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 …….