The Separation Of Capital Ownership And Control

1577 words - 7 pages

The argument of whether the separation of capital ownership and control is an efficient form of organization has constantly been a controversial issue. The criticism whether the controllers’ act is in the best interest of the owners’ wills never end as long as hired managers operate management. As the number of public companies has been increasing over the course of this century, meanwhile the American style of contact based corporation has become more common as well, the so-called “agency problem” has been concerned and examined more frequently from wider aspects. The common theory agreed by literates is that they consider that hired managers do not have to act exactly as they promised to ...view middle of the document...

He asserts that the modern corporate governance, which is the expectation of shareholders about managers’ behavior that comes from normal social sense, law and market forces, has a purpose of securing the promises of maximizing firm value made by hired managers to their employers. However, to what extent the governance is valid majorly depends on the combination of complex institutions and law process. As the nature of shareholders, they are the most incentive group of the corporation’s target and performance to cope with comparatively higher risk, since they take the last residual claimants after all other claimants’ claims. As in return, they also take the “biggest stake of outcome” that benefits the most from firm’s gain. The question here is to evaluate whether governance is efficient or not. In the US, a notable average amount of salary, which is more than $10 million per year, is paid to the chief executive. Not only high salaries (or overpayment as some may think), other factors like empire buildings, better office utilities and extra bonus causes high agent costs. These costs arise mainly due to lack of efficient monitoring and asymmetric information. Managers run business on a daily basis and then as a consequence, have a more comprehensive view of the business while owners get information only based on annual reports or data provided by managers. In this case, there is no rational reason to expect managers will act as they promised.
By contrast, there is another theory citing that the separation of ownership from control can be efficient, which is introduced by Fama in 1980. The role of a manager is highlighted by his/her decision making process during day-to-day management, while security owners as the risk bearers making contract of whether to invest or not by negotiating with managers. As long as managers have fulfilled the obligations of fixed claimants such as taxes, wages to employees and bank loans, the only variable that causing concerns about principle agency costs for corporations is the shareholders. They take the most risk of a firm’s performance and suffering scarcity of efficient monitoring and information. However, the modern capital market allows risk bearers to shift corporations more freely with low transaction cost and to minimize their securities. Moreover, by pooling an efficient investment portfolio, investors can diversify risks to prevent relying too much on one firm. Consequently, an individual investor may not have very strong incentives to monitor or oversee detailed performance of one particular company among lots firms he has invested.

The success or failure of the team may not influence manager’s current salary immediately, though the information suggests how talented the executive is on managing a team and that will determine his/her future potential salary growth. As a result, chief executives are supposed to have interests in success of the company. According to Fama, there are generally three...

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