There are three corporate governance mechanisms namely; the board of directors, Ownership concentration, and the executive compensation (Dierdorff et al 972).
Ownership Concentration
Ownership concentration gets its basis on the number of shareholders in a company and the amount of shares owned. A noteworthy percentage of shareholders ownership influences the decisions made by the top executives. A concentrated ownership offers a dynamic and effectual monitoring of the top executives unlike the diffuse ownership, which is weak in examining and controlling the decisions made by the top management (Dierdorff et al 972). In the United States, institutional owners for example CalPERS have used their powers to oust incompetent CEOs.
Board of Directors
Board of directors is elected by the shareholders and comprises of both insiders and outsiders. It is expected to run the firm’s activities with an aim of maximizing wealth of the shareholders. Directors who are outsiders are expected to play an independent role compared to the insiders. A board of directors, which comprises of many insiders, tends to be feeble in examining and controlling the decisions made by the management (Dierdorff et al 975). However, Boards of directors have always received criticism and there is a need to evaluate the boards and its members.
Executive Compensation
This mechanism regularly receives criticism and it is the most visible. The top management has an obligation of aligning their objectives with those of their shareholders and they get salaries and bonuses as rewards. The board of directors of any firm has a duty of establishing the extent to which the executives’ compensation thrives in controlling the behavior of the management (Dierdorff et al 979). However, evaluation of the top executives is hard and the compensation of the executives does not clearly reflect the decision-making effectiveness and the long-term outcomes of the shareholders. Moreover, the performance of any firm is also affected by other external factors. In addition, the management can manipulate the company’s performance incentive plans (Dierdorff et al 980). Accordingly, Executive compensation is not an appropriate governance mechanism.
Work Cited
Dierdorff, Erich C., Robert S. Rubin, and Frederick P. Morgeson. "The milieu of managerial work: an integrative framework linking work context to role requirements." Journal of Applied Psychology 94.4 (2009): 972.
