ABSTRACT
The resulting controls are both internal and external to the firm. Internally, the board acts to protect the interests of owners through monitoring performance and exercising a veto over strategic decisions. In addition, directors will use their power over setting pay packages to align the financial interests of managers and owners, such as linking rewards to performance through stock options. External monitoring is facilitated by the enforcement of strict accounting standards and rules of financial disclosure. Capital and equity markets measure performance and guide funds towards the more profitable firms and away from the less successful. Managers of unprofitable firms face the prospect of losing control over the firm through bankruptcy or takeover.
