7 Primary Stakeholders: Shareholders and Corporate Governance
Types of Shareholders and Agency Theory
• Shareholders are legal owners of business corporations.
• Two main types of shareholders:
o Individual shareholders
o Large shareholders
• Individual shareholders include regular persons buying and selling shares of any
company.
• Large shareholders are typically grouped as blockholders and institutional shareholders.
o Blockowners are individuals or corporations that buy firms’ shares directly, not
through an investment entity.
• Agency theory views the firm as a legal entity that serves as a nexus for a complex set of
contracts among disparate individuals.
• Two problems shareholders face with top management and CEO:
Corporate Governance
• Corporate governance refers to the many mechanisms that can be used to align
managements’ interests with owners’ interests.
Board of Directors
• The board of directors is often seen as one of the primary mechanisms to monitor and
control the conflict.
of their own interests.
• Functions of Board of Directors include:
o Review and provide guidance on all aspects of strategic management.
o Provide guidance on tactical and operational planning.
o Act as advisors to top management and CEO and provide guidance with respect to
the above strategic, tactical, and operation issues.
o Continuously monitoring the company’s other governance practices and making
changes as needed.
• Issues relevant to the effectiveness of a board of directors:
o Board independence
o Diversity
• Some of the key considerations to form the best board:
o Have a board with six to seven members.
o Get the right mix by bringing in people with new expertise.
o Have board members with accounting and financial expertise.
Executive Compensation
• Executive compensation refers to the pay, perks, and benefits given to top executives in
a company.
o U.S. CEOs make much more than their foreign counterparts and 475 times more
than the average employee.
• Criticisms regarding executive compensation
o High pay has encouraged CEOs to take excessive risks to keep companies growing.
• Justifications for high executive compensation
o Stock values have grown astronomically over the past 25 years.
o CEOs and top executives have rare skills and they devote their entire lives to the
company.
• Stock options are stocks awarded to the CEO who then has the ability to sell the stock at
a future date.
• Companies will need to address a number of issues as they devise such packages and
these include:
o Aligning CEO incentives with long-term health and profitability of companies.
▪ Many companies are abandoning compensation practices that promote
short-term gains.
Ownership Structure
• Ownership structure refers to the primary way ownership of shares of the company is
structured.
• Three main types of blockholders:
• Private equity refers to the various forms of private funding that are available to
companies that are not necessarily publicly traded.
• Two types of private equity:
Corporate Governance and Globalization
• Corporate governance will remain a key aspect of how companies need to be governed in
order to run the company efficiently and effectively.
• National culture represents the beliefs, norms, and values of individuals within a country.
• Power distance refers to the degree to which a society accepts that power differences exist
and that such power distance is distributed unequally.
o In such societies, people accept that there are individuals who have more power
and authority and that these individuals have the right to exercise such authority.
o This increase in outsiders provides the company with added expertise and
capabilities to reduce risks and ambiguities.
The Future of Corporate Governance
• As more of the emerging nations strive to present an environment conducive to business,
there will be an increased reliance on corporate governance to demonstrate that such aims
are being achieved.
• Multinationals need to consider shareholder rights, which include:
o To purchase shares.
o To timely and accurate information from the company.
o To share in the profits of the corporation.
• Corporate governance is also seen by both investors and governments as a critical way to
curb corruption.