Corporate Governance Mechanisms

INTRODUCTION

The relationship between the owners of a company and those who run the company is classified as an agent/principal relationship. In most cases this kind of relationship gives rise to a potential problem called the agency problem. This agency problem usually will occur where there is a conflict of interest between the desires of the principal and that of the agent. This is not a rare occurrence. It has been predominantly found to occur in companies where the directors are the agent and the shareholders who are the owners of the company is the principal.

It is not unusual for managers to sometimes want to pursue their own interests at the expense of the company to whom they have a duty to act in its best interest. Certain decision-taking may not be in the interest of the company for example, excessive risk taking without foresight of the long term consequences. Most times the action and inactions of management may have dire consequences on the company which may in the long run stigmatize a company as an underperforming one.

Consequently, managers who pursue their own interests rather than that of the company may underperform its duties. The following corporate governance mechanisms can play a major role in preventing managers from engaging in activities that lower firm value thereby incentivizing management to perform excellently. This essay will briefly consider three of those mechanisms that gear management towards excellent performances.

Board Composition: This is a principal mechanism through which the shareholders can check managerial performance. If a management team is not performing well, the shareholders could direct the board of directors to fire the incumbent team and replace them with better perfor...

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...eves that it “has changed the attitudes and practices of U.S managers”, stating that “it represents the most effective check on management autonomy ever devised. And it is breathing new life into the public corporations”.

Works Cited

Scharfstein David, ‘the Disciplinary role of Takeovers’ [1988] 55 the review of economic studies 185 accessed 27 November 2009 p 185.

Julian Franks, Collin Mayer, ‘Hostile takeovers and the correction of managerial failure’ [1996] 40 Journal of Financial Economics 163 accessed 27 November 2009 p163.

Ibid