The framework which presents the most appropriate explicit framework for corporate governance

Topics: Transaction cost, Theory of the firm, Cost Pages: 5 (2029 words) Published: April 29, 2014
QUESTION 1
The system of principles and processes which companies are governed by is known as corporate governance. Acting as management or control system, it motives to align the company with its set objectives and goals through a path that adds value to the company whilst keeping the best interests of stakeholders for the long term. (Kaplan Financial Knowledge Bank 2014) While generally carried out by most businesses, the practiced procedure or extent of corporate governance varies from company to company depending on the theoretical framework approached. Examples of frameworks typically applied to companies include the agency theory, transaction cost theory and stakeholder theory. Each framework reflects its own route as to how a company should operate hence; the difference in how corporate governance is interpreted when used to treat respective framework issues arising within entities. To conclude on a single theory which presents the most appropriate and explicit framework for corporate governance, the paper will thoughtfully evaluate and analyse each of the frameworks.

Simply put, the agency theory reflects on the relationship which exists between the principal and his hired representative- the agent. In this relation, the latter is said to bear fiduciary obligation to prioritise the best interests of the former- usually to maximise firm value on their behest- before own personal objectives thus; establishing that the interests of these parties side from different corners. Traditionally, interests united as company ownership and management came from the same individuals. Due to the costliness of business expansion, companies have little to no choice but to seek additional funding from wider ranges of investors thus; dispersing ownership and separating “principal-agent” interests. (Abugu 2012) The agency framework governs that agents are to act in the best interest of their owners which includes practising transparency in information disclosures to diminish the lines of information asymmetries. It is not practised religiously however; as managers- partially incentivised through bribes- still play a part in camouflaging the real director remuneration packages value from the eyes of shareholders to avoid potential outrage. This issue can be remedied however; by the introduction of a supervisor to monitor agent routines. The introduction of the this individual into the equation would result in a three-level hierarchy where the supervisor, induced to act in the best interest of its hiring principal, will monitor the efforts and behaviours of agents. Aware that their actions are being observed, the agents would be less inclined to give in to opportunistic temptations and exhibit and emphasise productive behaviours instead. (Abugu 2012) The framework also motives to steer the management off moral hazards arising from conflict of interests by setting clear that the alliances of agents to the principals is to serve the latter’s interests and work towards value-adding opportunities. It does not however; express how indirect moral hazards such as shirking agents relying on the efforts from other members in team production should be addressed. While it classifies as an indirect hazard, it could be twice as destructive as not only does it deter full productivity potential from being reached; it demotivates other members in the team as they are unfairly carrying a slacker’s work burden to generate a group output. Continental Airlines remedies this issue through a group incentive scheme which functions by only rewarding pays to members when efficient outcome is observed. Alternatively, denying this privilege to any one team participant if the outcome does not satisfy the specified standard. This eliminates moral hazards as pressure is placed on the shirker knowing that slacking would deprive himself and everyone else the reward opportunity. The change in group norms will go on to encourage members to initiate team performance...
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