Page 129 - Introduction to Business

CHAPTER 3 Business Governance, Ethics, and Social Responsibility 103

flicting interests of shareholders on the one hand and directors and corporate
executive officers on the other.

Separation of Ownership and Control and Potential
Conflicts of Interest
Corporate governance today, particularly in the case of large, publicly-held corpo-
rations, is built on a variety of principal-agent relationships. The owners of
corporations—their shareholders—are the principals. These principals elect a cor- principals Owners—shareholders—of
porate board of directors to act as their agents and to set policy and govern the a business
corporation in the principals’ best interests. The board of directors then hires more agents People working for the owners
of the business
agents, the corporation’s officers, to run the corporation on a day-to-day basis.
Today’s major public corporations have very large numbers of shares outstand-
ing and very large numbers of shareholders. General Electric (GE), for example, has
approximately 10 billion shares of common stock outstanding and well over
500,000 shareholders. GE shareholders are dispersed all over the world, and it is vir-
tually impossible for any individual shareholder or even shareholder group to own
any sort of controlling stake in the business. Purchasing even 1 percent of GE’s
common stock would involve billions of dollars of investment. The upshot of all this
is that in most prominent corporations today (the Wrigley Corporation noted above
being a rare exception) there is a separation of ownership and control. The corpo- separation of ownership and control
ration’s ownership lies in the hands of hundreds of thousands of widely dispersed The fact that the shareholders of major
corporations generally do not have
shareholders, each owning a very small stake in the business, while control of the
much control with respect to the
corporation rests with its board of directors, and perhaps even more so with its cor- corporation
porate officers. While technically corporate officers and directors are agents report-
ing to the corporation’s shareholders, the fractured nature of most corporate own-
ership today affords shareholders relatively little monitoring power over the officers
and directors. This lack of adequate monitoring of corporate officers and directors
has helped lead to a wide variety of recent corporate scandals, as at Enron, Tyco,
and WorldCom. In these and a wide variety of other situations, corporate officers or
directors arguably acted in their own self-interest, rather than in the best interests
of their principals, the shareholders. There are a number of key areas where impor-
tant potential principal-agent conflicts exist in the corporate world today. They
include
• Takeover bids
• Short-term versus long-term orientation
• Empire-building
• Informational access

Takeover Bids. Mergers and acquisitions are a regular part of corporate life
today, and even some of the nation’s formerly largest companies (e.g., Mobil Cor-
poration, recently bought by Exxon Corporation to form Exxon-Mobil Corporation)
have in recent years been acquired by other firms. Moreover, in some industries
such as banking, legal restrictions on corporate mergers have dramatically fallen in
recent years (e.g., past restrictions on interstate banking have collapsed and banks
are now free to acquire other banks anywhere in the United States). So, what hap-
pens if a company receives a takeover bid, or offer to be acquired, from another takeover bid An offer made by another
company at a 50 percent premium to its present stock price? Obviously, from the company to acquire a company
perspective of the to-be-acquired company’s shareholders, this is probably a won-
derful thing.
What about from the perspective of the company’s officers? For many of them
such an acquisition may not be such a good thing, since they will likely lose their

Copyright 2010 Cengage Learning, Inc. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part.