Abstract
For a market economy to function efficiently, corporate governance of the firms' management is vital. Without effective governance, agency theory's principal-agent (or "agency cost") problem will result in the managements ("agents") engaging in opportunistic activities detrimental to the enterprise's owners and the whole economy.
In public firms with full management/ownership separation, i.e. no dominant shareholder and dispersed shares ownership, the task of keeping managers working primarily in shareholders' interests thus becomes critical.