Question

BUSINESS FINANCE

Question 1

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 company will be growing larger, there is a growing need for separation of ownership and management and when the management would be appointed they would be appointed as agent for the respective shareholders and they are liable to make decisions in best of the interest of the shareholders so they should always be trying to take certain decisions which will be helpful in the The maximization of the value of the company and protection of the interest of the shareholders, and they should not be trying to make decisions based upon their own personal interest because they are hired as agents of the shareholders who are principal.

So, Agency theory will advocate that the management should be acting in best of the interest of the shareholders by adoption of proper corporate governance which will be helpful in maximization of the value of the shareholders and the companies can adapt high principle and policies along with the set of ethics and rules in order to comply with prescribed code of conduct so that it can follow up with the benchmarked corporate governance standard in order to maximize the value of the shareholders by making appropriate decisions.