preview

Fiduciary Duties: Corporate Owners and Managers

Powerful Essays
In the corporate form of business organization, an agency relationship problem exists. In agency theory, the agency relationship problem results from a separation of ownership and control. Self-interest on the part of managers acting as agents, and shareholders who are acting as principals exists within the corporate business organization. Agency theory allows us to understand the behaviors and conflicts that exist for corporation stakeholders and the managers of the company, and can allow for designing of effective incentive structures and other monitoring mechanisms to resolve the agency problem. Institutional ownership also plays a part in monitoring, and controlling agency costs within the corporate form of organization.
Nature of Agency Relationship Problem
In the corporate form of business, the primary goal should be to maximize long-term value and owners’ value, or shareholder wealth maximization (Brigham, & Houston, 2011). The problem is that managers, who are supposed to make the decisions that would best serve the corporation, are naturally motivated by self-interest, and the managers’ own best interests may differ from the principal's or stakeholders best interests. An agency problem that exits in the corporate form of business is the conflict of interest between the company's management, and the company's stockholders. The relationship between the stockholders and corporate management is often based upon those conflicting interests that arise from a separation of ownership and control, differing management and stockholder objectives, and an information asymmetry that exists between the two groups (Fama & Jensen, 1983).
Corporate Agency Conflicts That Need Monitoring
The expectation in corporate agency is that...

... middle of paper ...

.... doi: 10.5465/AMR.2007.23463924
Levinthal, D. (1988). A survey of agency models of organization. Journal of Economic Behavior and Organization, 9, 153-185.
Michael, S. C. & Pearce, J. A. (2004). Choosing constraints as a third solution to agency. Journal of Management Studies, 41(7), 1171-1197.
Milgrom, P. & Roberts, J. (1992). Economics, organizations, and management. Englewood Cliffs, NJ: Prentice Hall.

Morck, R., Shleifer, A. & Vishny, R. (1988). Management ownership and market valuation: An empirical analysis. Journal of Financial Economics, 20, 293-315.
Rutherford, M. A., Buchholtz, A. B., & Brown, J. (2007). Examining the relationships between monitoring and incentives in corporate governance. Journal of Management Studies, 44: 414–430.
Watts, R., & Zimmerman, J. (1990). Positive accounting theory: A ten year perspective. The Accounting Review, 65: 131–156.
Get Access