Topics: Corporate governance, Management, Principal-agent problem Pages: 3 (813 words) Published: March 12, 2013
Most organizations are governed by a board of directors. In fact, having a board is one of the legal requirements for incorporation. Given the myriad boards in place today, it’s reasonable to ask, why do they exist? What do they do? These questions are at the heart of governance and, to a certain extent, management and shareholders. Boards of directors are an economic institution that, in theory, helps to solve the agency problems inherent in managing an organization. Agency theory explains how agency problems depend on the ownership structure: on one hand, firms with dispersed ownership face agency problems between management and dispersed shareholders, as described by Berle and Means (1932). The composition and role of the board of directors can therefore influence shareholders and management agency problem. . Reasons why the presence of the board of directors could eliminate the agency conflict between management and shareholders Boards are by definition the internal governing mechanism that shapes firm governance, given their direct access to managers and shareholders (owners). Much of the weight in solving the excess (generally executive) power within corporations has been assigned to the board of directors and, specifically, to the need for non-executive directors to increase executive accountability. Agency theorists argue that the presence of the board is an important mechanism because the presence of non- directors represents a means of monitoring the actions of the management and of ensuring that the managers are pursuing policies consistent with shareholders' interests (Fama, 1980). However, from a resource provision point of view the presence of board of directors also bring in important knowledge, including providing legitimacy/bolstering the public image of the firm, providing expertise, administering advice and counsel, linking the firm to important stakeholders or other important entities, facilitating access to resources such...
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