Ownership in a Corporation with Due Emphasis on Relation between Shareholders and Executives - Coursework Example

Thesis ment Ownership in a corporation with due emphasis on relation between shareholders and executives. Introduction A corporation enjoys the privileges as well as the liabilities that are different from its members and is set up under the laws of the state as an autonomous yet legal entity. The corporations are set up for the purpose of business but in some cases the public bodies, clubs or charities can act as corporations as well. A corporation can take various forms namely statutory corporations, joint stock companies and cooperatives. Limited liability is one of the features of the corporation. Failure of a corporation will lead the shareholders to lose their investments and the employees will become unemployed but none can be held responsible for the debts of the corporation. Some of the advantages of the corporation are limited range of liability, management specialized in the operation procedures, and ownership is transferable, legal entity, sustained existence, tax advantages and ease in raising capital. The disadvantages of a corporation are the corporation is closely regulated, costly to organize the management, restrictions in charter, extensive record keeping and double taxation (Fox, 1992, p. 2). Ownership of a corporation A corporation can be owned by many owners and shareholders. A company can be owned by more than million people many of them holds less than 100 shares of the stocks. This kind of ownership has paved the way for some to hold a direct stake in the renowned companies. In the period of 1990s, a large proportion of the families in the United States owned common stocks either directly or through intermediaries. But this kind of disperse ownership also calls for distinction between ownership and control. The shareholders are not accustomed with running the business of a corporation. So they elect a board of directors who will implement the policies of the corporation. The members of the board of directors as well as the mangers own less than 5% of the stocks however there are exceptions to that. Only a small proportion of the board of directors plays the role of operating officers. There are some clauses that are taken into account in the election of the board. Some of the members are selected on the basis of prestige, some to generate skills in the organizations while the rest represent the financial institutions. To optimize the functions of the corporation, the CEO directs the executives to perform the decisions of the board. The CEO is entrusted with freedom and responsibility as long as he is able to generate the confidence of the board. However, some of the members with varying interests can force the change in management. There can be six types of ownership for a corporation. A corporation can be held by a family that is not listed in any of the stock exchanges, a financial institution can also acquire the ownership, there can be cross holdings where a certain firm is controlled by another firm or has the control of at least 20% of the stocks, charities, employees, trustees and a small part of the foreign investors can hold the ownership (Faccio and Lang, 2001, p. 6). Corporate ownership, sole proprietorship and partnership are the three categories of legal ownership form of business. In the sole proprietorship firm, the individual owner of the firm is responsible for the business activities and this type of firms bears no distinction between personal and business income. A partnership means joint ownership but in personal liability terms is similar in characteristics to the sole proprietorship firms (Franchise Tax Board’s Guide, 2010, p. 4). Relation between shareholders and executives In order to achieve corporate governance a company must look in maintaining transparency. In maintaining the transparency the company will provide emphasis on the relationship between the three main stake holders namely the board of directors, the members of the top management and the shareholders. If the system is considered to be as transparent then there will exist a two way relationship between the stake holders. The two way relationship can be found between the members of the top management and the shareholders where the members of the executive board communicates with the shareholders through department of investor relations as well as communicates both verbally and also through reports. The performance of the executives is reflected in the presentation of the results. Much depends on this presentation as it acts as the deciding factor for the shareholders in the investment decisions. The sustained improvement in the relationship between the shareholders and the members of the executive board cannot be perceived in the same manner as between the board of directors and the shareholders. The shareholders can think of minimum information from the board of directors who has no accountability towards them and the shareholders can hardly control or influence the decisions of the board. A conflict of interests may creep in the relation between the managers and the shareholders. This type of contradiction gives rise to agency costs. Agency costs rise due to asymmetry in information between the managers and the shareholders. The two possible cases of agency problem is the conflict between shareholders and the bondholders and the effort problem. One can think of three major agency costs. The first is the expenditures incurred to monitor the activities of the managers, expenditures incurred to structure the organization in such a way that will act as a constraint to undesirable activities of the managers and the third is the opportunity costs incurred when the impositions were laid by the shareholders. One of the possible ways to reduce the costs of agency is by monitoring the duties of the agent by the principle. But it may be difficult to monitor the job of the agent effectively. Academicians are of the opinion that there is need for legal strategies to reduce the agency costs. Agency problems can get accrued in the publicly held corporations as well. When a manager expands a firm through acquisition which has resulted in reduction in share price it may be difficult to examine whether the manager had personal interests in mind or was trying to maximize the value of the shareholders and was unlucky. Another way that is devoid of this effect is to diversify the interests of the agent with that of the principal. The efficiency of the managers is enhanced by high leverage. It is the tendency of the investor to take into account the newly issued debt in a favourable way. The managers may also lie upon some riskier projects. An agency problem arises whenever a person hirers another person to carry out the work on his behalf. In large corporation, the actions of the shareholders shall face a constraint as the shares are held diversely. The mangers act as agents of the shareholders and are entrusted to work out the decisions that are going to bring maximum benefit to the shareholders. Risk is involved in running the business and the shareholders can diversify the associated risk by investing in a variety of firms. The mangers may be interested in short term benefits which will promote their prospects but the shareholders are interested in maximizing the net present value. Therefore the agency relationship is the cause of the agency conflicts. The mangers are often offered bonuses to persuade them act in favor of the shareholders. In some cases the managers are also offered some shares so that the interests of both of them fall in line. In order to deal with the conflicts of interest two extreme positions can be accounted for. The managers of the firm are entirely compensated on the basis of the changes in the price of stocks. In this case the agency cost turns out to be low as the managers will have the incentive to maximize the wealth of the shareholders. But it might be difficult to hire managers as the earnings of the firm are subjected to economic fluctuations. The other way is to monitor every action of the managers which is costly as well as inefficient. Some of the measures that will encourage the managers to act in favor of the shareholders are performance based incentives, intervention from the part of the shareholders and the threat of firing and takeover (Salteh, Nahandi and Khoshbakht, 2011, p. 46). Conclusion If the shareholders do not take the adequate steps required to keep in check the behavior of the managers, then they are likely to incur losses. The cost benefit context is used to determine the best possible amount of agency costs that are to be borne by the shareholders. The agency costs will be allowed to increase given that every dollar spent on the costs provides in at least an increase of one dollar in the wealth of the shareholders (Jenson, 1986, p. 323). Reference Faccio M. and Lang, L. (2001). The ultimate ownership of Western European corporations. Retrieved From: http://118.96.136.228/ejurnal/Working%20Paper%20JFE/JFE%2002%20The%20ultimate%20ownership%20of%20Western%20European.pdf. Fox, L. (1992). Business Ownership. Retrieved From: http://www.cals.uidaho.edu/edcomm/pdf/CIS/CIS0939.pdf. Salteh, H., Nahandi, Y. and Khoshbakht, H. (2011). EVALUATING THE RELATIONSHIP BETWEEN CORPORATE GOVERNANCE AND VOLUNTARY DISCLOSURE IN LEVEL AUTOMOTIVE AND MANUFACTURING INDUSTRIES, BASIC METALS AND FOOD AND PHARMACEUTICAL PRODUCTS. Retrieved From: http://www.businessjournalz.org/articlepdf/BMR_11014.pdf. Jenson, M. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. Retrieved From: http://www.sml.hw.ac.uk/ms75/GP%20Papers/G32.pdf. Franchise Tax Board’s Guide. (2010). Forms of Ownership. Retrieved From: https://www.ftb.ca.gov/forms/misc/1123.pdf. Read More