Corporate Governance

One aspect of corporate governance is agency relationship. This is the relationship between principals and their agents, with emphasis on two problems: the conflicting goals of principals and agents, along with the difficulty of principals to monitor the agents, and the different attitudes and preferences towards risk of principals and agents. Another aspect of corporate governance is managerial opportunism. This is where a manager is pursuing their own interest to the detriment of the corporation. Managers will spend corporate funds on expensive perquisites, devote time and resources to pet projects, engage in power struggles and negate attractive merger offers because they may result in increased employment risk. The next aspect of corporate governance is the corporate governance problem. This is where the relationship among various participants in determining the direction and performance of the corporation fail to align managerial motives with the best interest of the shareholders, elected representatives and the board of directors. There are also governance mechanisms; the first is the board of directors. They are a group that has a fiduciary duty to ensure the company is run consistently with the long-term interests of the owners, or shareholders, of a corporation and that acts as an intermediary between the shareholders and management. The next mechanism is executive compensation; this is the most critical roles of the board of directors is to create incentives that align the interest of the CEO and top executives with the interest of owners of the corporation. This is to adopt policies and strategies that maximize the value of the stockholders shares. The board can require CEOs to become substantial owners of company stock, base salaries and bonuses on performance and they can also enforce dismissal for poor performance. Another mechanism is threat of takeover; this is the risk to management of the firm being acquired by hostile raiders. The next section deals with strategic controls and how they are used within organizations.