Question

What do you believe are the greatest challenge(s) to corporate governance in American companies today? Explain your answer.

Answer 1

Solution:-

One year after the government bailed out Wall Street, Goldman Sachs (NYSE:GS) and JPMorgan Chase (NYSE:JPM) are awarding record billions in bonuses. Clearly, compensation practices are just as out of line now as they were before the financial crisis. But compensation is just one part of the larger issue of corporate governance weighing on companies across America.

According to Nell Minow, editor and co-founder of The Corporate Library, a research firm that focuses on corporate governance, agency costs and conflicts of interest are the inherent problems in corporate governance today.

"If you're going to have a large, complex organization, and you're going to take capital from people who are not going to be in the boardroom all the time, what can we do to ensure those directors are as vitally concerned with the long-term success of the organization? That's what corporate governance is all about," Minow said on a recent visit to Motley Fool headquarters.

The Corporate Library rates 3,500 firms with letter grades -- and out of those 3,500, only four have been awarded an A. In general, Minow argues that founder-run firms are a great solution to the "agency cost" problem, in which shareholders' interests are not aligned with those of management. In a founder-run company, the CEO still has most of his or her net worth in the company; thus, for both personal and financial reasons, he or she remains dedicated to making sure the company succeeds.

If more companies were like hers, Minow says, things would be better. All of the shareholders in The Corporate Library are on the company’s board. "It's our money that's at risk, and we care very much how it all comes out," she says. "So we're focused on making sure it all works."