Question

The control model of corporate governance is not applicable under all of the following conditions except for

Group of answer choices

A.Board members are largely outsiders

B.Capital markets are liquid

C.Separate ownership and control

D.Equity ownership is not concentrated

E.None of the above

Answer 1

In following cases control model of corporate governance is appli

C)SEPARATE OWNERSHIP AND CONTROL

Explanation:

In large firms where there is a separation of ownership and management, the principal–agent problem can arise between upper-management (the "agent") and the shareholder(s) (the "principal(s)"). The shareholders and upper management may have different interests, where the shareholders typically desire profit, and upper management may be driven at least in part by other motives, such as good pay, good working conditions, or good relationships on the workfloor, to the extent that these are not necessary for profits. Corporate governance is necessary to align and coordinate the interests of the upper management with those of the shareholders.

D)EQUITY OWNERSHIP IS NOT CONCENTRATED

  Explanation:

  The principal–agent problem can be intensified when upper management acts on behalf of multiple shareholders—which is often the case in large firms (see Multiple principal problem).Specifically, when upper management acts on behalf of multiple shareholders, the multiple shareholders face a collective action problem in corporate governance, as individual shareholders may lobby upper management or otherwise have incentives to act in their individual interests rather than in the collective interest of all shareholders.As a result, there may be free-riding in steering and monitoring of upper management, or conversely, high costs may arise from duplicate steering and monitoring of upper management. Conflict may break out between principals, and this all leads to increased autonomy for upper management.