Question

who owns a Corporation? What is the process whereby the owners control the firm's management. What is the agency relationship that exists in a corporate organization? What agency problems can arise?

Answer 1

Shareholders are the sole owners of a company . They are eligible to elect directors, to vote on major corporate decisions (such as mergers) and to share in the company's profits. Shareholders do not, however, have the right to control the day-to-day activities of the company.

The corporate ownership type, the shareholders are owners of the company. The shareholders elect the company's directors, who in turn select the management of the company.

Agency relationship

An agency relationship is a fiduciary relationship, where one person (called the “principal”) allows an agent to act on his or her behalf. The agent is subject to the principal's control and must consent to her instructions.

Also without clear agreement, agency relationships may also emerge from circumstances. If an implied entity existed is a matter of fact for a jury or judge to decide when a trial comes up.

Agency problem

The conflicts of interest between principal and agent causes agency problem.

Where one party is anticipated to behave in the best interests of another. The agency issue in corporate finance typically refers to a conflict of interest between the management of a business and the stockholders of the business. The manager, acting as the agent for the owners, or executives, is expected to make decisions that will maximise shareholder wealth even if maximising his own wealth is in the best interest of the manager.