What inherent characteristic of corporations creates the need for a system of checks on manager behavior?

Fin515 – week 6 – problem set

The inherent characteristic of corporations that creates the need for a system of checks on manager behavior is limited liability. Limited liability means that the owners and managers of a corporation are only liable up to the amount they have invested in it, not any more. This allows them to make decisions without risking their personal assets but also means there is potential for abuse as shareholders have no direct control over management decisions.

Thus, in order to protect shareholders’ interests and ensure proper corporate governance, there needs to be checks on manager behavior. This usually involves some form of oversight such as board meetings where external parties can evaluate performance or review financial statements/business plans etc. It may also involve regulations such as Sarbanes-Oxley Act which set limits on certain activities (e.g insider trading) and require disclosure of certain information about a company (e.g financial reports).