CORPORATE GOVERNANCE: (bog, owners, managers)

corporate governance is concerned with identifying ways to ensure that strategic decisions are made
effectively. primary objective of corporate governance is to ensure that the interests of top-level
managers are aligned with the interests of the shareholders

“the managerial revolution led to a separation of ownership and control in most large corporations,
where control of the firm shifted from entrepreneurs to professional managers while ownership
became dispersed among thousands of unorganized stockholders who were removed from the day-
to-day management of the firm

Issues with family owned firm:

As they grow there may not have access to all skills to manage the firm and get retrun

As firm size increase they may need capital which will result in dilution of their shares

thus separation of ownership(risk bearing) and managerial control( decision making) produce the
highest return

agency relationship
agency relationships are consultants and clients and insured and insurer.
Agency relatioshiup exist between managers and their employees, as well as between top executives and the
firm’s owners.
The most important agency relationship exist between owner and managers
Top executives, for example, may make strategic decisions that maximize
their personal welfare and minimize their personal risk.33 Decisions such as these prevent
the maximization of shareholder wealth. Decisions regarding product diversification
demonstrate these possibilities

Product Diversification as an Example of an Agency Problem

First, diversification usually increases the size of a firm, and size is positively related
to executive compensation. Also, diversification increases the complexity of managing a firm
and its network of businesses, possibly requiring more pay because of this complexity.
35

Second, product diversification and the resulting diversification of the firm’s portfolio
of businesses can reduce top executives’ employment risk. Managerial employment risk
is the risk of job loss, loss of compensation, and loss of managerial reputation

Inside , related , outside

So majority of directors should be outside independent directors
Seperation of CEO is to separate the chairperson’s role and the CEO’s role
on the board so that the same person does not hold both positions.7

Outsiders do not have contact with the firm’s day-to-day operations

and typically do not have easy access to the level of information about managers and
their skills that is required to effectively evaluate managerial decisions and initiatives.76

Thus, boards with a critical

mass of insiders typically are better informed about intended strategic initiatives,
the reasons for the initiatives, and the outcomes expected from them.

Thus, the concentration of owner

Ship is an important means of corporate governance in Germany, as it is in the United
States