Chapter 11 - Governing the Corporation around the world Flashcards
Concentrated ownership and control:
ownership and control rights concentrated in the hands of owners:
-Founders start up and control firms
Diffused:
Numerous small shareholders, none with complete control:
Separation of ownership and control
control is the dispersal of ownership among many small shareholders, with control of the firm largely concentrated in the hands of salaried, professional managers who own little or no equity
Family ownership -
Founding family and descendants maintain controlling interest
Advantages of family ownership:
- May provide better incentives for the firm to focus on long-term performance
- Minimizes conflicts between owners and professional managers
Disadvantages of family ownership:
- May lead to the selection of less qualified managers
- Family conflicts leading to destruction of value
- Expropriation of minority shareholders
State ownership -
Means of production owned by the government, central or local. Managers employed by the state; firm governed by the state
Principal-Agent conflicts:
The relationship between shareholders and professional managers is a relationship between principals and agents
Principal-Principal conflicts:
Such conflicts are between two classes of principals: controlling shareholders and minority shareholders
Principal-Agent Relationship:
One example: The relationship between shareholders and professional managers
Agency Theory:
Because the interests of principals and agents do not completely overlap, there will inherently be principal-agent conflicts, which result in agency costs
Agency costs include:
(1) the principals’ costs of monitoring and controlling the agents and (2) the agents’ costs of bonding (signaling their trustworthiness)
Why conflicts persists?
Conflicts persist because of information asymmetries between principals and agents (agents always know more about their tasks than principals)
Agency Problems:
- Excessive on-the-job consumption
- Low-risk, short-term investments
- Empire-building (excessive diversification)
- In SOEs, agency problems are also extensive
Reducing Agency Problems:
While it is possible to reduce information asymmetries and minimize agency problems, it probably is not realistic to expect to completely eliminate such problems
