Saturday, February 6, 2010
Thoughts on Agency and Corporate Investment The Role of Executive Compensation and Corporate Governance by Kang, Kumar, Lee - Earl Malvar
Involving top executives in the performance of their own organizations by giving them stakes of interest is an intuitive way of ensuring that owner-management diversity does not put the company’s future at odds with the self-interests of those who would have a direct hand in its operations. Issues on agency, especially when owners entrust their capital investments in going concerns, have been somehow mitigated by the very nature and capital structure of a business entity in the form of a corporation. By ‘sharing in the fate’ of an organization, owners are assured that top management would treat the company they handle as if it were their own. It is exactly the same logic when investors buy stocks in equity markets, since shares represent partial ownership in a company that they would have otherwise been unable to establish or reap the benefits from on their own. Large firms that belong to complex industries only highlight the fact that no mere individual can establish a going concern like them without collaboration and synthesis of different specialties and talents. In the case of public companies, authorities are able to monitor or at least infer the performance and prospects of a company through internal management-related stock buy-ins or sell-offs. Owners of privately-held corporations also benefit from equity-based compensation as they allow the careers/livelihood of ‘unrelated individuals’ who they employ as the leaders of their organizations to be integrated into the ‘life’ of their respective companies.