be138 lecture 2 overheads 2012

7/31/2019 BE138 Lecture 2 Overheads 2012

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BE138 Lecture 2


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Corporate accountability Part of the more general topic of

Corporate governance: how corporations areorganized, and run and managed

Corporate governancerefers to: large, listedplcs:

i.e. not SMEs, not most plcs

Corporations: associations with legal rights andobligations, especially a legally required formalstructure:


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Formal Organization of

Corporations(required by law in most countries)Chair

Board of Directors(with both executive and non-executive directors)

Executive/Management

with Chief Executive (CEO), normallynot the ChairCompany Secretary

AGM of Shareholdersentitled to annual report,with audited accounts

nomination, remuneration and audit committees


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Principals and Agents Legal/formal position: Shareholders own the

corporation; Executive/ managements merelyrun it.

So legally: Shareholders are the Principal Chair, executive/management and directors are

theirAgents AGM of shareholders is sovereign

But: Ownership and management of corporationsoften separated: managements not composed ofowners of corporations assets: mere employees.


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The Agency Problem: separation of ownership and

management

Management/ executive who run the company could advance owninterests, rather than shareholders

Shareholders dont/cant run the company Dont even meet: AGM only assembles the main shareholders, and

institutional investors

So how to ensure management advances interests of shareholders?

Much of corporate governance and accountability concerned with this

agency problem

Wider problem: who is to look after interests of people notshareholders, but still affected by what corporations do? So-called stakeholders.


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Validity?

Corporations not charitable associations; must make profit

Assets belong to shareholders, not to directors or management

Supporting economic theory: maximising shareholder value is goodfor societies

Hence: Sternbergs version ofcorporate governance:

ways of ensuring that corporate actions, agents andassets are directed at achieving corporate objectivesestablished by the corporations shareholders

(not a definition: a proposal) Accountability must be combined with management independence


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Problems with Shareholder Accountability

Their actions are not the actions of each individual member

Have a legalidentity: rights and duties are not the rights and duties of eachmember

Have various distinctive legal privileges and benefits from state.

In return for benefits

Given their opportunities for criminal or moral misconduct, or incompetence

Possibility of externalities, third party damage (environment, health, welfare)

Some directly or indirectly affected by their actions have no voice in corporate decisionmaking; not affected voluntarily

All states impose some regime of internal and/or external supervision, more orless invasive.


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Stakeholder theory = Corporate Social Responsibility See e.g.Jill Solomon, Corporate Social Responsibility

Problem: Who are the stakeholders?

A stakeholder in an organisation is any group or individual whocan affect or is affected by the achievement of the organisationsobjectives.

Objections: Could be anyone at all No possible way ofinstitutionalising stakeholder accountability Stakeholder laws? E.g. UK Companies Act 2006, s.172 Hence narrow specification of stakeholders: shareholders,

employees, suppliers, customers, community: but what of: conflicts of interest between the shareholders and other stakeholders? conflicts of interest between various stakeholder groups?


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Who to protect/act for

stakeholders? Government (politicians, and activists)

Courts

Regulators

Self-regulation by Corporations: Corporations generally recognize social responsibility; some

long-term benefits, see Solomon (2006)

Hence: environmental and social responsibility audits; ethicalinvestment.

Improved corporate governance,and arrangements foraccountability:institutional architecture


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Record of regulation since 1990s: Cadbury (board independence and disclosure) 1992

Greenbury (Remuneration) 1995

Hampel and Combined Code 1998, balance between accountability and prosperity,increased disclosure, independent directors to pacify government

Turnbull Guidance 1999: internal control, risk management; revised 2005

Myners Review of institutional Investors 2001

Higgs Report 2002 : Non Executive Directors, remuneration and nomination committees

Modernising Co Law 2002

Smith Guidance (Audit committees) 2003

Directors Remuneration 2003

Combined Code 2003, opposed, esp on Non Exec Directors; revised 2006,2008,2010

be138 lecture 2 overheads 2012

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