People in Business
There are four types of people involved in the public corporation: shareholders, directors, officers, and
There are others who also have a stake in the firm. Creditors, government officials, suppliers, and customers are stakeholders because they deal with the firm.
With so many people involved with the company, who actually controls the corporation? Who makes the big decisions and has the most power? One might think that it is the owners who control the firm. Or the
Separation of Ownership and Control
A corporation's ownership and control are separated between two parties ”shareholders and officers. The shareholders own the firm, and the officers (or executives) control the firm. This situation comes about because public firms are owned by thousands, even hundreds of thousands, of investors. Obviously, thousands of people could not possibly join together to make the daily decisions needed to
Besides, most shareholders are not interested in being involved in the firm's business activities. These shareholders act like investors, not
There is a problem with this separation of ownership and control, and it exists at a simple level. Why should the managers care about the owners? It is not far-
The shareholders of a corporation are the principals, and the managers who run the company are the
Solutions to this problem tend to come in two categories: incentives and monitoring. The incentive solution is to create situations in which the executive's wealth is tied to the wealth of the shareholders. That way, the executives and the shareholders want the same thing. This is called aligning executive incentives with the shareholders. Executives would then act and behave in a way that is also best for the other shareholders. But how can this be done? For most U.S. companies, executives are given stock and/or stock options as a significant component of their pay. The advantages and disadvantages of this form of incentive solution are explored in the
The second type of solution is to set up mechanisms for others to monitor the behavior of managers. Indeed, there are several mechanisms for monitoring executives, which we discuss shortly.