Corporate Governance Essay Example


From an agency theory perspective, provide an explanation for having a “good” corporate governance structure.

The agency theory is the relationship between the shareholders and the company’s agents who are the executives and managers. Shareholders being owners of the company hires the agents and delegates the running of the business to them transparently. (Clarke, 2004). The agents are expected to make decisions to the advantage of the shareholder/principals to the good of the shareholders (Padilla, 2000).

Good governance structure is reliable of the strategic guidance and monitoring of the company’s management and accountable to the company and shareholder. The structure should be accountable of reviewing corporate strategy, risk policy, budgets and business plan, selecting, monitoring, replacing executives and overseeing their succession, ensuring transparent board nomination process, oversees all the activities in the company and make changes if need be (Ching et al, 2006). Since they manage the company on behalf of the shareholder, they are expected to authorize major transactions, declare dividends and authorize sales of any securities (Monks & Minow, 1991).

In this kind of a structure power and authority is concentrated in one person, thus effective decision making, unity of direction and strong command control is evident resulting to effectiveness and produce which means there will be superior returns to the shareholders. The reward scheme in this theory which gives the agent some shares in subsidized prices means that the financial interest of the share holders aligns with those of the mangers; maximizing returns to the benefit of the shareholders (Leung & Horwitz, 2004).

It is argued that the separation of ownership from control in corporations allows shareholders to avoid full costs associated with the benefits that they receive. First, briefly explain how this situation occurs. Second, discuss the implications of this situation for society at large.

Separation of ownership and control is evident in publicly held corporations where shareholders possess very little or have no direct control over the management decisions. These being the case, manager use their position in order to obtain private gains with the expense of shareholders. They increase the company’s size with the aim of increasing their managerial compensations and prestige and enhance job security (Firth, 1991). They utilize free cash flow for non important projects rather than channeling them to the shareholders. (Jasen, 1986). They concentrated ownership and can maneuver through voting rights and cash flow using dual class shares and pyramids structures (Morck et a, 2000). They are well positioned to extract personal benefits from the company. Like the agency increase in voting rights far above the cash flow from the rights ( Bebchuk et al, 2000); this leaves the minority shareholders at risk.

This kind of control has negative impacts on the society in many ways. First it may result to having individuals who are not competent in running the business like professionals who have to build their reputation in the labor market. The cost of this opportunity is shared by all shareholders while the private benefits are entirely to the individual (Perez-Gonzalez, 2001).the pyramid structure will fight hard to ensure that the same individuals retain their readership via the dual class voting shares. There may be an unwillingness to invest in the organization if the mangers don’t commit to behavior that is beneficial to shareholders (Akerlof 1970)


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