summary of the text book corporate governance and board decisions

Corporate governance and board decisions


Table of contents
CHAPTER 1: WHAT IS CORPORATE GOVERNANCE? .................................................................................... 2
CHAPTER 2 THEORIES OF CORPORATE GOVERNANCE .................................................................................. 5
CHAPTER 3 THE MECHANISMS OF GOVERNANCE ..................................................................................... 12
CHAPTER 4 INTERNATIONAL CORPORATE GOVERNANCE ............................................................................ 17
CHAPTER 5 CORPORATE GOVERNANCE CODES AND REGULATIONS ............................................................... 21
CHAPTER 6 COMPLIANCE .................................................................................................................. 22
CHAPTER 7 PERFORMANCE MEASUREMENT........................................................................................... 26
CHAPTER 8 CORPORATE SOCIAL RESPONSIBILITY ..................................................................................... 28
CHAPTER 9 CORPORATE OWNERSHIP ................................................................................................... 30
CHAPTER 10 BOARD THEORY AND BOARD STRUCTURE ............................................................................. 38
CHAPTER 11 BOARD BEHAVIOUR ........................................................................................................ 43
CHAPTER 12 EXECUTIVE COMPENSATION .............................................................................................. 47
CHAPTER 13 THE BOARD AND STRATEGY .............................................................................................. 51
CHAPTER 14 THE BOARD AND SUCCESSION ........................................................................................... 54
CHAPTER 15 SUPERVISION AND SUPPORT ............................................................................................. 57
CHAPTER 16 IT GOVERNANCE ............................................................................................................ 61




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,Chapter 1: What is corporate governance?
Introduction
Corporate governance is the control and direction of companies by ownership, boards,
incentives, company law and other mechanisms. -> the system by which companies are
directed and controlled.

The definition varies between the different kind of roles. (lawyer, shareholder etc.)

A key distinction in governance definitions is to what extent the company is accountable only
to shareholders or to a broader set of stakeholders.

Corporate governance principles




What corporate governance is not
Corporate governance is not directly concerned with business decisions, but with how the
decisionmakers can be held accountable. Corporate governance is not about faith, it is about
proof. Corporate governance is not synonymous with governance codes.




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,The basic governance problem
The basic problem is the agency problem, created by the separation of ownership and control.
This gives rise to a set of incentive problems because the managers might not have the same
set of goals and objectives as the share- and debtholders. The idea is that the shareholder
(owners) hires executives to manage companies on their behalf. The agent (manager) acts on
behalf of the principle (shareholder).

The basic question is: how to ensure that managers will manage the company well?

There is some law in place to ensure the that the manager does a good job. The board also
monitors. Large shareholders can also monitor. Another way is to align the interests of
managers and shareholders by incentive systems.

The agency theory is based on the idea that people think rationally. In the enlightened agency
theory, which is used in the book, we take into account that people are not always completely
rational.

The extended agency problem
In the real world there are more than two actors – the principle and the agent. We have a
series of agency relationships. Because of this goal alignment is a challenge.

The board of directors has an agency relationship with the shareholders and with
management.

Because the owners are usually not a
homogenous group it is difficult for them to
effectively ‘control’ the organizations
management.

Why corporate governance?
Good management is crucial to economic
efficiency, productivity, firm performance, and
social welfare. It functions as a safety switch.
Avoiding big scandals.

But taking risks is good for the economy. So in
this book when they talk about optimal
corporate governance they mean it’s good to
tolerate a few scandals than to slow down the
capitalist engine of innovation and growth.




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