Question

As companies grow in size, it is inevitable for the shareholders to hire management to run the operations of the business. The entire team of management, starting from the CEO and other top-level management, all the way to the middle and bottom level management are expected to perform towards the growth of the business. Since the shareholders of large companies are scattered across geographies, they appoint certain members as representatives who are elected to represent them on the company board. The board of directors of a company, along with the Chairman, are expected to keep the actions of the management in check. Explain the above in context of agency theory and corporate governance. What can companies do to ensure adequate corporate governance?

Answer 1

when the companies are becoming large they are appointing board of director to manage their operations because these public companies will be generally operating through separation of the ownership and the management and there will be agency problems during which the management will be trying to act in its own interest neglecting the interest of the shareholders because share holders are the principal and Management are the agent of the shareholders so shareholders interest should always be kept into the mind and it is to be protected by all means.

Shareholders should be trying to synchronise the goals of board of directors and chairman with that of the shareholders and the organisation and they should be provided with all such compensation and benefits and incentives which will synchronise their interest with the interest of the organisation.

there should be an effective channel of communication with the management and there should be industry level compensation and their should always be Stock incentive schemes which will make them interested party in the increasing stock price of the company so it will improve the overall shareholders value by synchronising the interest of management with that to shareholders.