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Samenvatting Corporate Governance P, ISBN: 9780199261314 Corporate Governance
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Corporate GovernanceChapter 2 Theoretical aspects of Corporate Governance
Theories associated with the development of corporate governance
Theory name Summary
Agency Agency theory identifies the agency relationship where one party (the principal) delegates
the work to another party (the agent). In the context of a corporation, owners hire
managers to run the firm in exchange for an agreed compensation
Transaction cost Transaction cost economics views the firm itself as a governance structure. The choice of
economics an appropriate governance structure can help align the interests of directors
Stakeholder Stakeholder theory takes account of a wider group of constituents rather than focusing on
shareholders. Where there is an emphasis on stakeholders, the governance structure of
the company may provide for some direct representation of the stakeholder groups
Stewardship Directors are regarded as the stewards of the company’s assets and will be predisposed to
act in the best interests of the shareholders
Class hegemony Directors view themselves as an elite at the top of the company and will recruit/promote
to new director appointments taking into account how well new appointments might fit
into that elite
Managerial hegemony Management of a company, with its knowledge of day-to-day operations, may effectively
dominate the directors and hence weaken the influence of the directors
Path dependence Path dependence may be structure-driven and rule-driven; corporate structures depend
on the structures with which an economy started
Resource dependence Directors are able to connect the company to the resources needed to achieve corporate
objectives
Institutional The institutional environment influences societal beliefs and practices that impact on
various ‘actors’ within society
Political Political theory has significant influence on different ownership and governance structures
Network governance A structure of network governance allows for superior risk management
Agency theory
The principal delegates work to the agent. Disadvantages can be:
The agent may not act in the best interest of the principal, or only partially
Information asymmetry whereby the principal and the agent have access to different levels of
information; the principal is at a disadvantage because the agent will have more information
Much of the agency theory as related to corporations is set in the context of the separation of ownership and
control as described in the work of Berle & Means (1932). Int his context the agents are managers and the
principals are the shareholders.
Separation of ownership and control
In the last few years there has mean increasing pressure on shareholders, and particularly on institutional
shareholders who own shares on behalf of the ‘man in the street’, to act more as owners and not just as
holders of shares. The drive for more effective shareholders, who act as owners, has come about because
there have been numerous instances of corporate excesses and abuses, such as perceived overpayment of
directors for poor performance, corporate collapses, and scandals, which have resulted in corporate pension
funds being wiped out, and shareholders losing their investment. The call for improved transparency and
disclosure, embodied in corporate governance codes and in International Accounting Standards (IASs), should
improve the information asymmetry situation so that investors are better informed about the company’s
activities and strategies.
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, Corporate Governance
Transaction cost economics (TCE)
Views the firm as a governance structure, whereas agency theory views the firm as a nexus of contracts. The
latter means that there is a connected group of series of contracts amongst the various players, arising
because it is seemingly impossible to have a contract that perfectly aligns the interests of principal and agent
in a corporate control situation.
There have been problems in the separation of ownership and control, and the resultant corporate
governance issues have arisen. There are certain economic benefits to the firm itself to undertake transactions
internally rather than externally. In its turn, a firm becomes larger the more transactions it undertakes and will
expand up to the point where it becomes cheaper or more efficient for the transaction to be undertaken
externally.
Coase (1937) thus argues that the bigger a firm becomes, the less efficient it becomes.
Williamson (1984) justifies the growth of firms, stating that the costs of any misaligned actions may be reduced by
‘judicious choice of governance structure rather than merely realigning incentives and pricing them out’.
Hart (1995) states that there are a number of costs to writing a contract between principal and agent, which
include:
The cost of thinking about and providing for all the different eventualities that might occur during the contract
The cost of negotiating with others
The costs of writing the contract in an appropriate way (legally binding)
Governance structure can be seen as a mechanism for making decisions that have not been specified in contracts
Stiles and Taylor (2001) point out that both TCE and agency theory are concerned with managerial discretion and
both assume that managers are given opportunities and moral hazard, and that they operate under bounded
rationality.
Stakeholder theory
This theory takes account of a wider group of constituents rather than focusing on shareholders. Employees,
providers of credit, customers, suppliers, government, and local community are also taken into account.
Shareholders and stakeholders may favour different corporate governance structures and monitoring
mechanisms.
Jensen (2001) advocates an “enlightened value maximization”, identical to "enlightened stakeholder theory”:
‘Enlightened value maximization utilizes much of the structure of stakeholder theory but accepts maximization
of the long-run value of the firm as the criterion for making the requisite trade-offs among its stakeholders and
therefore solves the problems that arise from multiple objectives that accompany traditional stakeholder
theory’
Stewardship theory
Donaldson and Davis (1991) cautioned against accepting agency theory as a given, saying that it emphasises
the control of managerial ‘opportunism’. Stewardship theory stresses the beneficial consequences on
shareholder returns of facilitative authority structures which unify command by having roles of CEO and chair
held by the same person.
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, Corporate Governance
Convergence
There are a number of views as to where corporate governance systems are converging or likely to.
Roe (2003) states that the fact that man people nowadays talk about corporate convergence due to globalization tells
us that people believe that corporate structures have sharply varied and that political forces play important roles
Aguilera & Jackson (2003) highlight that institutional change tends to occur in a slow, piecemeal fashion, rather than
as a big bang. This explains why internationalization has not led to quick convergence on national corporate
governance models
Branson & Guillén (2004) argue against convergence occurring on economic, legal, and cultural grounds. One size is
unlikely to fit all and there will likely continue to be some divergence. There does however, seem to be convergence
on the core aspects of corporate governance; transparency, disclosure, and the important contribution that
independent non-executive directors can make
Conclusion
Future developments in the theory of corporate governance need to take account of a multitude of parts that
make up the whole labyrinth of corporate governance:
Different business forms
Different legal and cultural characteristics
Different actors
The interaction of these different actors, and the effects both from, and on, the environment in which they
operate, means that corporate governance is of its nature a complex and evolving system.
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, Corporate Governance
Chapter 4 Shareholders and Stakeholders
Shareholders and stakeholders
Why are shareholders considered distinct from other stakeholder groups?
Shareholders invest their money to provide risk capital for the company
In many legal jurisdictions, shareholders’ rights are enshrined in laws whereas those of the wider
group of stakeholders are not
The simplest definition of a “shareholder” is an individual, institution, firm, or other entity that owns shares in
a company. There are various other stakeholder groups:
Directly related stakeholders Indirectly related stakeholders
Employees Government
Shareholders Interest groups
Providers of credit Local communities
Suppliers
Customers
Employees
The employees of a company have an interest in the company because it provides their livelihood in the
present and at some future point. In the present-day employment, employees will be concerned with their pay
and working conditions, and how the company’s strategy will impact on these. The long-term growth and
prosperity of the company is important for the longer term with regards to pension benefits.
Most companies include a statement or report to the employees stating in what ways they are looking after
the employees’ interests. Companies also need to consider and work with the employees’ trade unions,
recognizing that a good relationship with the unions is desirable. The trade unions may, amongst other things,
act as a conduit for company employee information dissemination, or be helpful when trying to ascertain the
employees’ views. Increasingly, trade unions are exerting their influence, via the pension funds, pressing for
change by use of their voting rights.
Companies also need to consider and comply with employee legislation, whether related to equal
opportunities, health and safety at work, or any other aspect. They should also have in place appropriate
whistle-blowing procedures for helping to ensure that if employees fell that if there is inappropriate behaviour
they can blow it whilst minimizing the risk of adverse consequences for themselves.
Providers of credit
Providers of credit want to be confident that the companies to which they lend are going to be able to repay
their debts and they will seek assurance for it. It is in the company’s best interests to maintain the confidence
of providers of finance to ensure that no calls are made for repayment of funds, that they are willing to lend to
the company in the future, and that the company is able to borrow at the best possible rate
Suppliers
Suppliers have an interest in the companies that they supply on two grounds. First, having supplied the
company with goods or services, they want to be sure that they ill be paid for these and in a timely fashion.
Secondly, they will be interested in the continuance of the company because they will wish to have a
sustainable outlet for their goods and services.
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