CORPORATE GOVERNANCE& AGENCY PROBLEMS

1. CORPORATE GOVERNANCE
&
AGENCY PROBLEMS

2. • What is Corporate Governance?
• Corporate Governance refers to the processes, structures and
information used for directing and overseeing the management
of an institution.
• Also ways of bringing the interests of investors and managers
into line and ensuring that firms are run for the benefit of
investors.
• Involves regulatory and market mechanisms, and the roles and
relationships between a company’s management, its board, its
shareholders and other stakeholders, and the goals for which
the corporation is governed.

3. •What is the responsibility of board members?
a. Maintaining an awareness of the licensee’s internal and
external operating environment.
b. Diligently performing the job.
c. Exercising independent judgment and not permitting
themselves to be influenced by another director, by
management, or by outside interests.
d. Avoiding conflicts of interests by inter alia.

4. •Why is corporate governance important?
• As it directly impacts the company behavior and performance not
only to shareowners but also to employees, customers, those
financing the company, and other stakeholders, including the
communities in which the business operates.

5. •Agency theory
• One or more persons (principal) engage another person (agent) to
perform some service on their behalf, which involves delegating
some decision-making authority to the agent.
•Stakeholder theory
• A corporate entity invariably seeks to provide a balance between
the interests of its diverse stakeholders in order to ensure that
each interest constituency receives some degree of satisfaction.

6. •Stewardship theory
• The Manager’s objective is primarily to maximize the firm’s
performance because a manager’s need of achievement and
success are satisfied when the firm is performing well.
•Resource dependency theory
• The strength of a corporate organization lies in the amount of
relevant information it has at its disposal.

7. •The corporate governance framework consists of:-
1. Procedures for reconciling the sometimes conflicting
interests of stakeholders in accordance with their duties,
privileges and roles.
2. Contracts between the company and the stakeholders for
distribution of responsibilities, rights, and rewards.
3. Procedures for proper supervision, control, and
information-flows to serve as a system of checks-and-
balances, Also called corporation governance.

8. •Principles of Corporate Governance:-
1. Rights and equitable treatment of shareholders.
2. Interests of other stakeholders.
3. Role and responsibilities of the board.
4. Integrity and ethical behavior.
5. Disclosure and transparency.

9. •Regulations
• Corporate governance principles and codes have been developed
in different countries, but one of the most important guidelines
has been the OECD Principles of Corporate Governance (published
in 1999 and revised in 2004) then the United Nations
Intergovernmental Working Group of Experts developed the OECD
on International Standards of Accounting and Reporting (ISAR) to
produce their Guidance on Good Practices in Corporate
Governance Disclosure.

10. •Regulations (cont’d)
• This internationally agreed benchmark consists
of more than fifty distinct disclosure items
across five broad categories:-
1. Auditing.
2. Board and management structure and process.
3. Corporate responsibility and compliance.
4. Financial transparency and information disclosure.
5. Ownership structure and exercise of control rights.

11. •Internal corporate governance controls
• Internal corporate governance controls monitor
activities and then take corrective action to
achieve organizational goals as follow:-
1. Monitoring by the board of directors
2. Internal control procedures and internal auditors
3. Balance of power
4. Remuneration
5. Monitoring by large shareholders and/or monitoring by
banks and other large creditors

12. •External corporate governance controls
• External corporate governance controls encompass the controls
external stakeholders exercise over the organization, as follow:
1. Competition
2. Debt covenants
3. Demand for and assessment of performance information
4. Government regulations
5. Managerial labor market
6. Media pressure
7. Takeovers

13. • Systemic problems of corporate governance
1. Demand for information
2. Monitoring costs
3. Supply of accounting information
•Resolving Corporate Governance Disputes
• Countries seeking to create a capital market and
companies seeking to attract local or global capital
must develop a framework that assures investors of:-
I. The assets they provide will be protected
II. disputes related to the company’s governance can be
addressed effectively.

14. •Resolving Corporate Governance Disputes
• Most companies experience corporate governance conflicts
or disputes, although they are less common for well-
governed companies. These conflicts and disputes
frequently involve the company’s shareholders, board
directors, and senior executives.
• To help companies manage and resolve corporate
governance disputes more effectively, the Forum has
actively promoted the use of ADR (alternative dispute
resolution) processes and techniques since 2007.

15. •What are the agency problems?
• Agency problems arise if managers and shareholders have different
objectives. Such conflicts are particularly likely when the firm’s managers
have too much cash at their disposal.
• Managers may place personal goals ahead of corporate goals.
•The Agency Problem prevention factors
• Market Forces:
The holders of large blocks of a firm’s stock exert pressure on
management to perform
• Agency Costs:
The costs borne by stockholders to minimize agency problems.
•

16. •Do managers really maximize firm value?
• No, if the managers are not the owners and they might be
tempted to act in ways that are not in the best interests of the
owners.
• The agency problem is mitigated in practice through
several devices: compensation plans that tie the fortune
of the manager to the fortunes of the firm; monitoring by
lenders, stock market analysts, and investors; and
ultimately the threat that poor performance will result in
the removal of the manager.

17. •How can corporations provide incentives for
everyone to work toward a common end?
• These problems are kept in check by compensation plans that link the
well-being of employees to that of the firm, by monitoring of
management by the board of directors, security holders, and creditors,
and by the threat of takeover.
•Motivating Managers: Executive Compensation
• There are several different ways to compensate executives,
including:-
-Salary.
-Bonus.
-Stock appreciation right
-Performance shares.
-Stock option.
-Restricted stock grant.

18. •The role of the rating agencies
• The purpose of rating agency evaluations is to provide objective
analysis of the creditworthiness of a corporation.
• The work of credit rating agencies has evolved into a critical
function in our financial system.
•Who Are the Raters ?
• As a current or future issuer of or investor in short- and longer-
term securities .
• Raters also provide reposts about the corporate financial position.

19. •What Raters Do?
• The ratings process involves the review of public documents.
• These data are explained and supplemented by discussions with
management on recent performance and future strategies.
• The evaluations result in credit ratings for specific debt issues
based on the issuer’s ability to repay interest and principal.
• This is different from the earnings perspective of equity analysts,
who calculate earnings per share; returns on assets, equity, or
sales; the price/earnings ratio; or market capitalization.

20. •What Raters Do? (Cont’d)
• Although assignments vary by rating agency, the general approach
to the assignment of ratings is as follows:-
I. Repayment on time usually is given one of the investment
grade ratings (AAA to A).
II. The possibility of not being paid on time is considered
noninvestment grade (BBB to B).
III. The possibility of not being paid in full is known colloquially as
junk (C).
IV. The fact of not paying is considered as in default (D).

21. •How ratings are constructed?
• The precise process in developing a rating is confidential, although
the analysis is known to focus on industry comparisons, financial
performance and stability, and the quality of management.
• The ratings agencies do not use a formula or standard template but
review each company with due respect for unusual factors, trends
and developments, and various no quantifiable concerns.

22. •Rating agency problems
• In effect, the rating agencies are market regulators without any
official status or qualification requirement. They benefit from
practices that could be considered as abusive.
• An examination of various legal pleadings and other public
documents indicates the following problems.
I. Accuracy Issues
II. Objectivity Issues
III. Coercion Issues
IV. Qualifications Issues.

23. •So, who’s rating the rating agencies?
• The power and impact of the rating agencies arguably exceeds
the role normally accorded independent.
• In order to appreciate the origin of this status, it is useful to
examine recent rating agency history.
- Moody’s
- Standard & Poor’s
- Fitch
•Nationally Recognized Rating Organization?

24. •Conclusions
• The CFO has no choice but to work closely with the rating gencies
to elicit the highest possible grade for commercial paper and
bond financings.
• We expect increasing competition among the rating agencies for
business, with the accompanying demand for access to managers
to discuss company activities.
• Any significant business developments should be communicated
to rating agencies prior to a public announcement.