be138 lecture 2 overheads 2012
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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
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