Concepts in Corporate Governance

Topic

Concepts in Corporate Governance

Instructions

• Explain the relevance of the notion of ‘agency gap’ to our understanding of contemporary corporate governance (300 Words).
• Critically assess the extent to which financial incentives can close the gap between managerial objectives and the financial interests of investors in an era of shareholder value (500 Words) Guidance: In this essay, outline what you understand by agency theory and the agency gap between managers (as agents) and investors (as principals). Considering how in an earlier period organisation
  structure –head office and divisions are a form of management control set up to align managerial and investor objectives around return on capital (Solomons and Chandler). How later Jensen and Meckling (then Jensen) focus on contracts and enforcement –use of debt financing rather than equity.
  Before turning to elaborate on the era of shareholder value and how large investment banks now control large equity stakes. This coupled with the use of consultants and installation of remuneration structures (bonuses and stock options) that are centred on delivering financial objectives: EVA, EPS and ROCE—where to all intents and purposes the agency gap is closed (Williams et al, Lazonick et al). A strong essay might also consider how these financial incentives might encourage risk taking by managers that does not align with investor interests.
  800 Words, 8 References
• It has been generally argued that global corporate governance throughout the world is converging towards the Anglo-American model. Critically assess this statement in terms of the extent to which there is global convergence towards an Anglo-American model of corporate governance. (800 Words). Guidance: Answers to this question should address both the tendencies towards convergence and tendencies driving and maintaining differentiation. Among the former they should include the international expansion of governance codes (for example, OECD’s); international accounting standards; the concentration of major corporate audits internationally into just four accounting firms; and the international evolution of capital markets along increasingly homogenised criteria. The forces that maintain differentiation include material differences in various aspects of corporate, commercial and financial law in various countries; the standards of implementation and enforcement of these laws, and national codes of practice, in different countries; remaining differences in capital markets and national stock markets (which are often greater than those supporting the convergence argument would suggest); differing ownership structures; and historical, cultural and ethnic factors.
  800 Words, 8 References

Answer preview

In the need to develop appropriate managerial practices, companies are heavily reliant on certain principles of governance. Through governance, certain concepts such as agency theory and agency gap develops. The agency theory critically explores the relationship between principals and agents in any firm set up.  According to Edmans (2014), the agency relationship in finance develops between investors (Principals) and corporate executives (agents). The manner in which the two key players relate will greatly determine how successful a company becomes in the long run. However, in the recent corporate management advancements passive investors in the capital markets look up to the government for protection from abuses met on them by managers (Fernando, 2012).

Word count: 2987