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Administrative Studies
ADMS 1000
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Introduction to Administrative Studies ADMS1000 – Summer 2012 – Eytan Lasry Lecture 3 – The Social Context & Corporate Governance – May 22 The Corporate Form - An “artificial being” that can engage in all forms of business activities (Canada Corporation Act) - A business organization that is recognized by the law as having a separate legal existence can be sued, hold property and incur debt - Less than 20% of businesses are corporations but they account for 90% of all business revenues (in the US) - Advantages (relative to sole proprietorships and partnerships): o Access to capital o Infinite life o Limited liability o Transferability and liquidity of ownership - Disadvantages: o Double taxation o Costs and disclosure o Principal/Agent Problem – GOVERNANCE! Corporate Governance - The system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance. Why do we need Governance? - The separation of ownership and control in modern corporations o In the late 19 century, corporations became too large and shareholders too dispersed to effectively monitor managers, resulting in a free-rider problem (Berle and Means, 1932) o During the same period, the growth of railroads resulted in the professionalization of management functions such that owners knew far less about the business’ operations than the managers (Chandler, 1977) The Principal – Agent Problem - Causes: o Managerial incentives and Information asymmetry  e.g. acquiring other corporations to increase revenues and executive compensation - Solution: o Aligning Incenti
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