CG Flashcards
CG Market Model
- Profit-maximized
- Price mechanism
Agency Theory
explain and resolve issues in the relationship between business principals and their agents. Most commonly, that relationship is the one between shareholders, as principals, and company executives, as agents.
Type 1 Agency Problem
(owner-manager problems)
Arise between shareholders and managers. They arise because the
agents (managers) do not always
act in the interests of the
shareholders.
Type 2 Agency Problem
Occur if there are conflicts of interest between majority and minority
investors
Type 3 Agency Problem
between shareholders and
stakeholders
Asymmetric information
- Adverse selection
before the manager makes a decision (hidden knowledge)
Asymmetric information
- Moral hazard
after a decision has been taken (hidden action)
Stewardship theory
- most people try to do a good job
- Directors/managers act as stewards of wealth
- Arises from moral considerations
Agent and Steward theory
Agent
People are
* Individualistic
* Utility maximizers (their own utility)
Steward
People are
* Collective self-actualizers
* Seek organizational achievement
Stakeholder theory
Any group or individual who can affect, or is affected by, the achievement of a
corporation’s purpose
Limitations of Agency Theory
1) Human beings are not completely rational or selfish
2) Managers looking for information that coincides with their personal
ideas and preferences
3) People consider their own mistakes as a result of bad luck
Why? Mechanisms of Corporate Governance
Minimize costs related to agency problems
Mechanisms of Corporate Governance
Culture
Regulations
Ownership
Board
Incentive systems
Stakeholders
Culture as Mechanism
- Social norms
- Values
- Routines
- Morality
- History
Regulations (Hard Law) as Mechanism
o property rights
o contractual law
o criminal law (fraud, corruption)
o corporate law (shareholder rights, transparency requirements, auditing requirements)
o employment law
