1. Corporate Governance
The relationship among various participants in determining the direction and performance of the company
Mechanisms to ensure that management fulfills its basic purpose: to promote the long-term interests of the shareholders
Primary Participants:
Shareholders
Board of Directors
Senior Management

2. Agency Problem
Arises because of separation of ownership (principals) and management (agents)
Management may act to promote their own interests at the expense of the interests of stockholders (opportunism)
Agency Problem arises from two sources
Goals of principals and agents may conflict
Principals and agents may have different attitudes and preferences toward risk

3. Corporate Governance Management – “Agents” Shareholders – “Principals”
Board of Directors

4. Internal Control Mechanisms
Responsible BOD
active
critical
independent
Active shareholders
individual investors
institutional investors
Management Compensation
align managers’ interests with shareholders’ interests
performance-based compensation

5. External Control Mechanisms
Takeover constraint
Auditors
Banks and investment analysts
Regulations
Media and public activists

6. Corporate Governance Board of Directors Management Share Holders
Stakeholders

7. Stakeholders Firm Owners/Investors Employees Customers Suppliers
Community

8. Types of Stakeholders
Stakeholder – any individual or group who can influence or is influenced by the operations of a firm
Primary – participation and support required for survival of the firm
Secondary – not directly involved in the activities of the firm but can have influence over its operations

9. Types of Stakeholders Organizational: Capital Market: Product Market:
unions, employees, managers, …
Capital Market:
shareholders, banks, brokers, rating services, ….
Product Market:
customers, suppliers, franchises, distributors, …
Environmental:
government, special interests, media, …

10. Stakeholder Analysis Identify Specific Stakeholders
Organizational: unions, employee categories, managers, …
Capital Market: shareholders, banks, brokers, rating services, ….
Product Market: customers, suppliers, franchises, distributors, …
Environmental: government, media, activist groups, …
Identify Stakeholder Interests
Potential impact of the firm on the stakeholder
Identify Stakeholder Power and Influence
Potential impact of the stakeholder on the firm
Identify Stakeholder Management
Actions taken to satisfy stakeholder needs

11. Stakeholder Analysis Stakeholder Interest Power Actions Satisfied
Organizational ……
Capital- market
……..
Product-Market
…….
Environmental