Corporate Governance

And managers shareholders principals firm owners

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Unformatted text preview: s Shareholders (Principals) • Firm owners • Decision makers Managers (Agents) 7 Agency Relationship: Owners and Managers Shareholders (Principals) • Firm owners • Decision makers Managers (Agents) • Risk bearing spet (principal) Risk pays compensation to a managerial decision-making spet (agent) spet An Agency Relationship 8 Agency Theory Problem The agency problem occurs when: the desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify that the agent has behaved inappropriately Solution: principals engage in incentive-based performance contracts monitoring mechanisms such as the board of directors enforcement mechanisms such as the managerial labor market to mitigate the agency problem 9 Risk Manager and Shareholder Risk and Diversification Shareholder Shareholder (business) risk S risk profile Managerial (employment) (employment) risk profile M risk A Dominant Related Business Constrained Related Linked Diversification B Unrelated Businesses 10 Governance Mechanisms Board of Directors Insiders • The firm’s CEO and other top­level managers Affiliated Outsiders • Individuals not involved with day­to­ day operations, but who have a relationship with the company Independent Outsiders • Individuals who are independent of the firm’s day­to­day operations and other relationships 11 Governance Mechanisms Board of Directors Role of the Board of Directors • Monitor – Are managers acting in shareholders best interests • Evaluate & Influence – examine proposals, decisions actions, provide feedback and offer direction • Initiate & Determine – delineate corporate mission, specify strategic options, make decisions 12 Governance Mechanisms Board of Directors Executive Compensation • Salary, bonuses, long term incentive Salary, compensation compensation • Executive decisions are complex Executive and non-routine and • Many factors intervene making it Many difficult to establish how managerial decisions a...
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