Lecture 1
Corporate governance; the way firms are directed and controlled
Why is good corporate governance important?
For the firm:
- Better access to external (financial) resources
- Lower cost of capital
For the suppliers of finance:
- Reduced risk of crisis and scandals
- Better firm reputation
For society:
- Better allocation of scarce resources
- More sustainable ways of operating
Do not learn the method and results by heart; you need to interpret tables/figures and critically assess
research design choices. Do not memorize the research method. You need to be able to apply theories, etc.,
to practice cases.
Agency theory:
Principals hire an agent who makes decisions that create value; in order to do so, they need to delegate
some decision-making power.
Separation of ownership and control leads to agency problems due to:
- Differences in goals and/or preferences, while at the same time all actors behave rationally
- Information asymmetry and uncertainty
- ‘Complete’ contracts are not possible.
Two basic forms of agency problems;
1. ‘adverse selection’(ex ante)
2. ‘Moral hazard’ (ex post)
Some examples of “adverse selection”
- The “lemons problem” -> what you expected -> what you got (stuck with)
Some examples of ‘moral hazard”
- Decision making -> ‘big is beautiful’ - > investments in project
, - Perks: “company jet”-> “leisure” consumption (e.g., golf)
To curb agency problems it is important to have a corporate governance (CG) mechanism.
The mechanisms are aimed at influencing the behavior of the agent, the principal, and other stakeholders.
CG can be internal or external mechanisms.
Internal mechanism; board of directors, board committee, the top management team (TMT), workers
councils, incentive structure used to motivate the agent, management information systems for accounting
and control.
External mechanism; (most) block holders!!!, providers of debt, the market of corporate control, the
auditor, the media, financial analysis, proxy advisors, other gatekeepers & reputational agents, country-
level rules and regulations.
Substitution vs complementarity
Substitution; CG mechanisms can replace each other
Complementarity can ………….
Lecture 2
If a company is listed, it needs to have a board. In a formal set, the board of directors is at the top of the
organization, and the CEO is an employee.
Owner (principal) -> Board of directors -> Manager (agent)
The owner hires the manager, but the manager will act with self-interest (moral hazard), and will not
observe my actions (Information asymmetry). The owner will hire the board of directors who set a pay
monitor. Next to that they have access to resources (advice and legitimacy, channels for communication,
and preferential access to important elements).
What makes the board of directors effective?
Board of directors, supervisory board, management board, top management team, executive directors,
non-executive directors, chair of the board, and executive officer.
An independent director is a director of a board of directors who does not have a material or pecuniary
relationship with a company or related persons, except for sitting fees.
Independent board has more motivation to criticize the CEO.
Determinants of the two roles
Board incentive to monitor: independence and equity compensation
Board ability to provide resources: human capital (skills, expertise), social capital (network)
Corporate governance; the way firms are directed and controlled
Why is good corporate governance important?
For the firm:
- Better access to external (financial) resources
- Lower cost of capital
For the suppliers of finance:
- Reduced risk of crisis and scandals
- Better firm reputation
For society:
- Better allocation of scarce resources
- More sustainable ways of operating
Do not learn the method and results by heart; you need to interpret tables/figures and critically assess
research design choices. Do not memorize the research method. You need to be able to apply theories, etc.,
to practice cases.
Agency theory:
Principals hire an agent who makes decisions that create value; in order to do so, they need to delegate
some decision-making power.
Separation of ownership and control leads to agency problems due to:
- Differences in goals and/or preferences, while at the same time all actors behave rationally
- Information asymmetry and uncertainty
- ‘Complete’ contracts are not possible.
Two basic forms of agency problems;
1. ‘adverse selection’(ex ante)
2. ‘Moral hazard’ (ex post)
Some examples of “adverse selection”
- The “lemons problem” -> what you expected -> what you got (stuck with)
Some examples of ‘moral hazard”
- Decision making -> ‘big is beautiful’ - > investments in project
, - Perks: “company jet”-> “leisure” consumption (e.g., golf)
To curb agency problems it is important to have a corporate governance (CG) mechanism.
The mechanisms are aimed at influencing the behavior of the agent, the principal, and other stakeholders.
CG can be internal or external mechanisms.
Internal mechanism; board of directors, board committee, the top management team (TMT), workers
councils, incentive structure used to motivate the agent, management information systems for accounting
and control.
External mechanism; (most) block holders!!!, providers of debt, the market of corporate control, the
auditor, the media, financial analysis, proxy advisors, other gatekeepers & reputational agents, country-
level rules and regulations.
Substitution vs complementarity
Substitution; CG mechanisms can replace each other
Complementarity can ………….
Lecture 2
If a company is listed, it needs to have a board. In a formal set, the board of directors is at the top of the
organization, and the CEO is an employee.
Owner (principal) -> Board of directors -> Manager (agent)
The owner hires the manager, but the manager will act with self-interest (moral hazard), and will not
observe my actions (Information asymmetry). The owner will hire the board of directors who set a pay
monitor. Next to that they have access to resources (advice and legitimacy, channels for communication,
and preferential access to important elements).
What makes the board of directors effective?
Board of directors, supervisory board, management board, top management team, executive directors,
non-executive directors, chair of the board, and executive officer.
An independent director is a director of a board of directors who does not have a material or pecuniary
relationship with a company or related persons, except for sitting fees.
Independent board has more motivation to criticize the CEO.
Determinants of the two roles
Board incentive to monitor: independence and equity compensation
Board ability to provide resources: human capital (skills, expertise), social capital (network)
