THE DIVORCE OF OWNERSHIP CONTROL Flashcards
When does a divorce of ownership control occur (also what types of companies does it typically occur in)
A divorce of ownership control occurs when the owners of the company are not involved in its day to day running.
Ity typically occurs in public limited companies.
Example:
A sole trader starts a business that is performing well, and wants to scale it, but they don’t have the capital required to do so. A way that they can increase capital is to get shareholders to invest money - Those shareholders may not have time involved in the business day to day, but they want to put money up, in the hope of getting a return on their investment - So they appoint a board of directors (managers) to run the business for them, and as the business grows, more and more layers are added (more management) to run the business on behalf of the owners
What are the issues divorce of owenership control causes
Shareholders often are interested in short-term returns (i.e dividend this year) and pressure on managers to deliver them - Pensions do this whilst people wait to retire
Shareholders may not be interested in the impact on other shareholders
Shareholders may not be interested in the impact on other stakeholders
Shareholders often do not have expertise or time to oversee the running of the business
Shareholders receive limited information about day to day running of the business
Managers may make decisions that benefit them rather than the organisation
What are the issues caused from principle agent proeblems
Shareholders often are interested in short-term returns (i.e dividend this year) and pressure on managers to deliver them - Pensions do this whilst people wait to retire
Shareholders may not be interested in the impact on other shareholders
Shareholders may not be interested in the impact on other stakeholders
Shareholders often do not have expertise or time to oversee the running of the business
Shareholders receive limited information about day to day running of the business
Managers may make decisions that benefit them rather than the organisation
What is corporate governance
Corporate governance refers to the rules and monitoring systems that are in place to protect the owners and other stakeholders in a business.
What does corporate governance include
The role of shareholders in holding the managers accountable for their decisions
The annual reports organisations issue
The role of non-executive directions in monitoring
