Corporate Governance

B) Say what you think about the conflict between managers and shareholders.

A) Read the text.

The financial manager’s duties include different tasks aimed to maximize the shareholders’ wealth.

It has been observed, however, that in practice not all management decisions are consistent with this objective.

In other words, there often is a divergence between the shareholder wealth maximization goal and the actual goals pursued by management.

Instead of seeking to maximize shareholder wealth, management try to satisfy their own welfare. In doing so managers are concerned with their job security. The concern for long-run survival may lead management to minimize (or limit) the amount of risk incurred by the firm, since unfavourable outcomes can lead to their dismissal or possible bankruptcy for the firm.

The existence of divergent objectives between owners and managers is an example of problems arising from agency relationships. Agency relationships take place when one or more individuals (the principals) hire another individual (the agent) to perform a service on behalf of the principals.

In an agency relationship, decision-making authority is often delegated to the agent from the principals.

Conflicts between corporate managements and shareholders surfaced as a major public policy issue in the 1980s. the potentially adversarial principal-agent relationship between corporation owners and managers has long been recognized. In the last decade, however, two major developments brought this issue to greater prominence.

First, corporate managements, responding to a wave of hostile corporate takeovers, instituted various defensive strategies. These defences were designed to prevent the target companies from being acquired easily, thereby protecting the jobs of exiting management. Indeed, they appear to have had the intended result of making those companies worth less to prospective acquirers. However, they also reduced the value of the companies to their existing shareholders.

Second, large shareholders came to realize that they wielded considerable corporate voting power. The growth of institutional investors has concentrated corporate ownership in the hands of a relatively few organizations. The resources of these large organizations enabled them to actively oppose management decisions that diminished the value of their investment. Corporate governance has become the catchall description for institutional investor efforts to influence the fundamental business policies of corporate managements.

Words you may need:

corporate governance – керівництво корпораціями

to be consistent (with) – відповідати

divergence – відхилення

survival – виживання

to incur a risk – нести ризик

agency relationships – взаємовідносини між агентом та принципалом

adversarial – той, що містить елемент суперництва

wield – володіти, мати в руках (владу, вплив і т.п.)

catchall – повний

3. Read the text and say how investment risks can be reduced:

Дата добавления: 2014-11-29