Chapter 10 Review Questions Business & Marketing Essay

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Discuss: Corporate Governance.
1 What is corporate governance? What factors account for the considerable amount of attention corporate governance receives from several parties, including shareholder activists, business press writers, and academic scholars? Why is governance necessary to control managers' decisions?
Corporate governance is the set of mechanisms used to manage relationships among stakeholders and to determine and control the strategic direction and performance of organizations. The factor resulting in attention that corporate governance receives often results from the failure of corporate governance to monitor and control the decisions that are made by top-level management. However, governance is necessary to control management decisions because effective corporate governance leads to the alignment between the decisions made by managers and the interests of shareholders of the company.
2 What is meant by the statement that ownership is separated from managerial control in the corporation? Why does this separation exist?
When ownership is separated from managerial control it means that the control of the business is shifted from entrepreneur to the professional managers while the ownership is distributed among shareholders. These changes often lead to the creation of public corporations with a clear separation between company ownership and management control. The objective of such separation is to increase the business profit returns and the financial gain of the shareholders. The separation also allows shareholders to purchase shares or stocks, giving them entitlement to earn dividends from the annual profit of the company.
3 What is an agency relationship? What is managerial opportunism? What assumptions do owners of corporations make about managers as agents?
An agency relationship is a situation where one-party delegates decision making responsibility to another party for compensation. It's created by the separation between the business owners and managers. For instance, the shareholders and top-level management. On the other hand, managerial opportunism is a situation whereby a manager exploits opportunities for his self-interest. The opportunism is the use of internal information of the company for the personal benefits of the manager. However, the owner of the corporation does assume managers do not have conflicts of interest on the decisions they make on behalf of the corporation, and that the strategic decisions they make are not geared towards their personal welfare.
4 How is each of the three internal governance mechanisms ownership concentration, boards of directors, and executive compensation-used to align the interests of managerial agents with those of the firm's owners?
Ownership concentration is the concept of using large-block shareholders to control management decisions so that they best represent the owner's interests. Large-block shareholders help in higher-level monitoring of managers' decisions, ensuring that it aligns with the interests of company owners. Therefore, a high degree of ownership concentration can influence the decision of managers t...