A small company, Stevens Textile Co. is expanding its operations and needs additional financing to support its expansion projects. The company is planning to change its business registration from a limited liability company to a corporation. As a corporation it will be listed on the stock exchange market and sell shares to the public to raise capital from investors. The business will be managed by professional executives who are not owners of the corporation.

1. Explain agency relationship and agency costs to the owners of Stevens Textile Co.
2. Suppose Stevens Textile company is very successful and the founders' cash out most of their stock and turn the company over to an elected board of directors. Neither the founders nor any other stockholders own a controlling interest (this is the situation in most public companies). List six potential managerial behaviors that can harm a firm's value.
3. What is corporate governance? List five corporate governance provisions that are internal to a firm and under its control.
4. Stevens Textile Co. might want to reduce the conflict of interest that may arise between corporate executives and shareholders by electing board of directors to oversee the activities of the corporate executives. Identify five characteristics of the board of directors that usually lead to effective corporate governance.