The Compack Corporation is the largest supplier of PC systems in the United States and plans to expand the market to China. Because of separation of management and ownership in corporations, the shareholders of Compack elect board of directors to ensure that management of the company carry out their duties in the best interest of shareholders to maximize the value of the firm. However, the separation of ownership and management creates agency problems and conflict of interest between management and shareholders. Conflict of interest occurs because managers may want to maximize their own interests at the expense of shareholders or select corporate goals not in the interest of owners.

The management of Compack believes that the goals of the company are to survive, beat competition, maintain steady earnings growth, and maximize profits. But these goals present a problem to the financial manager because he thinks that the only way to maximize profit is to cut down costs by reducing wages, stopping employee benefits, delaying maintenance, running down inventories, and taking short$-$run cost cutting measures to increase profits. One member of the board, Michael Nobles believes that these activities are not desirable because they can harm the long$-$run survival of the company. He has called for an emergency meeting of the board of directors of the company to take a second look at the possible goals of the corporation.

Compack Corporation has been in the news recently because of some activities that occurred a year ago. Management of the company reported misleading financial statement through accounting manipulations to artificially increase profits and their bonuses. The Securities Exchange Commission $($SEC$)$ fined the company $$2$ million for reporting false financial information. The managers also took some actions to merge and acquire three unprofitable businesses at a cost of $$2$ billion. The objectives of the mergers and acquisitions, they claimed, were to increase the size of the corporation, ensure operational efficiency, diversify risks, and increase profitability.

The news report stated that management of the company makes decisions that are meant to increase their power, status, and salaries at the expense of shareholders. To prove this point, the news reporter cited an instance that last year the CEO purchased an expensive corporate jet and increased executive compensation by $60\%$ while the stock price of the company continues to decline from $$32$ per share to $$25$ per share in the capital market. There is an obvious abuse and misuse of corporate assets. It stated that during the election year the management contributed $$8$ million of corporate dollars to their favorite charities and political parties for glory and favors.

The board of directors is aligned with management and do not fully act in the interest of the shareholders. The chairman of the board of directors is the CEO of the company and has great control and influence over most of the board members. The issue of agency problems is not only common in Compack Corporation but in all corporations. Agency problems pose a threat to the capital market and investor confidence. Corporate governance studies have, therefore, received global attention to ensure management accountability and to reduce or eliminate the principal$-$agent problem.

Please answer the following concept questions:

Who are the owners of corporations? $($Choose one: shareholders, CEO, board of directors, management, or federal government$).$

Identify the goal of financial management that the board should consider at the meeting. Explain with two reasons why that goal you stated is important for the corporation.

Does the goal of financial management differ for financial management in China or any foreign country? Why or why not?

The board of the company wants to avoid any ambiguity of the duties of the financial manager. List three corporate finance activities that should be the main areas of concern to the financial manager.

All things being equal, which one of these three companies is likely to create value for its shareholders and why:

Compack Corporation

Hewlett$-$Packard Co$.$

Snyk Inc

Profit

$$102$ million

$$200$ million

$$250$ million

Cash flow

$$35$ million

$$15$ million

$($$$10$ million$)$

Shares outstanding

$2$ million

$2$ million

$2$ million

Uses of cash flow

$$20$ million

$$20$ million

$$16$ million

Explain agency theory and describe three agency problems facing Compack Corporations.

Do you think agency problems are likely to be severe or less severe in partnerships and sole proprietorships than in corporations? Why or why not?

The current stock price of Compack Corporation is $$25$ per share. Another company wants to buy Compack and will pay $$35$ per share to acquire all the outstanding stock. The management immediately begins to fight off this hostile bid. Is management acting in the best interest of shareholders? Why or why not?

Identify four corporate governance mechanisms that can be used to reduce the agency