Summary Corporate Governance Matters

ISBN-10 0133518507 ISBN-13 9780133518504
102 Flashcards & Notes
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This is the summary of the book "Corporate Governance Matters". The author(s) of the book is/are Larcker Tayan. The ISBN of the book is 9780133518504 or 0133518507. This summary is written by students who study efficient with the Study Tool of Study Smart With Chris.

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Summary - Corporate Governance Matters

  • 1 Introduction to Corporate Governance

  • After some affairs and scandals in the financial marker there was a lot to complain about. Central to these stories is the assumption that somehow Corporate Governance is to blame, ie. the system of checks and balances meant to prevent abuse by executives failed.
  • 1.1 Self-interested Executives

  • Corporate governance rests in the idea that when separation exits between the ownership of a company and the management of it, self-interested executives have the opportunity to take actions that benefit themselves, with shareholder and stakeholdes bearing the costs of these actions. This is called the Agancyproblem and the costs associated with this problem are called the agency costs.

    To lessen agency costs some type of control or monitoring system is put in place in the organization and this is called Corporate Governance.
  • But not all people have the incentives to benefit themselves at the expense of shareholders. This is know as Moral Salience, the knowledge that certain actions are inherently wrong even if they are undected and left unpunished.

    The need for Corporate Governance control mechanism to discourage costly, self-interested behavior therefore depends on the size of the potential agency costs, the ability of the control mechanism to mitigate agency costs, and the cost of implementing the control mechanism. 
  • 1.2 Defining Corporate Governance

  • Corporate governance is the collection of control mechanisms that an organization adopts to prevent or dissuade potentially self-interested managers from engaging in activities detrimental to the welfare of shareholders and stakeholders. 

    The governance system is influenced by a broad group of constituents (Owners, creditors, labor union, customers, suppliers, media etc).
  • It is economically efficient when the decrease in agency costs more is than the costs of implementation.

    The structure depends on the fundamental orientation of the firm and the role that a firm plays in society.
  • Shareholders perspective is focused on maximizing the shareholders value.

    Stakeholders perspective is focused on a social obligation beyond value. Stable and safe employment, mitigate risk etc.
  • Third parties might be subject to their own agency issues that compromise their ability to work solely in the interest of the company. These conflicts of interest can contribute to breakdown in oversight of management activity.
  • 1.4 Does on size fit all?

  • Governance is a complex and dynamic system that involves the interaction of a divers set off constituents, all of whom pla a role in monitoring executive behavior. Therefore it is unlike that a single set of best practices exist for all firms.
  • 2 International Corporate Governance

  • A variety of factors inherent to the business setting shape the governance system in general. Therefore these factors contribute in different countries to the corporate governance systems.

    These are the factors starting in chapter 2.1
  • Differences in these factors have important implications for the agancy problems and the type of governance needed.
  • 2.1 Capital market efficiency

  • Capital market set prices for labor etc. Efficient markets correct the prices based on available information for all parties. When the capital market are  inefficient, prices are subject to distortion and corporate decision making suffers.

    Furthermore companies that do not perform according to the exceptance of the market are being punished in efficient market. In inefficient markets shareholders can not rely on the market for corporate control to punish management for making bad decisions. 
  • In efficient markets companies can give management share options in order to align the interest of management and shareholders.
  • 2.2 Legal tradition

  • Minority shareholders are concerned with how the legal system protects their ownership rights and discourages abuse by controlling owners.

    Strong protection could lead to decrease in agency problems. 
    Corrupt system increases agency problems. 
  • Governance structures are more efficient in countries that combine common-law tradition with a reliable enforcement mechanism. 
  • 2.3 Accounting standards

  • Reliable and sensible accounting standards ensure that the financial statement conveys accurate information to shareholders.

    It is also critical for oversight of management since this can be used to evaluate the performance of the company and to detect agency problems. 
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