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

The management of organizations must be mainly concerned with the interests of shareholders of the entity and should act in the best interests of them. The agency theory for corporate governance mainly suggests that organizational executives should demonstrate financial and moral obligation to those parties they serve such as shareholders of entities. The implications of agency theory are considered to be very challenging especially in such circumstances when there are millions and millions of dollars at stake. Agency theory offers specific guidelines for the strategic decision-making initiatives by board members and corporate officers of entities. It is considered to be useful under such circumstances when decision-makers are inclined to be greedy and is mainly concerned with making profit at the company's expense. This is also an invaluable tool under such circumstances when long-term goals of an entity clash with organizational decision making which may offer fewer but more immediate benefits for stakeholders.

The steps with respect to improvement of strategies for corporate governance are enumerated as below:

· Increase in organizational diversity;

· Appointment of competent members to the organizational Board;

· Facilitate timely information for better decision making;

· Implementation and prioritization of effective procedures for risk management;

· Facilitate evaluation of performance of organizational Board.