Uncertainty 3 risk and as the number of managerial

Uncertainty
(3) Risk
And as the number of managerial levels increases, so do the
levels of agency costs associated with managerial decision making.
So how do we ensure that managers act in firms interests??
Firm Structure & Control
Topics in Firm Structure & Control
Top Management Teams

|
faculty of economics
and business
K.J.McCarthy 2018
Corporate governance is the system by which businesses are controlled.
The governance structure specifies the distribution of rights and
responsibilities to the firms participants, such as the Board, the managers,
and shareholders. It spells out the rules and procedures.
It provides the structure through which
the company objectives are set, and
the means of attaining those
objectives, and monitoring
performance.
Firm Structure & Control
Topics in Firm Structure & Control
Corporate Governance

|
faculty of economics
and business
K.J.McCarthy 2018
Firm Structure & Control
Topics in Firm Structure & Control
Corporate Governance
The VOC was established in 1602.
Unti 1609, it worked on a project finance basis. In 1609 it became a
public company; its IPO raised 6.4million guilders.
In 1610 the VOC paid dividends in nutmeg and pepper, and
reinvested the profits it generated. Shareholders we pis*ed.
There were allegations that the management were paying
themselves too much, and were giving supply contracts to friends.
Issac Le Maire was the worlds first activist shareholder. He
calculated that the VOC was destroying shareholder value.
In 1622, shareholders threatened to withdraw from the VOC unless…

|
faculty of economics
and business
K.J.McCarthy 2018
Firm Structure & Control
Topics in Firm Structure & Control
Corporate Governance
Mangers provided:
• An overview of investment decisions
• The right to appoint managers
• Time limits for managerial positions
• The right to adjust the managers pay
• Limit the possibility of insider trading

|
faculty of economics
and business
K.J.McCarthy 2018
According to the literature on corporate governance, there are two
ways to insure that managers act in the owners interests:
1. Incentive Alignment
2. Monitoring
- Internal
- External
- Competition Based
Firm Structure & Control
Topics in Firm Structure & Control
Corporate Governance

|
faculty of economics
and business
K.J.McCarthy 2018
There are a number real-world ways to align managerial actions:
1. Cash Bonuses
Managers receive a cash bonus if and when they achieve specified goals.
2. Share Plans
Managerial interests are aligned with a financial stake in the firm.
3. Stock Options
Managers are given the right to buy shares at a specified moment in the future, for a fixed
price. The value of the right increases with the performance of the firm.
4. Temporary Contracts
Managerial employment contracts are for fixed time, and for a limited duration, and are
renewable only if the required performance is attained.
Firm Structure & Control
Topics in Firm Structure & Control
Corporate Governance: Incentive Alignment

|
faculty of economics
and business
K.J.McCarthy 2018
Incentive alignment, agency problems may be reduced, but can
not be totally eliminated. Shareholders remain relative outsiders ,
with less information than the managerial insiders.