Post on 17-Jan-2016
Corporate Governance
The relationship among various participants in determining the direction and performance of the company
Mechanisms to ensure that management fulfills its basic purpose: to promote the long-term interests of the shareholders
Primary Participants: Shareholders Board of Directors Senior Management
Agency Problem
Arises because of separation of ownership (principals) and management (agents)
Management may act to promote their own interests at the expense of the interests of stockholders (opportunism)
Agency Problem arises from two sources Goals of principals and agents may conflict Principals and agents may have different
attitudes and preferences toward risk
Corporate Governance
Shareholders – “Principals”
Management – “Agents”
Board of Directors
Internal Control Mechanisms
Responsible BOD active critical independent
Active shareholders individual investors institutional investors
Management Compensation align managers’ interests with
shareholders’ interests performance-based compensation
External Control Mechanisms
Takeover constraint Auditors Banks and investment analysts Regulations Media and public activists
Corporate Governance
Stakeholders
Firm
Owners/InvestorsEmployeesCustomersSuppliers
Community
Stakeholders
Types of Stakeholders
Primary – participation and support required for survival of the firm
Secondary – not directly involved in the activities of the firm but can have influence over its operations
Stakeholder – any individual or group who can influence or is influenced by the operations of a firm
Types of Stakeholders
Organizational: unions, employees, managers, …
Capital Market: shareholders, banks, brokers, rating services, ….
Product Market: customers, suppliers, franchises, distributors, …
Environmental:government, special interests, media, …
Stakeholder Analysis
1. Identify Specific StakeholdersOrganizational: unions, employee categories, managers,
…Capital Market: shareholders, banks, brokers, rating
services, ….Product Market: customers, suppliers, franchises,
distributors, …Environmental: government, media, activist groups, …
2. Identify Stakeholder InterestsPotential impact of the firm on the stakeholder
3. Identify Stakeholder Power and InfluencePotential impact of the stakeholder on the firm
4. Identify Stakeholder ManagementActions taken to satisfy stakeholder needs
Stakeholder Analysis
Stakeholder
Interest
Power Actions Satisfied
Organizational ……
Capital- market ……..
Product-Market …….
Environmental …….