Corporate Governance Flashcards
What is the starting point?
A divergent interest between management and shareholders
How do we decrease the divergence?
Monitoring/bonding mechanisms
How is this problem created?
Selling shares
What is the agency cost challenge?
Whether joint wealth can be increased with monitoring and bonding arrangements
How do we reach optimal firm value?
Adopting monitoring mechanisms where they are efficient; that is, where $1 spent on them reduces more than $1 of residual loss.
What are legally required monitoring mechanisms?
- Right to sue managers
- Outside director oversight
- Right to vote out and replace directors
What are common contractual monitoring mechanisms?
- Auditing by accountants
- Incentive pay
- Direct oversight (VCs)
What is residual loss?
Loss incurred by the principal (shareholders) because the agent’s (management) decisions do not serve its interests.
How might management’s divergent interests create residual losses?
The taking of perquisites.
