifically refers to manufacturing carpets, but not to selling carpets in the retail sector. Others feel that the initiative will require what they consider to be an irresponsible level of expenditure on marketing and sales, with no guarantee of success.

Required:

(a) Discuss the extent to which the shareholders, who object to the new initiative, will be able to prevent the board of management from implementing its plans.

(b) Discuss the potential consequences to the members of the board of management in respect of the decisions they have taken.