Corporate Governance
Corporate governance
Two definitions:
ASX CGC: rules, relationship, systems and processes help a company to monitor and assess risk, optimize performance, create value and provide accountability.
A narrow definition which consistent with agency theory focuses on relationship between company and shareholders.
OECD: a system a company can be directed and controlled, specify rights, responsibilities and rules; set and achieve objectives and monitor performance.
A board definition consider relationship between company and stakeholders
Agency theory
A contract under which one or more person engage another person or persons to perform some service on their behalf
Agency problem rise because of the conflict of interest between principle and agent
Three specific problems:
Managers try to maximize their wealth at the expense of shareholders
Tendency for management to focus on short-term performance
Different attitude of managers and shareholders towards risk
Corporate governance structures, policies and relationships can help to overcome these three related agency problems
Independent board of directors
Independent board chair
Independent board subcommittees such as audit, remuneration and nomination
Stakeholder theory
Reject the only important relationship is shareholders and managers, but consider from a much broader perspectiveshareholder is only one part of the group
Stakeholders include employees, creditors, suppliers and so on, and they all have impact on the corporation to some extent.
Company can only achieve its goal with a full and detailed understanding of the relationships it holders with different group of stakeholders.
Agency theory vs. stakeholder theory
It is a value judgment, and it is hard to compare because of the different perspectives of each theory
Agency theorytraditional financial perspective, and it is based on the assumption that all individuals are self-interest and rational.
Stakeholder theory it is more morally driven
Two definitions:
ASX CGC: rules, relationship, systems and processes help a company to monitor and assess risk, optimize performance, create value and provide accountability.
A narrow definition which consistent with agency theory focuses on relationship between company and shareholders.
OECD: a system a company can be directed and controlled, specify rights, responsibilities and rules; set and achieve objectives and monitor performance.
A board definition consider relationship between company and stakeholders
Agency theory
A contract under which one or more person engage another person or persons to perform some service on their behalf
Agency problem rise because of the conflict of interest between principle and agent
Three specific problems:
Managers try to maximize their wealth at the expense of shareholders
Tendency for management to focus on short-term performance
Different attitude of managers and shareholders towards risk
Corporate governance structures, policies and relationships can help to overcome these three related agency problems
Independent board of directors
Independent board chair
Independent board subcommittees such as audit, remuneration and nomination
Stakeholder theory
Reject the only important relationship is shareholders and managers, but consider from a much broader perspectiveshareholder is only one part of the group
Stakeholders include employees, creditors, suppliers and so on, and they all have impact on the corporation to some extent.
Company can only achieve its goal with a full and detailed understanding of the relationships it holders with different group of stakeholders.
Agency theory vs. stakeholder theory
It is a value judgment, and it is hard to compare because of the different perspectives of each theory
Agency theorytraditional financial perspective, and it is based on the assumption that all individuals are self-interest and rational.
Stakeholder theory it is more morally driven