Ethics and Governance

Topics: Ethics, Morality, Board of directors Pages: 29 (6727 words) Published: November 1, 2014
Theories of Corporate Governance

Agency Theory






Separation of
ownership from
control
Dispersed
ownership
structure – no
single
shareholder has
the power to
control
management
Economic
theory suggest
that managers
will act in their
own self interest
instead of
maximizing
shareholders’
return

Stewardship Theory
Managers are good
stewards of corporations
and diligently work to attain
high levels of corporate
profit and shareholders’
returns
• Different perception of
human behaviour, different
corporate governance
approach
• Managers should be
empowered to perform to
their maximum potential
thus maximizing the
organisational financial
performance and
shareholders’ value
• Managers are primarily
motivated by achievements
and responsibility needs.
• Managerial prerogative
⇒ Managers are more
responsible stewards of the
firm working diligently to
serve the interest of
shareholders
• Governance structure is to
facilitate and empower
stewards rather than
monitor and control them


Stakeholder Theory
Takes account of
wider group of
constituents rather
than focusing on
shareholders
• Accountable to
all, shareholders,
employees,
creditors, suppliers
and customers.
• Stakeholderoriented board
⇒ Encourage longterm employee
ownership and
encourage board
representation by
significant
customers,
suppliers, financial
advisers,
employees and
community
representatives.

Transaction Cost
Economics











Building on Coase’s
Boundary of the Firm
Firm as a Governance
Structure
Williamson TCE
Make or Buy Decision –
Insource V Outsource –
Hierarchy Vs Market
Costs associated with
either decision
Core Competencies
retained?

Principal-Agent Problem
Economists see
ownership/control
relationship as a
‘game’ in which a
player (principal)
offers incentives to
the other (agent) to
encourage the agent
to act in the
principal’s best
interest.
• Contract that
engages one or more
persons to perform
some service on
behalf, which involves
in delegating some
decision-making
authority to the
agent.
• Rational choice
Theory
⇒ People make
rational economic
decisions and hence
seek to maximize
their own economic
position
• Agency costs: cost
generated in the
relationship
⇒ Monitoring cost
⇒ Bonding cost
⇒ Residual cost

Agency Implication








CEO and chairman to
be different person.
Outside director
advocated
Non-executive
directors advocated
Important role for
Audit and
Remuneration
Committees.

Stewardship Implication





CEO and chairman to
be the same person.
Often prevalent in
family firms
Inside director
advocated
Board members act
as advisor to
management

Stakeholder Implications








CEO and chairman
to be different
person.
Outside director
advocated
Large board size
representative of
stakeholders
Important role for
Nomination
Committee

Agency Theory – Governance
Mechanism

External: market for
corporate control
(takeover)
⇒ Bidder makes offer to
disperse shareholders of
target firm. When offer is
accepted the bidder gains
control of the target firm
and can replace or at least
control the management
• Internal: Strong,
independent boards of
directors.
⇒ BOD is to control
managerial behaviour and
ensure they act in the best
interest of shareholders.


Shareholders
(Own the
company)

CEO &
Management
(Run the
company)

Board of Director
(Control the
company)

Limitations of Theories

Agency Theory






View individualist as opportunists
and self-seeking maybe
simplified.
Presents partial view of the
world ignoring the good bit of
complexity of organisations.
Additional perspectives can aid
in capturing the greater
complexity.
Monitoring is the main function
of agency theory; service and
strategic roles are advocated.
There is a lack of empirical...
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