Академический Документы
Профессиональный Документы
Культура Документы
3
AGENCY THEORY
SEPARATION BETWEEN OWNERSHIP AND CONTROL
PRINCIPAL
E.G. SHAREHOLDERS
EMPLOYEES ACCOUNTABLE TO
AGENT
ON BEHALF OF E.G. DIRECTORS
TO PERFORM
TASK
E.G. MANAGING THE
COMPANY
AGENCY THEORY AND CORPORATE
GOVERNANCE
COMPANIES OWNED AND MANAGED BY SAME PEOPLE
SEPARATION OF GOALS
AGENCY PROBLEMS
Key concepts of AGENCY
THEORY
• Affect or affected by the policies
STAKEHOLDERS • It may be any person or group
shareholders
suppliers
Future generations
STAKEHOLDERS
Creditors
Animal species
Community
General
Environment public/world
society Government
mendelow model of
stakeholder management
12
Advantages of Stakeholder Analysis
• Get to know stakeholders better:
– Relative importance, power and interests
– Better managed relationships
– Risks identified
• Make better strategies and decisions
Disadvantages of Stakeholder Analysis
• Best done on continuous basis. Gets outdated
quickly
• hard to categorize stakeholders in real life
situations
– Focus on most important stakeholder
– Stakeholders can work together and form
13
pressure groups
Codes of conduct
24
Disadvantages of NEDS
High caliber NEDs may go to best run companies
rather than the ones which are in more need of
input from good NEDs
As they do not work full time for the company,
they may only spend limited time there. It is
debatable how much they actually know about the
company and how much they can add value.
They can damage company performance by
weakening board unity, stifling entrepreneurship
and concentrating on matters other than
maximization of financial performance.
Having additional directors increases the size of
the board of directors as at least half of the board
must be independent non executives. This
25
Chairman’s responsibilities
30
Reasons for splitting the role
'A clear division of responsibilities must exist at the
head of the company. No individual should have
unfettered power of decision.'
Representation: the chairman is clearly and solely a
representative of shareholders with no conflict of
interest having a role as a manager within the firm.
The chairman provides a channel for the concerns of
non-executive directors
The chief executive can fully concentrate on the
management of the organisation without the
necessity to report to shareholders
31
Reasons against splitting the
role
Unity: the separation of the role creates
two leaders rather than the unity
provided by a single leader.
Ability: both roles require an intricate
knowledge of the company. It is far
easier to have a single leader with this
ability rather than search for two such
individuals.
Human nature: there will almost
inevitably be conflict between two high
powered executive offices.
32
NOMINATION COMMITTEE-ROLES
All members must be NEDS
Oversees board appointments to maintain a
balance in the board.
Establishes desirable size of the
board(bearing in mind the current and
planned size and complexity of the
operations
It needs to consider a balance between
executives and independent NEDs
skills, knowledge and expertise of the
current board
It considers the need to attract board
members from diverse backgrounds
33
family businesses.
INSIDER SYSTEM
Aninsider system is one where there are
strong links between those that run the
company and major stakeholders.
The major shareholders may also feature
on the board, for example bankers or
institutional shareholders employees may
have representatives on the board.
Familydominated companies often
have a similar structure with family
members sitting on the board.
36
Family dominated companies pros:
lower agency costs associated with insider-dominated
businesses because fewer agency trust issues. Less
monitoring is usually necessary because the owners are
often also the managers
Ethics – it could be said that threats to reputation are
threats to family honour and this increases the likely
level of ethical behaviour.
Fewer short-term decisions – the longevity of the
company and the wealth already inherent in such
families suggest long-term growth is a bigger issue.
Decision making may be quicker as there are relatively
lesser number of people and they are likely to have the
same mindset 37
Cons
Minority shareholders and non-included
stakeholders may lack protection from the
dominant insiders as they have little
representation within the company.
There is a potential lack of transparency as
information is kept inside the company.
There are relatively lesser formal governance
structure, systems, policies and procedures.
‘Gene pool’ and succession issues are
common issues in family businesses.
‘Feuds’ and conflict resolution can be major
governance issues in an insider-dominated
38
business.
REMUNERATION COMMITTEE-ROLES
separately later)
REMUNERATION COMMITTEE-ROLES
3. It reports to the shareholders on the outcomes
of their decisions, usually in the corporate
governance section of the annual report (usually
called Report of the Remunerations Committee).
This report, which is auditor reviewed, contains a
breakdown of each director’s remuneration and a
commentary on policies applied to executive and
nonexecutive remuneration.
4. They may also be asked to make severance
packages.
5. Where appropriate and required by statute or
voluntary code, the committee is required to be
seen to be compliant with relevant laws or codes
40
of best practice.
Components of an ED’s remuneration package
Basic salary: When setting a director’s salary, the
remuneration committee should consider hi past
experience, performance and responsibilities. It
should not be related to performance of company.
Another aspect to consider is what others
companies are willing to pay ( Market rate)
Performance-related elements: Bonuses are often
given for increased profits, increased market
share, increased sales, reduced costs, increased
margins and so on. However, bonuses could also be
given for non-financial measures, for example,
reducing employee turnover or better customer
service or environmental targets such as reducing
pollution. This may avoid the focus on inflating
short-term profits. 41
Components of an ED’s remuneration package
Share options :Share options are contracts that allow the
executive to buy shares at a fixed price or exercise price. -
If the stock rises above this price the executive can sell the
shares at a profit. – they give the executive the incentive to
manage the firm in such a way that share prices increase,
therefore share options are believed to align the managers'
goals with those of the shareholders.
Benefits in kind: transport, health provisions, holidays,
loans
Retirement benefits: The Combined Code suggests that
only a director’s basic salary is pensionable.
A retirement benefit such as lifetime use of the company
plane/car or a sizeable pension payout could be awarded.
The company makes payments into directors’ pension
schemes so on retirement the director will have an income
42
Should corporate governance provisions
vary by country?
YES
Some countries have more insider structures than
outside because of which accountability relationship is
different
Developing countries may not want incur compliance
and monitoring costs
Developing countries might not have enough skilled
people and formal systems
Some governments may have more flexible governance
to attract international companies and hence improve
their economic climate ( when SOX was enforced in the
USA, some companies delisted from the NYSE and got
themselves listed on the London stock exchange)
43
Should corporate
governance provisions vary
by country? NO
Regardless of the culture, standardized
corporate governance provisions will
ensure that minority interest is protected
Countries with poor reputation in terms
of corruption and fraud need a strict
standardized governance structure
Investor confidence is greater in
countries where good governance
structures are followed.
44
Rules based approach
In a rules-based approach to corporate governance,
provisions are made in law and a breach of any
applicable provision is therefore a legal offence. This
means that companies become legally accountable
for compliance and are liable for prosecution in law
for failing to comply with the detail of a corporate
governance code or other provision.
It is the judiciary rather than investors which
monitors and punishes transgression
In a rules-based approach such as Sarbanes-Oxley
,the legal enforceability of the Act requires total
compliance in all details. This places a substantial
compliance cost upon affected companies .45
Principles based approach
principles-based approach works by (usually) a stock
market making compliance with a detailed code a
condition of listing.
If a company is unable to comply in detail with every
provision of a code, the listing rules state that the
company must explain, usually in its annual report,
exactly where it fails to comply and the reason why it is
unable to comply. The shareholders, and not the law,
then judge for themselves the seriousness of the breach.
years)
Transaction cost theory
A theory accounting for the actual cost of outsourcing
production of products or services including transaction costs,
contracting costs, coordination costs, and search costs. The
inclusion of all costs are considered when making a decision
and not just the market prices.
It is in the interests of management to internalize
transactions as much as possible, to remove these costs and
the resulting risks and uncertainties about prices and quality.
Transaction costs can be further impacted by the following:
Bounded rationality: our limited capacity to understand
business situations, which limits the factors we consider in the
decision.
52
Transaction cost theory
Opportunism: actions taken in an individual's
best interests, which can create uncertainty in
dealings and mistrust between parties.
The significance and impact of these criteria will
allow the company to decide whether to expand
internally (possibly through vertical integration)
or deal with external parties.
Managers become more risk averse seeking the
safe ground of easily governed markets.
Transaction cost theory and agency theory
essentially deal with the same issues and
problems. Where agency theory focuses on the
individual agent, transaction cost theory focuses
53