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Summary week 1-2 chapters 1-6 +9 Corporate governance UVA
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Corporate governance week 1 & 2Corporate governance and board decisions
Chapter 1: What is corporate governance?
Introduction
Corporate governance is the control and direction of companies by ownership, boards,
incentives, company law and other mechanisms. -> the system by which companies are
directed and controlled.
The definition varies between the different kind of roles. (lawyer, shareholder etc.)
A key distinction in governance definitions is to what extent the company is accountable only
to shareholders or to a broader set of stakeholders.
Corporate governance principles
What corporate governance is not
Corporate governance is not directly concerned with business decisions, but with how the
decisionmakers can be held accountable. Corporate governance is not about faith, it is about
proof. Corporate governance is not synonymous with governance codes.
,The basic governance problem
The basic problem is the agency problem, created by the separation of ownership and control.
This gives rise to a set of incentive problems because the managers might not have the same
set of goals and objectives as the share- and debtholders. The idea is that the shareholder
(owners) hires executives to manage companies on their behalf. The agent (manager) acts on
behalf of the principle (shareholder).
The basic question is: how to ensure that managers will manage the company well?
There is some law in place to ensure the that the manager does a good job. The board also
monitors. Large shareholders can also monitor. Another way is to align the interests of
managers and shareholders by incentive systems.
The agency theory is based on the idea that people think rationally. In the enlightened agency
theory, which is used in the book, we take into account that people are not always completely
rational.
The extended agency problem
In the real world there are more than two actors – the principle and the agent. We have a
series of agency relationships. Because of this goal alignment is a challenge.
The board of directors has an agency relationship with the shareholders and with
management.
Because the owners are usually not a
homogenous group it is difficult for them to
effectively ‘control’ the organizations
management.
Why corporate governance?
Good management is crucial to economic
efficiency, productivity, firm performance, and
social welfare. It functions as a safety switch.
Avoiding big scandals.
But taking risks is good for the economy. So in
this book when they talk about optimal
corporate governance they mean it’s good to
tolerate a few scandals than to slow down the
capitalist engine of innovation and growth.
,
, Insight of corporate governance theories Yusoff and Alhaji
Introduction
With the advent of globalization, there is a greater deterritorialization and less of
governmental control, which results in a greater need for accountability. -> corporate
governance.
Definition corporate governance -> they stress that there are a lot of definitions -> it is
concerned with the social political and legal environment in which the corporation operates
system practices and legal environment and procedures- the formal and informal rules that
governed the corporation. -> contributes to a better firm performance
Corporate governance theories
Agency theory
Literature on agency theory
- Assumes that the interests of both shareholders and management are clear
- Assumes that humans are self-interested and disinclined to sacrifice their personal
interests for interests of others
Firm is a legal friction -> nexus of contracts. -> these contracts have the intention to make sure
everyone does what is best for the company. -> reducing agency cost and adopting accounting
methods that most efficiently reflect their own performance.
According to agency theory the primary function of the board is towards the shareholders to
ensure maximization of shareholder value. The focus of agency theory is the relation between
agent and principal. Arising from the agency problem on how to induce the agent to act in the
best interest of the principal. This results in agency cost.
The agency problem depends on the ownership characteristics of each country.
Agency model assumes that individuals have access to complete information and investors
possess significant knowledge of whether or not governance activities conform to their
preferences and the board has knowledge of investors’ preferences. -> therefore, according
to agency theory, an efficient market is considered a solution to mitigate the agency problem
which includes an efficient market for corporate control, management labour and corporate
information.
Stakeholder theory
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