Page 167 - F1 - AB Integrated Workbook STUDENT 2018-19

Governance and social responsibility in business

Separation of ownership and control

1.1 The principal agent problem

 In some, usually small, companies the owners also manage the business.

 However, in larger companies shareholders usually delegate control to
professional managers – the board of directors – to run the company on their
behalf.

 This separation of ownership and control leads to a potential conflict of
interests between directors and shareholders.

 This conflict is an example of the ‘agency problem’. The principals (the
shareholders) have to find ways of ensuring that their agents (the managers)
act in their interests.

1.2 Possible areas of conflict

 ‘Fat cat’ salaries and benefits

 Mergers and acquisitions

 Poor control of the

 Short-termism

 Attempts to resolve this conflict can take a number of forms:

 Corporate governance (see below)

 A review of the remuneration and bonus schemes given to directors.

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