Ethics and Governance
Theories of Corporate Governance
Agency Theory
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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
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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
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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. •
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. •