ABSTRACT
Corporate governance refers to 'those administrative monitoring and incentive mechanisms that are intended to reduce conflicts among organizational actors due to differences in incentives'. Modern corporations, characterized as they are by the separation of ownership and managerial control, use managers as decision-making specialists who act on behalf of the firm's owners. Self-interested managers may make corporate level strategic decisions that maximize their own personal power and welfare and minimize their personal risk rather than maximizing shareholder value. This chapter argues that in addition to shareholders, top managers are responsible to other stakeholders and, to some extent, to society at large. Agency theory pertains to the conflict of interest between shareholders and top managers; it provides the dominant theoretical perspective on corporate governance systems. According to agency theory, managers are solely responsible to shareholders, so their actions must aim to maximize shareholder value: They should be accountable only for making a profit.
