Question

What is corporate governance? Who are the players of corporate governance? (Discuss in detail)

What do top executives do? Do managers matter? (Discuss the doubtful view and the positive view)

Discuss the different theories of corporate governance (Agency theory, stewardship theory, institutional theory, resource based view, resource dependence theory)

What is agency problem? Discuss agency theory and its implications for corporate governance. Discuss insider, outsider and gray directors. Explain “voice” and “exit” as mechanisms of control.

Discuss the mechanisms of corporate governance

Discuss the corporate governance practices of Japan, Germany and United Kingdom. Compare and contrast those practices to the ones in United States.

Answer 1

Corporate governance:

Corporate governance is a mechanism which consists of a set of rules which are set to control and direct the corporation and to check whether it is operating ethically or not. This mechanism includes various policies, corporation decisions, actions and practices, the stakeholders and the agents. Corporate governance specifies the powers distribution among the directors, shareholders and stock holders.

There are several key players in the mechanism of corporate governance which are mentioned below:

• Board of directors
• Senior management
• Shareholders

Senior management: It is the topmost authority which is runs the business and informs the board of directors about business operations.

Board of directors: After the senior management, comes the board of directors who are responsible for the business and affairs of the corporation.

Shareholders: These are the known as the owners of the corporation as they have financial interests regarding the corporation’s performance. They are the stock holders and have the voting rights in the board of director’s elections.

Top executives play a vital role in the effective running of a corporation. The roles of top executives are mentioned below:

• They maintain the management and organization structure and manages risks to the organization.
• They implement the strategic plans and ensures proper control of the organization.
• They set the annual budget and plans for the corporation.
• They ensure ethical and accurate financial reporting.

Managers also play a vital role after the top management. They assign the work to the employees and control them. They take into account the responsibility of the employees and check the credibility of the work at the very initial level. A top-level manager plans, organizes, directs and controls the subordinate level managers. Thus, managers play a vital role.

The theories of corporate governance are mentioned below:

• Agency theory
• Resource dependency theory
• Stewardship theory
• Stakeholder theory

Agency theory:

It shows the principal and agent relationship. Here principals are the top-level authorities and they hire agents to get the job performed. They expect that the agent should take the best decision which is not always possible. This theory says that every authority is held accountable for the decisions they make.

Stewardship theory:

This theory says that the company executives (stewards) protects the shareholder’s wealth and maximizes it. They stress on the employees to act autonomously based on their position in the organization so that the employees take the responsibility and shareholder’s wealth is maximized.

Stakeholder theory:

This theory states that the managers are held accountable for a large range of stakeholders. It states that the decision taken by the managers should be taken by keeping in mind all the stakeholders of the corporation. This is because, managers have a network which consists of suppliers, business partners and employees.