Company law explicitly distinguishes between shareholders and directors of a company. Shareholders are the owners of the company while directors manage the company on behalf of the shareholders. The top managers are appointed by the board to manage the day to day operations of the company.
Legal responsibility of Shareholders
Company law bestows upon the shareholders certain roles and responsibilities to ensure that they are the ultimate owners with control of the corporation. The shareholders have a legal responsibility to attend any general meeting be it a special general meeting or the annual general meeting. In such meetings the shareholders have a responsibility to approve any decision made by management or the directors that is likely to affect their rights (Charitou & Louca, 2014). Thus in law, the shareholders have minimal powers over how the company is run, their main responsibility is to attend the general meetings and pass resolutions to ensure the directors do not breach their fiduciary responsibility.
Legal Responsibility of board of directors
The board of directors ultimately bares the legal responsibility for the corporation’s actions, and the actions of the corporation’s subsidiaries, employees, officers, and agents. The specific legal responsibility of the board is; governing the corporation by creating policies and objectives, selecting and appointing the top executives, reviewing the performance of the top executive, approving the annual budgets, setting the compensation for the company’s top management and finally the board has a legal responsibility of ensuring proper accounting records are kept to track the company’s performance.
Top management’s legal responsibility.
Top management is appointed by the board of directors to manage the day to day affairs of the corporation. Top management derives its legal authority to act on the corporation’s behalf upon appointment. The legal authority is derived from the powers bestowed upon a particular position held by the manager which varies from one corporation to another.
Agency Problem
In corporate finance, the agency problem refers to conflicting interests between the corporation’s management and its shareholders. The management who act as the agents for the shareholders (or principals) is meant to make decisions with the objective of maximizing the shareholder’s wealth. However, in their own best interest management may seek to maximize their own wealth (Fabozzi & Peterson, 2003). Thus, agency problem arises when the management does not act in the best interest of the shareholders in the discharge of its duties. For example in large corporations agency problem arises when top management abuse their power and reward themselves huge salaries, use company assets for private businesses, doing business with the company, etc.
Overcoming the agency problem
Corporations have a few options available to them to encourage management act and make decisions that are in the shareholder’s best interests, hence minimize the agency problem. One option is through executive compensation. Most large corporations pay the executive through a number of ways such as a good salary, bonus based on a predetermined performance measure, stock options, etc. To limit or monitor the actions of the management, the shareholders of most corporations incur monitoring costs. These are costs associated with the preparation of financial statements and auditing the same (Fabozzi & Peterson, 2003).
The government on the other hand, through legislation, provides remedies should the directors breach their fiduciary duties. Such remedies help in minimizing the agency problem. They include; damages or compensation, injunction, restoration of the corporation’s property, summary dismissal and account of profits (Charitou & Louca, 2014)
References
Charitou, A., & Louca, C. (2014). Corporate Governance, Agency Problems, and Firm Performance: Empirical Evidence from an Emerging European Market. Corporate Governance, 15(4), 20-27.
Fabozzi, F., & Peterson, P. (2003). Introduction to Financial Management and Analysis. In Financial Management and Analysis (2nd ed., pp. 17-23). Hoboken, New Jersey: John Wiley & Sons.
