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Corporate Governance Around the World - Coggle Diagram
Corporate Governance Around the
World
The Agency Problem
Shareholders allocate decision-making
authority to the managers
Residual control rights
refer to the right to make discretionary decisions under those contingencies that are not specifically covered by a contract
the control rights, managers may allow themselves to consumer exorbitant perquisites
Managers may also steal investors’ funds
Self-interested managers
waste funds by undertaking
unprofitable projects that benefit themselves but not investors
Law and Corporate Governance
Commercial legal systems of most countries derive from a relatively few legal origins.
French civil law
German civil law
English common law
Scandinavian civil law
Remedies for the Agency Problem
Concentrated ownership
•With concentrated ownership and high stakes, the free-rider problem afflicting small, atomistic
shareholders dissipates.
•An effective way to alleviate the agency problem is to concentrate shareholdings.
Accounting transparency
•Strengthening accounting standards can be an effective way of alleviating the agency problem.
•To achieve a greater transparency, however, it is important for (i) countries to reform the accounting
rules and (ii) companies to have an active and qualified audit committee.
Incentive contracts
With the grant of stocks or stock options, managers can be given an incentive to run the company in
such a way that enhances shareholder wealth as well as their own.
•Many companies provide managers with incentive contracts, such as stocks and stock options,
Debt
•Borrowing can have a major disciplinary effect on managers, motivating them to curb private
perquisites and wasteful investments and trim bloated organizations.
•Excessive debt creates its own agency problems, however.
Independent board of directors
•In the U.S., shareholders have the right to elect the board of directors.
•In Germany, there are two-tier boards consisting of supervisory and management boards.
•In the United Kingdom, there should be at least three outside directors and that the board chairman
and the CEO should be different individuals.
Shareholder activism
•“Activist investors”, who invest in stocks of a company for the explicit purpose of influencing the
company’s management,
•Pursue social and political agenda by promoting changes in companies’ environmental, social, and
governance practices
Overseas stock listings
•Studies confirm the effects of cross-border listings
•Companies domiciled in countries with weak investor protection can bond themselves credibly to
better investor protection by listing their stocks in countries with strong investor protection
Market for corporate control
•The market for corporate control, if it exists, can have a disciplinary effect on managers and
enhance company efficiency.
Corporate Governance Reform
Among other things, reform requires:
enhancing the transparency and disclosure standard of financial statements, and
energizing the regulatory and monitoring functions of the SEC (in the United States) and
stock exchanges.
strengthening the independence of boards of directors with more outsiders,
The Sarbanes-Oxley Act
Audit committee
•The company should appoint independent “financial experts” to its audit committee.
Internal control assessment
•Public companies and their auditors should assess the effectiveness of internal control of prevention financial record keeping and fraud prevention
Accounting regulation
Executive responsibility
Scandal-weary investors around the world are demanding corporate governance reform
The Cadbury Code of Best
Practice
Positions of CEO and COB be held by two different individuals
BODs of public companies include at least three outside (nonexecutive) directors
The Dodd-Frank Act
Consequences of Law
Protection of investors’ rights has major economic consequences.
Equity cross-holdings
among a group of companies, such as keiretsu and chaebol, can be used to concentrate and leverage voting rights to acquire control
pyramidal ownership
structure in which they control a holding company that
owns a controlling block of another company,
These consequences include
Development of capital markets.
Economic growth.
The pattern of corporate ownership and valuation.
Corporate governance
can be defined as the economic, legal, and institutional framework in which corporate control and cash flow rights are distributed among shareholders, managers, and other stakeholders of the company.