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Managers. Without the presence of these parties the company cannot run properly. Shareholders are the person who own share of stocks in an organization. In another word, the one who hold one or more than one shares in the company. They are also known as the stockholders. They have got rights to purchase and sell the share in or out the organization, rights to vote for the board and has power to take what assets remains after liquidation of a company. But they don't have rights to check the books of financial credit.
Similarly, where as manager are the person who are the brain of an organization. All the success and failure of an organization depends upon the activities, ideas, knowledge, and experience of manger. In another word the person who use the 'management skills' to control overall organization is known as manager. The manager has got power to monitor the performance and handle works to the lower members in an organization. Managers mainly focus to take lead in a competitive environment using different kinds of resources like capital, human, natural, intellectual and intangible.
Living together in same building creates lots of problems. Likewise no one wants to be small in related to business. The most obvious problem that occurs in company is conflict in interest between shareholder (principal) and manger (agent). This problem usually arises when both the parties tries to maximize their benefits. Shareholder wants to see higher profit in the organization which in results they get dividends from it and manger wants to see higher revenue because more expenses can be made to gain benefit from them. For example if the company or shareholders said to manager to buy another building for business and manager can easily increase the rate and take rest of the money as their benefits which is expenses for the company or shareholders but company does not realise because it is in higher revenue. Both the parties have different attitude towards risks too. Shareholders do not want to bear huge amount of loss in the organization so they invest money in 'many' organization. So, when one company might go to ends then rest of the money are still safe. Therefore their financial securities are not threatened. But manager's financial security depends upon how well is an organization is running.
According to the agency theory, the firm can be viewed as a nexus of contract between resources holders. An agency relationship takes palace when the more than one individual known as principal and employ one or more than one other individual called agents, to do certain task in the organization. This theory shows that it creates primary problem in an organization i.e. self-interested behaviour. If the market and the labour are poor outside the organization than the manger tries to increase their own benefit at the expenses of shareholder. Agents (manager) in the company knows more than the Principal (shareholders) so agents has got more chances in their own self-interest rather than the company's interest due to asymmetric information and insecurity. This theory also shows the principal agent relationship.
Similarly, if the manager of a company own less than 100% of the organization common stock than the potential agency is formed. But if the company is sole proprietorship than the owner own self as a manager should manage to increase its benefits. So, following are reasons that create conflicts of interest that takeover between manager and the shareholders:
Profit related pay
Rise in share value
Direct interference by shareholder
Threats of takeover
Managers can be more interested to take over the shareholder's interest if shareholders did not monitor and take certain action to them. To reduce these kinds of problems shareholder must bring agency cost. Agency costs are those cost made by shareholders to bring managers in the right track or in another word to encourage manager to maximize shareholders revenue rather than their own self-interest. In order to monitor the activities of managers following activities should be done like:
Performance based motivation plans
The threat of firing
The threat of takeover
Controlling undesirable managerial behaviours
Codes of ethics
Shareholders should always be attentive towards the manager behaviour and activities because managers have better information of company than the shareholder so they can cleverly temp to use the firm's assets of their own end. Some inactive share holders will go along with whatever management wants, some active shareholders have tried to influence management, but they often met with defeat. So, the pros and cons of this statement are as follows:
Flexible in capital market If the company is corporate than the investors can be easily attract because corporation's ability to issue share is a strong point to sell those who wants to invest in the business. So the capital is easily access in the market.
Power formation Corporate or joint stock company has got power structure and management form; shareholders, managers, Board of directors. Each of them has got their own rights, duties and responsibilities which help to keep organization in control.
Owner have limited liability According to the law the corporation is a separate business. Members of corporate company cannot be held personally until the legal formalities are completed. So the owners are protected from legal liability.
Infinite life corporate company has got infinite life unless the company goes to bankrupt or unless it is compound by other company or people.
Cost and time Running these kinds of corporation organization it consume lots of cost and time which is not a good aspect of an organization. Similarly having the problems between shareholder and manger can create huge problems while preparing different legal documents and fees must be paid to the secretary of state office.
Follow lots of legal formalities According to law a corporate company is a separate entity, independent of owners where different corporate formalities should be ensured. The formalities like handling regular meeting, keeping records of activities, financial records etc.
Double Taxation In this kind of corporation the shareholders are exposed to pay double taxation. It means that corporation itself is taxed from the any profit of the business earned plus the any other shareholder who earns profit in the form of dividend is also taxed.
Similarly the board of directors are the person who lead and control overall organization using their skills, experience and knowledge. They also act as a link between the manger and the shareholders. The board of director's main purpose is to certify the company's success by monitoring the companies' affairs and providing appropriate interest to shareholders and stakeholders. The roles of board of directors are shaping the company's aim and plans, monitoring, handling meeting with effective objectives, solving the financial issues. They are the individual who are been elected by the board of members. They are also sometimes known as board of trustees, board of governors, board of manager.
There are different duties that the board of directors should follow in the corporate company which are described below:
Fiduciary duty Under the fiduciary duty the board of directors enhance the firm's profitability, avoid conflict between the share holders and the managers, act as a good belief in the best interest of the company.
Duty of care under this section the board of directors do what a normal wise person would do under same position. Using skills, knowledge, experience the directors takes good decisions. Business judgements rules are held.
Duty of loyalty and fair dealing in this section the board of directors makes a decisions which act in the interest of company beside acting interest of owner which means interest of shareholders are given first priority. It is often called as self-dealing transactions.
Duty of disclosure Under this section the disclosure to shareholders are provided in two cases i.e. when shareholders are asked to vote and when there is conflict of interest transaction.
So, those were the duties of board of directors to make a balance in the organization and to monitor the different activities of manger and to control the problems in conflict of interest between shareholders and mangers. It is an important aspect of good corporate governance that board will, in its turn, be accountable to shareholder and provide them with relevant information so that good decision can take place.
Corporate governance is just as related to a family-owned business as to one with a diverse shareholders support, and just as related to a public limited company as to a state-owned enterprise. Whatever is the form of business but the good corporate governance organization helps to make a business long-lasting controlling its internal disputes, management structures, performance of a organization, plans and policies and complete reflection of shareholder and manger interest.
Similarly, it can be clearly seen from the above discussion that the board of directors can make a huge contribution between the principal and agent problem. To control such conflict of interest between shareholders and managers the board of directors should use the leadership skills and the monitoring power in the corporate governance or Joint Stock Company.