Separation of Ownership and Control in the US and EU and its Implications

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It is seen that a weak owner leads to a strong manager where agency problem arises due to entrenched managers and dispersed shareholding. Conflict of interests is an important aspect that corporate governance addresses to. The separation of ownership that is the shareholders and control that is the management gives rise to agency issues. This separation is usually seen in firms where the shareholding is dispersed. Agency conflicts arise when the ideal situation isn’t achieved and the managers prefer their interest over shareholder’s interest. Agent principal relationship is governed by the agency costs that the principal incurs to align the interest of his agent with that of his own. Corporate governance deals with the minimization of the conflict of interests in the organization. Proper incentives linkage to the remuneration can help prevent the conflict of interests and align the interests of managers and shareholders. Stock option plans can be a good way to make interests common because the managers become the shareholders and put in the efforts to increase the wealth of the shareholders. Another option could be the board of directors, as they have the power to dictate decisions in the organization and control the company, they can serve as a solution to align the interest of both. Stock options have proved to be quite efficient it the linked remunerations to the shareholder’s interest can also induce the managers to act dishonestly and adopt a short-term behavior because of quarterly disclosures.