Corporate Governance and Agency Problem

Outline:

Introduction:

Content

A. Definitions of corporate governance

B. Theories behind corporate governance

1. Agency problem

2. Stewardship theory

3. Resource dependency theory

4. Stakeholder theory

5. Political theory

6. Transaction cost economics

7. Ethical theory

C. Principles of corporate governance

D. SOX Act,

E. Enron Scandal,

Conclusion

*

Introduction:

* The concept of corporate governance in legal and economic terms is equivalent to “the defense of shareholders”. Corporate governance is the response to typical agency problems between investors and managers of the firm, who frequently have divergent interest. What constrains management to return profit to the suppliers of finance? For the investors “what will guarantee that their money is best exploited?” managers may use many techniques to pursue personal benefits at the expense of investors. For example they may spend money on unnecessary luxury items, make business decision with the primary intention of increasing their power, or improperly manage risk in a manner that does not maximize shareholders utility.

* The corporate governance framework consists of explicit and implicit contracts between the company and the stakeholders for distribution of responsibilities, rights, and rewards, procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles, and procedures for proper supervision, control, and information-flows to serve as a system of checks-and-balances.

* Corporate governance became a pressing issue following the 2002 introduction of the Sarbanes-Oxley Act in the U.S., which was ushered in to restore public confidence in companies and markets after accounting fraud bankrupted high-profile companies such as Enron and WorldCom.

Most companies strive to have a high level of corporate governance. These days, it is not enough for a company to merely...