The Concern of the Separation of Ownership and Control

According to Hutton (1995), the agency problems rests in the abuse power by elites because the excess power is in the hands of senior management and some of them use the power in their own interests, thereby, damaging the shareholders (Oba, 2004). Agency theory is being considered very important in corporate governance. Corporate governance includes the principles which are designed to direct and control the businesses. Corporate governance has been defined by The Financial Aspects of Corporate Governance (Securities and Exchange Commission of Pakistan, n.d.).
“Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholder’s role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place …”
Since 1995, corporate governance has been assisting the shareholders to better govern corporations and to enhance the corporate accountability of controllers (McRitchie, 2010). A clear allocation of control to a majority shareholder is favored by the legal US provisions (Hauswald &amp. Hege, 2006). U.S. Corporate governance differs from corporate governance in Japan or Germany (Blair, 1995). However, the corporate governance policies related to agency theory are quite similar.
Agency theory actually defines the relationship and divergent interests of managers and shareholders. Agency theory conveys that the delegation of power or decision making&nbsp.authority becomes problematic when it is transferred from principal to an agent and the interests of both diverge when principal may not perfectly and costless monitor agent actions or principal may not acquire information possessed by the agent.&nbsp.