Question

Critically examine the mechanisms of corporate governance utilising agency theory as a theoretical framework for analysis. (20marks)

Answer 1

The corporate governance is a setup in the public limited companies to make sure that the agent is working in the best interest of the principal. The agency theory shows the relationship and the conflict of interest that arises between a principal and an agent. When a principal hires an agent to act on behalf of him, the principal and agent are entering into a contract where the agent will take action for the benefit of the principal. In the case of public limited companies, the principal are the shareholders of the company and the agent is the management of the company. The management is supposing to act on the bets interest of the shareholder but it is often seen that management takes up project where they sometimes benefit even at the expense of the shareholder. The corporate governance board is set up with the motive to protect the interest of the minority shareholders as well as large shareholders. The board establishes internal rules and regulation and the senior management is supposed to act within those rules and act in the best interest of the shareholder. The board of the company normally consist of the representatives of the majority shareholders an independent shareholders and chairman of the board which takes these considerations.