Chap.

Corporate Governance

1
The Corporate Firm

2
 3

Sole Proprietorship
• Owned and Managed by one person
• Very easy to form
• Profits taxed as personal income
• Unlimited liability
• Life of company linked to life of owner
• Amount of funding is limited by owner’s
 4

Partnership
• Easy to form
• Requires a partnership agreement
• Limited and unlimited partners
• Partnership is terminated when a partner dies or
leaves the firm
• Difficult to raise cash
• Profits taxed as personal income
• Controlled by general partners – sometimes votes
are required on major business decisions
 5

Limited Corporation
• Articles and Memorandum of
Incorporation Required
• Limited Liability
• Profits taxed at corporate tax rate
• Board of Directors
• Life of company hypothetically unlimited
 6

The Agency Problem

• Agency relationship
• Principal hires an agent to represent his/
her interest
• Stockholders (principals) hire managers
(agents) to run the company
• Agency problem
• Conflict of interest between principal and
agent
 7

Agency Theory
Shareholders
Type I
and
Agency Relationships
Management

Dominant
Type II
and
Agency Relationships
Other Shareholders
 8

Managerial Goals
• Managerial goals may be different from
shareholder goals
• Expensive perquisites
• Survival
• Independence
• Increased growth and size are not
necessarily equivalent to increased
shareholder wealth
 9

Managerial
Compensation
 10

% of Firms with 1
Share-1 Vote
 11

% of Dual Class Share

Characteristics
 12

Example 2.5 Ownership

Structure of Fiat SpA
 13

Ownership Structure of
20 Largest Companies
 14

Agency Theory
Overview
• Relationship between management and
shareholders

• Relationship between large shareholders and

minority shareholders

• Relationship between shareholders and

debtholders
 15

Agency Theory
Overview
• Agency problems arise when an agent is hired
by a principal to do a job for them.

• Managers are hired by shareholders

• Do managers act in the interests of

shareholders?