Chapter 1, Problem 1CQ

Summary Introduction

To discuss: The owner of the corporation.

Introduction:

Corporation is an organization formed by a group of people or a company authorized to be a single entity. This is a more advantageous form of business compared to others.

Explanation of Solution

The owner of the corporation is shareholders or stakeholders. Shareholders are person who own at least a single share in the company, the voting rights, receives a portion of profits during the profit distribution by the company.

Summary Introduction

To discuss: The process by which the shareholders control the firm’s management.

Explanation of Solution

The ultimate control of the firm’s management lies in the hands of shareholders. The roles and responsibilities of shareholders are listed below:

• Only the majority of the shareholders can exercise the control and not all the shareholders can have control over the management.
• The shareholders can replace the existing management, which is called as proxy fights.
• Another process by which the shareholders control the management is takeover.
• The directors of the company are elected by the shareholders.

Summary Introduction

To discuss: The reason behind the existence of agency relationship in the corporate organization.

Explanation of Solution

Agency relationship is the bond between the stakeholders and the management. The agency relationship exists when someone hires a person based on his or her interest. The person who hires another person is termed as principal and the one who is being hired is termed as an agent. Generally, there will be a conflict among the principal and the agent, which is termed as agency problem.

Summary Introduction

To discuss: The problems that arise due to the agency relationship.

Explanation of Solution

If the management focuses on the interest of people other than the shareholders, a problem arises. This may deny the shareholders to maximize the share price of the equity of the firm. Separation of ownership also occurs in the form of corporate organization.

Conclusion

Thus, the ultimate control of a firm’s management lies with the shareholders. This tends to maximize the shareholders’ wealth and at the same time the goals of management can be achieved at the expenses of the shareholders on temporary bases.