Professional Documents
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Supplier
Do they prioritize the same?
Society
Customer
Employee
Security/ Esteem
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Service Satisfaction
Relationship
Policy, Directions
Expertise, Performance
Compliance, Accountability
Services, Supplies
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Social Responsibility
by the principal shareholders, comprised people who had an emotional as well as monetary investment in the company (e.g. Ford), Thus, the Board diligently kept an eye on the company and its principal executives. The Board, mostly chosen by the President/ CEO, may have been made up primarily of their friends and colleagues.
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Sustainability issues
The investors (shareholders) participate in the profits without taking the responsibility for Operations; The management runs the company without being responsible for personally providing Funds; Therefore, the investors appoint a legally constituted Board of Directors to represent them and protect their interests; The BoD has an obligation to approve all decisions that impact the long-run performance of the Company
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as both:
the structure and
the relationships
corporate governance.
Its relationship to the other primary participants,
etc., and Social Responsibility e.g. the endowments of orphanages, hospitals, etc.
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provokes conflict. Anything so important will be fought over like other decisions about authority
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practices. E.g.:
BCCI, London &HK, avoided scrutiny and falsified
accounts.; Maxwell (Communication & Newspaper)UK pension fund fraud by abuse of position. The oldest British bank Barrings, made unethical investment decisions without covering the risk. Barrings went bankrupt, shaking up global financial markets. The Enron collapse in 2001 (USA) focused international attention on failed companies
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Basis for effective Corporate Governance The Rights of Shareholders and Key Ownership functions Equitable treatment of Shareholders The Role of Stakeholders in Corporate Governance Disclosure and Transparency
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Top managers are in effect hired hands who may be more interested in their own rather than the shareholders welfare/interests! Problems highlighted by the theory: Objectives are in conflict and may be too difficult/ expensive for owners ascertain what the agent is actually doing e.g. padding remuneration.
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with different
attitude towards risk. Tendency for maximising short-term gains rather than creation of long-term wealth for shareholders. More widespread the holding, the more the probability of the problems particularly with strong voice of institutional investors
As a remedy, Agency theory suggests that top management take a significant ownership of the firm and have a stake in the long-term performance.
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Top Manager thus is a steward rather than a hired hand for the Board Top management care more for the company than that shown by short-term investors and shareholders. Promote involvement and empowerment of employees.
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executive, mobility is not so high particularly in difficult times. Their interest for long-term performance is therefore high.
Agency Theory Stewardship Theory Focus: Sociological, Performance & long-term Convergence of interest of Managers & Principals Relationship Basis: risk taking & trust Behaviour: collectivistic, societal, mutuality
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An extension of the trust theme is the trusteeship model, wherein the Directors hold the investors money in trust for creation of assets and are legally liable to the shareholders.
Concurrently, they had fiduciary (ethical, moral, in-trust) responsibility to the public and the Society at large.
Managers balance the various interest for and in the interest of the Corporation.
Indian governance mode draws from Gandhi-jis similar thinking, particularly in respect of employee relations. Oriental cultures also imply that an entrepreneur is ordained by God to act as his chosen one for society.
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This theory is based on the fact that firms have become so large that they effectively substitute for the market in determining allocation of resources.
Thus, the way in which a company is organized determines its control over transactions e.g. extent of vertical integration; Kiretsus in Japan, Cartels etc,
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in order to reduce risk, internalize transactions as far as possible, insuring against uncertainties of future product & prices In classical economics , Profit maximization occurs with all players equally rational; in practice, this is governed by bounded rationality. Transaction cost economics suggests the behavioural slant for profit generation. Since there is space for opportunism, the perils outlined in agency theory also visit this practice.
The principal difference from the Agency Theory, lies in the shift of emphasis from individuals (and ambition) to transactions (opportunism).
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Another area of concern, addressed by the Greenbury Report, (UK:1995) addressed the balance between Directors remuneration and company performance.
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May include influential stakeholder e.g. Creditors, Customers & (local) Community
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However, the agenda of these institutional investors is primarily securitization of their interests.
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Boards are smaller and getting more involved in shaping rather than supervising; Institutional investors are getting larger share of voice in Boards, thus pressure on corporate performance. More outside Directors are being inducted (loosening of the grip of CEOs); taking on members with specialized knowledge/expertise thus take more control of functions; Globalization and Societal demands are making Boards more international (expertise) and focusing more on broader aspects of business e.g. CSR.
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Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection.
E.g., to monitor managers' behavior, an independent third party (the external auditor) attests the accuracy of information provided by management to investors.
An ideal control system should regulate both motivation and ability. Internal corporate governance controls monitor activities and then take corrective action to accomplish organizational goals. They include:
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Monitoring by the board of directors: Regular board meetings allow potential problems to be identified, discussed and avoided
the ability of the board to monitor the firm's executives is a function of its access to information. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes Executive directors often look beyond the financial criteria
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Internal control procedures and internal auditors: Internal control procedures are policies implemented by an entity's board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives
related to reliable financial reporting, operating efficiency, and compliance with laws and regulations.
Balance of power: The simplest balance of power require that the President be a different person from the Treasurer.
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In the UK, a balance of power between board members was recommended in the Cadbury Committee and confirmed in the Higgs report (2003) The roles of chairman & chief executive should not be exercised by the same individual The US code (Sarbanes-Oxley rules), while prescribing a host of checks, stop short of this.
A CEO generally does not serve as Chairman of the Board in the UK, whereas in the US having the dual role is the norm, despite major misgivings.
In Germany and the Netherlands, a two-tiered Board of Directors is a means of improving corporate governance.
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Remuneration: Performance-based remuneration is designed to relate some proportion of salary to individual performance.
Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic, myopic behavior.
Monitoring by large shareholders, monitoring by banks and other large creditors: Given their large investment in the firm, these stakeholders have the incentives, combined with the right degree of control and power, to monitor the management
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Disclosure implies The submission of facts and details concerning assets, situations, or operations
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Voluntary disclosure is the provision of information by a companys management beyond statutory requirements e.g. GAAP in accounting and is carried out extensively by many companies.
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