Corporate Ownership and Control

Corporate finance highlights clearly the purpose of establishing business corporations as maximization of owners’ wealth. The owners of such as corporations would wish to record as maximum value as possible for their investments. Due to some constraints such as expertise and time they fail to fulfil their dreams hence they have to employ decision making professionals to manage the investments on their behalves. This idea of company management delegation was first introduced in 1932 by Berle and Means who contend that, because shareholders are not in a position to make strategic decision, they should delegate this role to professional managers who will undertake the managerial role on their behalves. It is from this foundation that the agency relationship between managers and owners of the firm is established. According to this relationship, bearing in mind that there is a deviation of interest between managers and shareholders, the role of owners remains to be monitoring of managers so that the interests of the two sides are aligned. There are two types of corporate owners, namely; those with significant ownership level and those with insignificant shareholdings. The incentive for monitoring managers differs across these categories depending on the benefit derived out of monitoring exercise, Stiglitz (1985). Among those with high incentive to monitor, Bhattacharya and Graham (2007) categorize them into two categories and distinguish them by their involvement in company's business. They suggest that those shareholders who possess business link with the firm in which they hold shares may have low monitoring power as opposed to those without business link because managers have possibility of linking with them in expropriating minority shareholders.