Company is a form of organisation in which the ownership and management are separated. Share holders are considered the owners where as board of directors are their agents . The seperation of Ownership and owners. The objectives of management may different fromt hose of the share holders. In big companies where shares are held by a large number of share holdres it is difficult to make the management know the expectations of the share holders. Managers may have personal goals that compete with shareholdres, wealth maxmization goal and such conflict is known as agency conflict .The seperation of ownership from management creates a situation in whihc the management may act in its own intereacts rather than those of the management will make optimal decisions only if approproate incentive ate given. To reduce agenecy conflict, share holders must incur agency costs, which include all costs born by share holders to encourage managesrs to maximize the stock price rather than act in their own self-interst. The optimal soluiton lies in the situaltion where executive compansation is tied to performance
presently , as majority of the shares in companies is owned by institutional investors sucha as insurance companies , mututal funds, pension funds, etc .. and represntatives of the lending agencies like developement banks are being placed on the Borad of Directors of companies there is a considerable scope for exercising influence over a company's operations. Another feature is that the belief in practicing good corporate governance is on the rise
The team of management takes various decisions involving the prosperity and perpetuity of a company . When such strategic decisions are what goal should guide them . Obviosuly the economic interest of the share holders , who are taking the maximum risk, should guide the management.
These are two widely dicussed approaches to achieve the above objectives.
(a). Profit Maximisation
(b). Wealth Maximisation .
Should the company aim at maximising profits of wealth ?
presently , as majority of the shares in companies is owned by institutional investors sucha as insurance companies , mututal funds, pension funds, etc .. and represntatives of the lending agencies like developement banks are being placed on the Borad of Directors of companies there is a considerable scope for exercising influence over a company's operations. Another feature is that the belief in practicing good corporate governance is on the rise
The team of management takes various decisions involving the prosperity and perpetuity of a company . When such strategic decisions are what goal should guide them . Obviosuly the economic interest of the share holders , who are taking the maximum risk, should guide the management.
These are two widely dicussed approaches to achieve the above objectives.
(a). Profit Maximisation
(b). Wealth Maximisation .
Should the company aim at maximising profits of wealth ?
