Separation of ownership and management in corporate governance involves placing the management of the firm under the responsibility of professionals who are not its owners. Owners of a company may include shareholders, directors, government entities, other corporations and the initial founders. This separation allows skilled managers to conduct the complicated business of running a large company.
Professional Managerial Skills
The growth of a company comes with the demand for different skills to manage the operations of the company, meaning the owners of a company may not have all of the necessary skills and experience needed for certain managerial roles. Creating a management team separate from the ownership enables the company to be run by professionals with diverse skills such as in marketing, corporate financing and public relations.
Easier Performance Appraisals
Performance appraisals are an essential part of good corporate governance, as they enable managers to evaluate the company and to point out areas of improvement. It can be complex to evaluate performance where there is a lack of separation of ownership and management. But separation makes it easier for the board and those in management to be evaluated objectively. Owners can freely deal with the chief executive officer and other senior managers, even after the appraisals.
Capital utilization involves the arrangements that determine the way in which resources and assets are managed in a company. Separating personal assets and liabilities from the business assets and liabilities may prove difficult for company owners. Managers come in to devise ways in which business assets are managed to generate the highest profits for all shareholders.
Checks and Balances
Separate managers and owners in a firm ensure that a system of checks and balances is in place. Managers act as a buffer between the company and stakeholders such that they can alleviate negative impacts of stakeholder activities and avoid hitches in public relations. Managers are well suited to put in place strategies that will lessen losses to the rest of the stakeholders as a result of the actions of another stakeholder.