Transparency and conflicts of interest. The prime aim Understand conflicts of interests that origin...
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![Page 1: Transparency and conflicts of interest. The prime aim Understand conflicts of interests that origin from the intermediaries between the investors and.](https://reader035.fdocuments.us/reader035/viewer/2022062407/56649f535503460f94c78010/html5/thumbnails/1.jpg)
Transparency and conflicts of interest
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The prime aim
• Understand conflicts of interests that origin from the intermediaries between the investors and the top managers
• Extend the standard view in corporate governance from owner-manager relations to encompass the role of multiple players and multiple conflicts
• A few comments about the regulatory institutions.
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Transparency:
The extent to which outsiders can evaluate firms’ operations
Depends on
• Type of information (accounts, governance disclosures, accounting principles)
. • The level of information
• What the information means to the user of financial statements
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No optimal level of transparancy
Factors influencing the level of information:
• Distribution of costs and benefits of information
• Bargaining power of the various stakeholders
• The debt/equity ratio: the scrutiny of banks raises the information level
• Negative information reduces the shareholder value (keeps the transparency at a low level).
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The framework of contracting
Interface between investors and management:
• Auditors
• The boards
• Analysts
• Brokers (person, who sells and buys at a stock exchange) • Investment bankers, Hedge funds and private equity funds
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Asset management: example of mediators
Hedge funds• A small stake in a company • Launch proxy fights for corporate control
Equity funds• Majority owners • Ownership motivated by a governance arbitrage (delist
companies, restructure over a period of 3-7 years and public again)
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Intermediation failure: the Enron case
The business model of Enron:• Founded in 1985 through the merger of two gas pipeline
companies
• 1990, 75 per cent of gas sales were transacted at spot prices rather than through long-term contracts
• 2001, Enron had become a conglomerate: owned and operated gas pipelines, electricity plants, pulp and paper plants, broadband assets and water plants internationally
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Theory of intermediation
Similar to the contractual approach to corporate governance• Calls attention to private benefits of misbehaviour
• Contractual approach: misbehaviour due to properties of transactions and contracts
• Theory of intermediation: misbehaviour due to difficulties to manage official action and influence.
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Theory of intermediation……..
Rules and institutions matter:• Do not only constrain, but they also enable strategic
choices
• Auditors, investment bankers and analysts develop new business practices from inside institutions
• Institutional innovations usually contribute to good economic performance, but some players misbehave
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Theory of intermediation……..
Misbehaviour and cheating are associated withconflicts of interests:
arise “when an executive, an officeholder or even an organization encounters a situation where official action or influence has the potential to benefit private interest”
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Limitations of the contractual approach:
Institutional supplements to contracts:
• Need of an institutional theory
• Innovations in institutions as adaptations to institutions
• Innovative, optimising and maximizing behaviour supplemented with imitative behaviour (“herding”)
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Regulatory institutions
Principle for a mixed economy: The private sector by itself should reach a consensus about
appropriate rules and standards. Public authorities monitor private regulatory institutions
and intervene if the self-regulatory forces of the private sector fail.