The fundamental characteristic of the corporate form of business organisation that gives rise to the need for governance mechanisms is:

Question

Quizplus · Accepted Answer

The separation of ownership and control in the corporate form of business organization means that shareholders, who own the company, delegate authority to managers or a board of directors to run the company on their behalf. This creates the potential for conflicts of interest between shareholders and management, as managers may pursue their own interests rather than those of the shareholders. Governance mechanisms, such as oversight by independent directors, compensation incentives, and shareholder voting rights, are needed to align the interests of shareholders and management and ensure effective decision-making. Mutual agency (B) refers to a situation where each partner in a partnership is both an owner and a decision-maker, which is not applicable to the corporate form. The lack of separation of ownership and control (C) is not a characteristic of the corporate form and is actually the opposite of what creates the need for governance mechanisms. The abuses by professional managers (D) is a potential consequence of the separation of ownership and control, but it is not the underlying characteristic that creates the need for governance mechanisms.

The Fundamental Characteristic of the Corporate Form of Business Organisation