Aspecten corporate governance
Learning objectives week 1
Explain corporate governance theories, mechanisms and cross-country differences
What is a corporation?
• What is a corporation ? What are the key features ?
o A legal entity separating from its owners
o Unlimited life ; limited liability ; separation of ownership and control
What is Corporate governance:
• Corporate governance deals with the ways in which suppliers of finance to corporations
assure themselves of getting a return on their investment (Shleiferand Vishny, 1997).
→ How do the suppliers of finance get managers to return some of the profits to them ?
→ How do they make sure that managers do not steal the capital they supply or invest it in
bad projects ?
→ How do suppliers of finance control managers ?
• Corporate governance refers to a set of relationships between a company’s board, its
shareholders and other stakeholders (OECD, 2015)
Why corporate governance?
• Encourage transparency and accountability by putting in place a system of internal controls
• Ensure good decision making : good management, good investments ; create checks and
balances and prevent abuse of power
• Diminish corporate failures and scandals
• Crucial for corporate performance, economic efficiency and social welfare
Agency theory:
• Principal: anyone who hire someone else to do a certain job at their expense
• Agent: a person hired to do a certain job in exchange for an agreed compensation
• Different parties have different interest -> potential risk of people acting in their own interest
on the other party’s expense.
• Owner-manager problem
→ Owners (principals) employ managers (agents) to run the firm in the best interest of
the owners.
→ However, some managers act wrong and embezzle shareholder funds
,• E.g., Enron scandal Watch video
→ The managers manipulated financial statements, hid losses, and inflated profits
→ Enron’s board of directors failed in their oversight duties.
Stakeholder theory:
• Stakeholder theory takes account the interests of a wider group of constituents rather than
that of shareholders.
• The term “stakeholder” can encompass any individual or group on which the activities of the
company have an impact.
• The 21st Century is one of “Managing for Stakeholders.” The task of executives is to create as
much value as possible for stakeholders without resorting to tradeoffs. Great companies
endure because they manage to get stakeholder interests aligned in the same direction.
• Maximizing profits and shareholder value v.s. considering all stakeholders (employees,
customers, suppliers, and the wider community), not just shareholders.
Institutional theory:
• Institutional theory emphasizes the influence of cross-country features (norms, beliefs and
values, rules and practices, environment and systems) shaping behaviour of individuals
Corporate governance mechanisms:
• Corporate governance mechanisms are the instruments used to motivate and monitor
managers
o motivate to align their own interests with those of other stakeholders
o monitoring them to work properly, not to pursue their own interests
Major corporate governance mechanisms:
• Internal (firm-oriented)
o Ownership structure, Board structure, Compensation structure
• External (market-oriented)
o Capital market/analysts, auditors, takeover market, debt market/creditors, product
market competition, labour market, law and regulation...
• In addition to these formal mechanisms, there exist informal mechanisms : codes, social
norms, reputation and trust.
, Corporate governance differences across countries
• Governance systems are not uniform across countries
• They are shaped by variety of factors that are inherent to the business environment
o Financial system
o Protections afforded by legal system
o Enformcement of regulations
o Societal and cultural values
Differences in these factors impact the prevalence of agency problems and the control mechanisms
needed to prevent them.
Financial systems
• Market-based system
o Capital market (stocks and bonds) major source of finance (VS)
o Role of bank is transactional: hard criteria on each loan
o Banks influence is not prevalent, does not infiltrate the corporate governance
structure
• Bank-based system
o Banks are the main source of finance
o Role of bank is relational: firms build long term relationships
o Banks play a key role in funding and have so some control via board structure
Legal tradition
• A country’s legal system has important implications on the rights afforded to business
owners :
→ Protection of property against expropriation
→ Predictability of how claims will be resolved
→ Enforceability of contracts
A strong legal system mitigates agency problems because self-interested managers know illegal
actions will be punished.
• Common law
o The body of law created by judges
o The defining characteristic of common law is that it arises as precedent (rechters
kijken bij het nemen van beslissingen naar eerdere beslissingen om richting te geven
aan besluitvorming)
• Civil law
o Core priniples codified into a referable system, which serves as the primary source of
law.
Common-law countries generally have the strongest, and French-civil-law countries the weakest,
legal protections of investors, with German- and Scandinavian-civil-law countries located in the
middle.
Learning objectives week 1
Explain corporate governance theories, mechanisms and cross-country differences
What is a corporation?
• What is a corporation ? What are the key features ?
o A legal entity separating from its owners
o Unlimited life ; limited liability ; separation of ownership and control
What is Corporate governance:
• Corporate governance deals with the ways in which suppliers of finance to corporations
assure themselves of getting a return on their investment (Shleiferand Vishny, 1997).
→ How do the suppliers of finance get managers to return some of the profits to them ?
→ How do they make sure that managers do not steal the capital they supply or invest it in
bad projects ?
→ How do suppliers of finance control managers ?
• Corporate governance refers to a set of relationships between a company’s board, its
shareholders and other stakeholders (OECD, 2015)
Why corporate governance?
• Encourage transparency and accountability by putting in place a system of internal controls
• Ensure good decision making : good management, good investments ; create checks and
balances and prevent abuse of power
• Diminish corporate failures and scandals
• Crucial for corporate performance, economic efficiency and social welfare
Agency theory:
• Principal: anyone who hire someone else to do a certain job at their expense
• Agent: a person hired to do a certain job in exchange for an agreed compensation
• Different parties have different interest -> potential risk of people acting in their own interest
on the other party’s expense.
• Owner-manager problem
→ Owners (principals) employ managers (agents) to run the firm in the best interest of
the owners.
→ However, some managers act wrong and embezzle shareholder funds
,• E.g., Enron scandal Watch video
→ The managers manipulated financial statements, hid losses, and inflated profits
→ Enron’s board of directors failed in their oversight duties.
Stakeholder theory:
• Stakeholder theory takes account the interests of a wider group of constituents rather than
that of shareholders.
• The term “stakeholder” can encompass any individual or group on which the activities of the
company have an impact.
• The 21st Century is one of “Managing for Stakeholders.” The task of executives is to create as
much value as possible for stakeholders without resorting to tradeoffs. Great companies
endure because they manage to get stakeholder interests aligned in the same direction.
• Maximizing profits and shareholder value v.s. considering all stakeholders (employees,
customers, suppliers, and the wider community), not just shareholders.
Institutional theory:
• Institutional theory emphasizes the influence of cross-country features (norms, beliefs and
values, rules and practices, environment and systems) shaping behaviour of individuals
Corporate governance mechanisms:
• Corporate governance mechanisms are the instruments used to motivate and monitor
managers
o motivate to align their own interests with those of other stakeholders
o monitoring them to work properly, not to pursue their own interests
Major corporate governance mechanisms:
• Internal (firm-oriented)
o Ownership structure, Board structure, Compensation structure
• External (market-oriented)
o Capital market/analysts, auditors, takeover market, debt market/creditors, product
market competition, labour market, law and regulation...
• In addition to these formal mechanisms, there exist informal mechanisms : codes, social
norms, reputation and trust.
, Corporate governance differences across countries
• Governance systems are not uniform across countries
• They are shaped by variety of factors that are inherent to the business environment
o Financial system
o Protections afforded by legal system
o Enformcement of regulations
o Societal and cultural values
Differences in these factors impact the prevalence of agency problems and the control mechanisms
needed to prevent them.
Financial systems
• Market-based system
o Capital market (stocks and bonds) major source of finance (VS)
o Role of bank is transactional: hard criteria on each loan
o Banks influence is not prevalent, does not infiltrate the corporate governance
structure
• Bank-based system
o Banks are the main source of finance
o Role of bank is relational: firms build long term relationships
o Banks play a key role in funding and have so some control via board structure
Legal tradition
• A country’s legal system has important implications on the rights afforded to business
owners :
→ Protection of property against expropriation
→ Predictability of how claims will be resolved
→ Enforceability of contracts
A strong legal system mitigates agency problems because self-interested managers know illegal
actions will be punished.
• Common law
o The body of law created by judges
o The defining characteristic of common law is that it arises as precedent (rechters
kijken bij het nemen van beslissingen naar eerdere beslissingen om richting te geven
aan besluitvorming)
• Civil law
o Core priniples codified into a referable system, which serves as the primary source of
law.
Common-law countries generally have the strongest, and French-civil-law countries the weakest,
legal protections of investors, with German- and Scandinavian-civil-law countries located in the
middle.
