Corporate Governance and Agency Theory 代写

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  • •Topic 9

    Corporate Governance and Agency Theory
    •MAA350 Professional Ethics and Governance
    •Learning objectives
    •Define corporate governance
    •Explain why corporate governance is important
    •Define board of directors and its various roles
    •Describe how the structure of the board addresses agency problems
    •Understand the obligations placed on directors by law and corporate governance codes
    •Describe the agency theory and agency problem
    •An understanding of the extended agency problem
    Corporate governance

     ‘’… encompasses the direction, control mechanisms, procedures and relationships involved in the economic, legal and operational performance of a corporation … ”

    Ethics + Corporate Governance = sound business practices and a reduced likelihood of corporate collapse

    Sometimes corporate governance can be described in the following layman’s terms:

    ‘ … corporate governance is the conduit between the principal (the owners) and the agent (management, CEO, Board of Directors etc. ) … ‘
    “ … it focuses very much so on the responsibilities of the Board of Directors (BOD) and its sub committees, their management and oversight of the corporation, risk management and BOD performance, evaluation, remuneration  etc. …”

    “ … in essence, corporate governance is designed to ensure that the BOD’s are fully aware of operational practices, and that they are managing the executive level in an ethical, diligent and responsible manner, on behalf of the shareholders / owners  …”
    Corporate Governance: An overview. KPMG New Zealand

    Click here to watch
    The following u-tube clips will provide you with a taste of what is meant by corporate governance,  why it is important and the possible impact of its failure:

    What is the purpose of Corporate Governance?
    Click here to watch
    The future of corporate governance
    Click here to watch
    Corporate Governance, UCLA Anderson school of management (watch in your own time)
    Click here to view ASX Corporate Governance Recommendations

    ASX Corporate Governance Principles include:
    1.Lay solid foundations for management and oversight
    2.Structure the board to add value
    3.Promote ethical and responsible decision-making
    4.Safeguard integrity in financial reporting
    5. Make timely and balanced disclosure
    6. Respect the rights of shareholders
    7. Recognise and manage risk
    8. Remunerate fairly and responsibly (at Board and executive level)

    Source: ASX Corporate Governance Council 2007, Corporate Governance Principles and Recommendations with 2010 Amendments, ASX Corporate Governance Council, Sydney, pp. 10–12

    Economic efficiency, productivity and social welfare
    Example of bad and good corporate governance
    •Board of Directors
    •A board is made up of a mix of both executive and non-executive directors
    •‘ … a group of persons chosen to govern the affairs of a corporation or other large institution …’

    Executive Board of Director:
    ‘ … same as non-independent or dependent. The member is employed by the organisation … ‘ (paid as part of their salary)

    Non-executive Board of Director:
    ‘ … same as independent …  not employed by the organisations … ‘ (based on more of a consultancy role and paid as part of a set fee for service)

    •Boards are made up of  ‘executive’ and ‘non executive’ directors
    •Diversity is also important where there is a mix of experience, knowledge, age and gender

    ‘ … one who consumes or enjoys the benefit accruing from the efforts of others but does not contribute (or contributes little) to the collective effort … ‘

    (this can be a problem within large boards)
    •Role of Board of Directors
    •Powers of management are vested in the Board of Directors, not the shareholders
    •Shareholders can only (at least theoretically) alter the constitution of the Board
    •The role of the  Board is to set policy, objectives and strategy and to ensure adequate controls and review procedures are in place
    Board’s role includes:

    •Taking steps to protect the company’s financial position
    •Adopting  a strategic plan for the company and measuring its implementation
    •Adopting an annual budget and monitoring results, eg, review of monthly management accounts
    •Adopting clearly defined delegations of authority
    •Agreeing performance indicators with management

    •Ensuring risk management systems are in place

    •Ensuring adequate reporting systems and internal controls are in place
    •Ensuring the company complies with the law and highest ethical standards
    •Determining the accounts present a true and fair view and satisfactory audit arrangements are in place

    •Guidance on appointing and remunerating senior management

    •Ensuring effective communication with shareholders and other stakeholders
    •Adopting formal processes for the selection of new directors
    •Overall, reviewing own processes and effectiveness and the balance of competence on the board
    •Directors’ code of conduct
    Part 2 D.1 of Corporations Act sets out the fiduciary duties of directors, which include:

    •To be honest and loyal      
    •Take care and exercise diligence.
    •To disclose interest
    •Not to make improper use of information or position
    •In business judgements, a director must:
    -make judgments in good faith and for a proper purpose

    -not have a material personal interest in the subject matter of the judgment

    -inform themselves about the subject matter to the extent they reasonably believe to be appropriate

    -rationally believe that the judgement is in the best interests of the corporation
    Overall, a  director must act in the interest of the  company and not for self-interest or personal gain

    •Information is the  property of  the company and must not be used improperly or disclosed to others without authorisation
    •The Articles of Association of the Australian Institute of Company Directors sets out a code of conduct  

    •Key advantages of having a board
    •Provides a conduit between the executive level /  managerial level to a range of external groups
    •Obtain and circulate advise and connect the company to important groups / constituents
    •In-house consultants to management
    •Provide contact to; shareholders, customers, regulators and banks
    •Assist with strategy, risk management, headhunting, pay negotiations, auditing and legal issues
    •Delegate responsibilities to the CEO, staff members, auditors, pay consultants etc.
    •Designed to reduce the agency problem
    •Appropriately set remuneration / salaries, will sufficiently motivate board members, and will ideally reduce the agency problem
    •Some problems associated with boards
    •Exacerbation of  the agency problem (when boards are ineffective or dysfunctional)
    •Detracting from sound corporate governance
    •Excessively compensated
    •A lack of true understanding of the actual financial affairs of the company (e.g. Enron)
    •A lack of true responsibility (e.g. Enron)
    •Too removed from management practices (e.g. Enron)
    •False sense of security that they are protected by the ‘corporate veil’ 
    •An ‘ … all care no responsibility attitude … ‘ (only on some boards only, of course)
    •Have been criticised as sometimes being  ‘boys clubs’ i.e. ‘jobs for the boys’ or ‘jobs for each other ‘ etc.

    •Advantages / Disadvantages of having executive directors (non-independent)
    •Advantages / Disadvantages of non-executive directors (independent)
    •Average salaries for executive boards of directors
    Agency theory

    “ …  describes the potential opportunistic behaviour of agents that have the capability to transfer wealth from the owners to themselves …”

    The owner / worker relationship within a corporation:

    “ … the owner / shareholders (the principals) are not generally the employees (the agents) of the corporation … “

    •An agency problem arises because the agents of a corporation do not always share the same commitment or sense of ownership, as would the principal, and they may fail to operate with the same level of responsibility i.e. self-interest or bias may exist
    •An ‘agency gap’ can emerge, where there is a differential of commitment between a principal and that of an agent
    Information asymmetry

    “ …  A situation in which one party in a transaction has more or superior information compared to another … “

    Moral Hazard

    “ … arises when the principals (the shareholders) bear the cost of the risk-taking behaviour of the agents (the managers)

    “ … may occur in the event of a major failure in corporate  governance … e.g. The GFC  “

    Risk aversion

    “ … a description of an investor who, when faced with two investments with a similar expected return (but different risks), will prefer the one with the lower risk … “

    Assumptions in agency theory
    •Examples of agency problems
    •Excess expenditure
    •Empire building
    •Shareholder value
    •What is ‘Embezzlement’? (in the context of agency problems)

    “ … the fraudulent appropriation of funds or property entrusted to your care but actually owned by someone else, i.e. an agent removes funds from the company to the his/her personal bank account
    •What is ‘Excess expenditure’? (in the context of agency problems)

    “ … potentially a significant  expense incurred by the agent supposedly for business purposes, but in fact used for personal benefit of the agent i.e. improper use of a company vehicle (used for personal reasons
    •What is ‘Empire building’? (in the context of agency problems)
    “ … a potentially overzealous agent with a propensity to over build and over invest (where risk taking becomes problematic) driven by a personal, selfish and power hungry ego to work for a dynamic and entrepreneurial entity, which would boost his/her inflated ego  …
    shareholder / principal may not be comfortable with the risk taking ‘megalomaniac ‘ tendencies of such a leader

    A ‘megalomaniac’
    “ … is one who has a psychopathological condition characterized by delusional fantasies of wealth, power and success … “
    •What is ‘Entrenchment’? (in the context of agency problems)
    “ … when managers create barriers which make it difficult to fire them so that they stay on in their positions for too long, when failing to perform well … “

    •What is ‘Shareholder value’? (in the context of agency problems)

    “ … a potential failure of companies to cover the costs of running the business over a period of time … i.e. when companies lose money on behalf of their shareholders … “

    •The extended agency problem
    It is not just the owners and managers involved
    •The real issue with the ‘extended agency problem’
    •there can be a flow on ‘ … win-win effect …’ , where one may ask, ‘… why question or change things, if so many areas / people, seem to be benefitting? E.g. Enron )
    (shareholders would have benefitted in the interim when share prices were high, they could have sold their shares at a healthy ‘high’, but once a company collapses, the shareholders lose everything)
    •Enron was a classic case where the extended agency problem existed
    •Not only were the CEO and management team of Enron benefitting from their unethical and fraudulent business practices, but so too were the governments, the banks, and the financial advisors …
    Click here to watch (Enron … a failure of corporate governance?)
    •How were these stakeholder groups benefitting from the extended agency problem (in the Enron case)?
    •The extended agency problem … in summary (Enron)
    •“ … when things were good at Enron, many benefitted. While the magnitude of this mutual benefit prevailed, why would anyone question or change it … ? “
    •The BOD’s at Enron claimed that “ … they were  ‘kept in the dark’ and were not aware of the true financial position of the company, due to the complexity of the financial dealings i.e. SPE’s etc.  … “
    •Management remuneration - performance based
    •Performance-based remuneration
    –salary related to individual performance and/or overall company performance
    –transfers risk to the manager’s compensation

    –manager suffers financially if the manager or firm does not meet performance targets
    –factors outside managers control also affect performance
    –theory doesn’t always match reality, as poorly performing managers often leave with huge payouts
    •Equity based remuneration
      1. Management share ownership
    –increased risk to management wealth, i.e., if share prices drop through poor financial performance, so does remuneration
    –goal alignment with shareholders (at least theoretically)
      2. Share options
    –future purchase of share at a fixed price  
    •Remuneration disclosure
    •Listed companies must now annually disclose the nature and amount of each element of the fee or salary of each director and each of the five highest paid executives (Corporations Act )
    •Some argue that this has in fact compounded the sharp rise in  executive salaries

    •Does corporate governance work?
    •Good corporate governance does not necessarily lead to better firm performance

    •But bad corporate governance is more likely to lead to poor firm performance
    In this week’s topic, students need to have an understanding of the following:
    •The significance of corporate governance
    •The impact if corporate governance fails
    •The responsibilities of all those involved in delivering sound corporate governance practices
    •An appreciation of agency theory and the various agency problems
    •An understanding of the extended agency problem
    •An appreciation for who is bearing the risk of poor management practices i.e. the agent or the principal ?
    There is only one boss. The customer. And he can fire everybody in the company form the chairman on down, simply by spending his money somewhere else.

    - Sam Walton (1918-1992), business entrepreneur and founder of Walmart