Page 132 - Introduction to Business

106 PART 1 The Nature of Contemporary Business

boards of directors and officers. The company’s CEO and her or his lieutenants
obviously know, or should know, virtually everything that’s going on in the corpo-
ration. Moreover, the CEO should be sharing all important information with the
board of directors, although this may not always be the case (e.g., in some recent
corporate scandal situations various directors have argued that they were never
fully informed about what was going on by the CEO, and thus they should not be
held responsible for any misdeeds).
Where do the owners of the company, its shareholders, fit in this scenario?
Shareholders are invited to the corporation’s annual meeting (but only a very small
number actually attend) and receive annual and quarterly reports regarding corpo-
rate developments. The advent of the Internet also permits shareholders to access
any corporate press releases or governmental filings fairly easily. In general, though,
shareholders do not have any better access to information about the company they
own than nonowner general members of the public.
asymmetry of corporate information An What kind of mischief can this imbalance of information, or so-called asymme-
imbalance among different people try of corporate information, breed? Suppose the CEO of a corporation knows
regarding information or what’s going good news that is not yet publicly known about the company. Putting legal issues
on at a corporation
aside, the CEO can then go out and buy shares in the company from an existing
shareholder, who would not be paid what the shares were really worth, and also
might well not even be selling the shares if he or she had the information the CEO
possessed. Conversely, the CEO might be selling shares, as some prominent former
CEOs have recently been convicted of doing, if he or she knew bad information
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about the company before the general public. Under current laws, these actions
by a CEO would be blatantly illegal insider trading, as would be any trading by the
CEO’s friends or relatives based on his or her tips. Nevertheless, on occasion such
actions continue to occur.
reality Do you or anyone you know own stock in a corporation? Do you know
CH ECK anyone who has ever attended a company’s annual meeting?

LEARNING OBJECTIVE 4
Analyze different methods of solving the problems and conflicts of
interest engendered by the separation of ownership and control in
major corporations.

Addressing Separation of Ownership and
Control-Related Conflicts of Interest
There are a wide variety of ways to address and possibly solve some of the myriad
conflicts of interest that result because of the separation of ownership and control
in today’s large public corporations. None of these possible solutions is perfect.
Nevertheless, they do represent a good start. These potential solutions are either
private solutions or public government solutions.

Private Solutions.
ALIGNMENT OF FINANCIAL INTERESTS. One way of addressing the principal–agent
problems in corporate governance is by better aligning the financial interests of
corporate executive officers and directors with those of shareholders. If sharehold-
ers (again, as opposed to stock speculators) are concerned with the long-term
appreciation of their stock, why not strongly tie executive and even board member
compensation to this criterion? Granting executives and directors stock options is

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