Management Case Study

MGMT 430

Assignment

MGMT 430

Assignment

Chapter 4

1. Explain the evolution of corporate governance. What problem developed? What are the current trends?

Corporate governance refers to the method by which a firm is being governed, directed, administered or controlled and to the goals for which it is being governed. It is concerned with the relative roles, rights and accountability of such stakeholder groups as owners, board of directors, managers, employees, and other stakeholders. Shareholders own stock in the firm, giving them ultimate control (the shareholder-primacy model), Board of Directors govern and oversee management of the business, managers are the individuals hired by the Board to manage the business on a daily basis and employees are hired to perform actual operational work.

Corporations at their inceptions were ran by owner-managers who retained full responsibility for all functions of the enterprises. As corporations grew (the availability of limited liability was a significant impetus in this process), owners’ roles became more investor than owner. Berle and Means, in The Modern Corporation and Private Property, refer to this change as moving from active property to passive property. In this process, the functions of managing the business were divorced from the ownership function, leaving managers effectively in charge of the organization. As “ownership” became more diluted among many investors, shareholders soon lost any pretense of control over the firm. Even the board of directors, designed to oversee the company’s operations for the investors, became subservient to management, as many directors have financial, relationships and other ties to management, making it difficult for many directors to make decisions independent of management. Exacerbating this final problem is the proxy process, which effectively turns over to management and the selection of directors. What this means in practice is that managers choose their...