Impact on the corporate government (1) Including social objectives in the mission statement oforganization is a
(1) Including social objectives in the mission statement oforganization is a sign that the board believes that they have significantimpact on corporate strategy.
(2) Ethical codes are part of corporate guidance to promote goodcorporate behavior among their employees.
(3) Company should report on ethical and social conduct in theirOperation and Financial Review and also may prepare social accounts showing impactof stakeholders.
(4) Impact of stakeholders on corporate governance may includerepresentatives from key stakeholder groups on the board.
(1) Institutional investors are now the biggest investors in many stockmarkets. They manage funds invested by individuals. Institutional investors canwield great power over the companies in which they invest.
(2) The major institutional investors include pension funds, lifeinsurance companies, unit trusts and venture capitals companies.
Role & influence
(1) The significant role of institutional investors is to promote goodcorporate governance.
(2) Due to the size of their shareholdings, institutional investors canexert significant influence on corporate policy.
(3) Institutional investors should make a dialogue with companies baseon the mutual understanding of objectives.
(4) Institutional investors can use many means to intervene and exerttheir influences on companies, such as voting, calling on extraordinary generalmeeting.
(5) The key issue is to increase dominance of investors and contributepositively to corporate governance through concentrating power in a few hands.
(1) Under the form of joint-stock, companies are limited by shares. Theseparation of ownership from management makes agency is a significant issue incorporate governance, especially for large companies.
(2) The problem of principals (owners) not being able to run thecompany themselves and therefore having to rely on agents (directors) to do sofor them can cause issues if there is a breach of trust by directors who maypursue their own interests rather than he shareholders’.
(1) For principals, it is difficult and expensive to verify what theagent is doing and to introduce mechanism to control the activities of agent.
(2) Agency costs are incurred when principals attempt to monitor theactivities of agents as well as establishing control system.
(3) Agency costs may be measured in monetary terms.
(1) Agency accountability means that the agent is answerable under thecontract to his principal and must account for the resources of his principaland the money he has gained working on his principal’s behalf.
(2) Accountability relates to the need to act in shareholders’interests, the need to provide good information, the need to operate within adefined legal structure.
(3) Corporate governance systems are designed to enforce thisaccountability for principal.
Resolving the agency problem
(1) Alignment of interests is accordance between the objectives ofagents acting with an organization and the objectives of the organization as awhole.
(2) Alignment of interests may be achieved by giving managers profit-relatedpay or incentives that are related to profits or share price.
Transaction costs theory & Stakeholder theory
Transaction costs theory
(1) The way the company is organized and governed determines itscontrol over transactions.
(2) Outside transaction occur costs such as searching and bargainingcosts. Keeping transaction internally may reduce the uncertainties aboutdealing with outside.
(3) In terms of transaction costs, company consider to whetherinternalize their transaction or deal with outside.
(4) Manager behave rationally and opportunistically to organize theirtransaction to pursue their own interests.
(5) Asset specificity, certainty and frequency are three variablesconsidered by company to determine the degree of monitoring and control.
(6) Corporate governance costs build up including internal controls tomonitor management.
(7) Transaction costs theory is similar to agency theory to ensure thatcompany managers pursue shareholder’s best interests rather than their own.
(1) Stakeholder theory is based on companies being so large that theyare not only responsible to their shareholders, but have a significant impacton society.
(2) Stakeholders affect or be affected by companies include:shareholders, employees, customers, suppliers, creditors, community,government, and environment etc.
(3) Stakeholder theory may be the necessary outcome of agency theory.Agency theory is a narrow form of stakeholder theory. Both of them have thepurpose of aligning divergent interests.
Role & Responsibilities of Board ofdirectors
(1) Promote the success of the company
(2) Direct and supervise the company affairs
(3) Provide entrepreneurial leadership
(4) Enable risk to be assessed/managed and a prudent/effective controlsystem
(5) Set company’s strategic aims
(6) Ensure necessary financial and human resources in place for meetingobjectives
(7) Review management performance.
(8) Set the company’s values and standards
(9) Ensure company’s obligations to its stakeholders are met
(10) Monitoring the CEO
(11) Manage potential conflicts of interests
(12) Ensure effective communication internally and externally
Unitary boards vs. two-tier boards
Advantages/disadvantages of unitary boards
(1) It is a structure that permits much more involvement. Alldirectors, including executive directors and non-executive directors, have theequal legal responsibilities for the management of the company.
(2) Non-executive directors are empowered. They bring not only theindependent scrutiny to the boards, but their own expertise and perspectivesand, which is valuable for the decision-making and management of company.
(3) Accountability is enhanced. Under a cabinet-like arrangement, alldirectors are equally accountable. Meanwhile wider viewpoints provided by boarddiscussion suggest better decisions.
(4) Reduce the likelihood of abuse of power by a small number of seniordirectors and protect against fraud and malpractice.
(1) It is awkward to ask non-executive director or independent directorto be both manager or monitor.
(2) It requires non-executive director to spend much time on attendingboarding meeting or the commitment required to obtain sufficient knowledge.
Advantages/disadvantages of two-tier boards
(1) Separating clearly and formally between those monitoring and thosebeing monitored. In other words, between those managing the company and thosewho own the company or control it for the benefit of shareholders.
(2) Taking account of the needs of stakeholders and allow widerinvolvement of stakeholders. The supervisory board has worker’s representativeswho are important stakeholders of the company.
(3) There is direct power over the management through the right toappoint members of the management. Meanwhile it allows effective guards againstmanagement inefficiency and fraud.
(4) Encouraging transparency and independence of thought, discussionand decision within the company.
(1) There is confusion over authority and therefore a lack of accountability.
(2) The management board may restrict the information passed on to thesupervisory board.
(3) There is dilution of power through stakeholder involvement.
(4) There is bureaucracy and slower decision-making.