Welcome to Corporate Governance Module Details − Corporate Governance 5fnce002C

Stakeholders and their interests

Financial stakeholders

• Shareholders ➜ value of their shares
• Lenders (banks and bond holders) ➜ payment of interest and repayment of capital on time

Other stakeholders

• Board of Directors (executive and non-executive directors)
• Management (CEO)
• Employees
• Major suppliers
• Government
• General public

Agency theory developed by Jensen and Meckling in 1976.

Agency theory developed by Jensen and Meckling in 1976.

Agency relationship is a form of contract between shareholders and managers, owners are principal and managers are agent.

Corporate governance theories

Agency conflict

• Moral hazard
• Level of effort
• Earnings retention
• Time horizon

Agency costs

• Cost of monitoring
• Bonding costs
• Residual loss

Agency theory is based on the view that the system of corporate governance should be designed to minimize the agency problem and to reduce agency cost by improving the monitoring of management and/or providing management with incentives to bring their interests closer to those of the shareholders.

Corporate governance theories

Corporate governance theories

Stakeholder theory

The theory states that a company owes a responsibility to wider group of stakeholders, other than just shareholders.
Example: Costco runs their business according to the stakeholder theory;
they put everyone that contributes in the operation of the company, the stakeholders, ahead of their shareholders.
Compared to the industry average of 23% of employees having insurance coverage, Costco covers 85% of their employees.

Corporate governance theories