Agency Challenges of Corp. Governance

Agency Challenges of Corp. Governance Shareholders, the board of directors and top management in large U.S. corporations share three major legal duties to the corporation. These include (Board roles and responsibilities):

Duty of Care: to act with the same care as a "reasonably prudent person" would exercise under similar circumstances, in good faith, and in a manner reasonably believed to be in the best interests of the organization.

Duty of Loyalty: to act in good faith in the best interests of the organization, not engaging in activities which would injure or take advantage of the organization.

Duty of Obedience: To act to ensure the organization operates in keeping with the laws and rules governing its formation and in accordance with its own bylaws and mission as well as federal and state statutes and contractual agreements.

However, conflicts of interest often lead to behavior that is inconsistent with these duties. Relationships, compensation incentives, and reporting arrangements can often motivate individuals to act in their own best interest

Today, the government and corporate governance boards are trying to eliminate these impediments to fulfilling legal duties to the corporation.

Most notably, the Sarbanes-Oxley Act is a far-reaching U.S. corporate governance legislation, motivating companies to implement governance boards to ensure compliance. The Act covers six main areas (Corporate accountability: A summary of the Sarbanes-Oxley Act.):

Oversight Board: The Public Company Accounting Oversight Board was created to oversee the audit of public companies.

Auditor Independence: Auditors now have a list of non-audit services they can't perform during an audit.

Financial Disclosure: Off-balance sheet transactions and relationships that may affect financials must be disclosed. Annual reports must state that management is responsible for the internal controls and procedures for financial reporting.