The Paper defends the agency theory and different themes which can make up for the deficiencies in analysis and pave a way forward for the companies to audit and update their strategies..
The statement in the question has been taken from the thesis by Byrd, Parrino and Pritsch (1998) where the authors argue that the separation of ownership and control in a modern corporate form will require the transfer of responsibility to professional managers and this will introduce a stockholder-manager conflict within the corporate structure. It has even been suggested that most small investors would be likely to depend on free-rider benefits from the efforts of larger shareholders, who may have better expertise in corporate monitoring (Byrd, Parrino, & Pritsch,1998). My paper will defend the Berles and Means thesis and try to assess the truth in the statement given in the question. Later there will be an exploration of different themes through which shareholder-manager conflict, if it exists, can be explained and resolved.
The modern corporate form finds itself dependent on the efficient allocation of resources provided by its principals (shareholders). The creation of new ventures and prudent investment becomes a focal aim of the established companies. This efficient allocation is dependent upon what the investors believe will be the returns as well as the trust that their company will be managed to maximize the investment and that the cash flows promised in exchange for the investment will effectively be returned. This trust will be established through a broad set of factors which will stem from the legal, institutional and regulatory environment that guarantees the investor protection.
The concept of corporate governance pertains to the notions of the "agency" or the "principal-agent" relationship which is a consequence of the Berle and Means thesis that the person who owns the firm does not necessarily control it. In the modern corporate entity the investors or shareholders (principals) hire managers (agents) to