KEY TAKEAWAY

Like the government of any country where rule-of-law provides structure and order so the society can function effectively, corporate governance provides a framework by which modern corporations can operate. Agency theory provides the basis for corporate governance and is largely responsible for the current state of publicly traded companies and their access to vital capital through the equity market. But sometimes, things can go wrong. Because the interests of shareholders (owners) and decision makers (managers) can sometimes be at odds, owner representatives (board members) must take care to ensure proper controls are in place to both motivate the behavior of managers while at the same time guarding against potential abuse by those same leaders. Strong, and complex, rules dictate how the various actors in modern corporations behave, but they sometimes go wrong with devastating consequences for all stakeholders.