Understanding Principal-Agent Relationships & Effective Oversight in Corporate Governance , Exams of Business Strategy

Download Understanding Principal-Agent Relationships & Effective Oversight in Corporate Governance and more Exams Business Strategy in PDF only on Docsity! Chapter 9  Understand the Concept of Agency o Agency Theory is a theory of relationship between principals (shareholders) and their agents (managers), with emphasis on two problems: (1) the conflicting goals of principals and agents, along with difficulty of principals to monitor the agents, and (2) the different attitudes and preferences towards risk of principals and agents.  Different Mechanisms for Corporate Governance o Ownership Concentration  Actions by large shareholders to protect their interests when they feel that managerial actions of a corporation diverge from shareholder value maximization.  May also obtain a board seat which enhances their ability to monitor effectively. o Board of Directors  A group that has a fiduciary duty to ensure that the company is run consistently with the long-term interests of the owners, or shareholders, of a corporation and the acts as an intermediary between the shareholders and management.  Review and ratify important decisions  Set compensation of CEO and decide when to replace CEO  Recommendations for more effective Board Governance o Use a greater proportion of outside Directors o Increase shareholding of board members as an incentive to monitor more closely o Increase diversity of board members o Establish formal process for evaluation of the board’s performance. o Watch out for interlocking boards. o Executive Compensation  Salary, Bonuses, and long-term incentive compensation  Long-term incentive compensation (stock ownership) makes managers more susceptible to market changes which are partially beyond their control.  Incentive systems do not guarantee that managers make the “right” decisions, but they do increase the likelihood that managers will do the things for which they are rewarded. o Market for Corporate Control  An external control mechanism in which shareholders dissatisfied with a firm’s management sell their shares.  The market for corporate control acts as an important source of discipline over managerial incompetence and waste