Different types of corporate governance structures in market - Free Essay Example

Sample details Pages: 13 Words: 3913 Downloads: 6 Date added: 2017/06/26 Category Marketing Essay Type Cause and effect essay Did you like this example? Corporate governance structures today in most market based economies apply the separation of ownership from control model in large corporations and firms. This can be said to occur where ownership has been progressively diluted from complete ownership to minority control (Clarke, 2007). Much of this concept, particularly with regard to large corporations, directly results in an agency relationship between the owners (shareholders) and the controllers (managers) and it is from this concept that the agency theory in corporate governance arises. Don’t waste time! Our writers will create an original "Different types of corporate governance structures in market" essay for you Create order The practical reality today is that even smaller companies employ this same model in order to improve their efficiency as more shareholders (owners) prefer to engage others to run their businesses not on the basis of filial relationship but on the strength of qualifications, competence and experience although they usually retain ultimate control. Needless to say, there are inherent problems and challenges that also arise as a result of this sort of relationship. The most significant being the ultimate divergence of interest between the principal the agent as the latter may not always act in the best interest of the former or may only act partially in that interest (Mallin, 2010). Indeed a substantial and significant amount of literature has been developed in the agency theory in corporate governance and it has not been without its criticisms. While some contemporary assessments of corporate governance today note that this diffused ownership model (separation of control from ownership ) was to a larger extent, a purely Anglo-Saxon phenomenon which does not necessarily reflect the governance system of corporations in other parts of the world (Coffee, 2000), others have criticised the agency theory as over-simplifying the intricacies of corporate governance by reducing its scope to merely a term of contracts between principal and agents (Tricker, 2009). This essay will attempt to critically analyse some of the more relevant literature with the aim of first of all exposing the rationale behind the emergence and development of the separation of ownership from control, and how instrumental it has now become in ensuring proper corporate governance framework in todays global economy. In doing so, there will be extensive discussions on the agency theory in corporate governance in a bid to highlight the common problems and challenges that are inherent in this theory and identify ways by which these problems may be mitigated. The emergence of agency relationship in corporations: Separation of ownership from control. There exists a general consensus by academics and practitioners alike that market development and the era of industrialisation in the early to mid 19th century brought about a diffusion of ownership in many large corporations as individual or family owners were unable to, on their own, provide adequate capital to match and sustain the expansion of their businesses. The resultant implication of this situation, as identified by Berle and Means (1932) was the separation of ownership from control. They described this diffusion of ownership as the dissolution of the old atom of ownership into its component parts: beneficial ownership and control. Sorenson (1974) opines that this steady separation of ownership from control can be directly linked to the growth of corporate capitalism. It therefore followed that as the number of shareholders increased, their influence and corporate control progressively diminished leaving control in the hands of what has now developed into extensive salaried managerial hierarchies; professional managers (Dignam Galanis, 2009). This heralded the origin of the agency relationship between the parties and it is within the context of separation of ownership from control and this agency relationship between the parties that the agency theory in corporate governance was developed. This diffusion of ownership was however subject to a precondition that the shareholders retained ultimate control so as to protect them from stealth raiders with this protection formalised by statute (Coffee, 2000). Agency Theory Jensen and Meckling (1976) explained the theory of the agency relationship as a contract under which one party (the principal) engages another party (the agent) to perform some service on their behalf. In order to achieve this, the principal will delegate some decision-making authority to the agent. Thus the agency theory sees the corporation as a nexus of contracts which are constantly re-negotiated by individuals each aiming to maximise his own utility (Alchian and Demsetz, 1972). This notion of a multiplicity of constantly renegotiated contracts is borne out of the fact that it would be practically impossible to have a single contract with the capacity to holistically capture interests of both the principal and the agent (Mallin, 2010:17). The agency theory in corporate governance is a particularly dominant governance structure employed in large corporations and firms particularly in advanced economies like the UK, the US and in most other common law countries. Mallin (2010) posited that unlike countries that operate under a civil law system and are restricted by legal codes/rules which are merely administered without the flexibility to adapt to changing circumstances, the common law jurisdictions operate a legal system that consists an independent judicial system that employs the doctrine of judicial precedents with heavy reliance on case law and other legal principles that have afforded them the opportunity to make significant advancements and develop the codification of various laws/rules/principles that have over time, increased the level of protection for minority shareholders thereby encouraging a more diversified shareholder base within those jurisdictions. Dilemma of the agency theory The inherent dilemma within the agency theory was identified as far back as the 18th century. According to Smith (1838), the directors of companies however being the managers of other peoples money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance as they would their own. This quotation simply summarises the problem with the agency theory. Tricker (2009) further notes that the real challenge is ensuring that the agent acts solely in the interest of the principal. However, these agency problems arise largely due to the impossibility of contemplating for every future action of an agent, whose decisions are sure to affect both his own welfare and the welfare of the principal (Brennan, 1995). It is at this point that we can clearly point out the divergence of interests between the principal and his agent as they both aim to maximise their respective aspirations. It is given that an agent will act with rational self interest and cannot be expected to act in the interest of the shareholders thus the need for them to be monitored to ensure that the interest of the principal is best served (Calder, 2008). In a sense, it is safe to assume that an agent will not act in the best interest of the principal and such matters in which he may display self interest may include a situation where an agent misuses his delegated authority for pecuniary advantage by remunerating himself disproportionately to his performance, taking hazardous and uncontrolled corporate risk or on the other hand refusing to take certain risks as both principal and agent may have developed different attitudes to risk in line with their respective interests. Thus certain corporate governance mechanisms for example, the board of directors, is seen as an institutional instrument of control and an essential monitoring device in corporate governance to ensure that the conflicts brought about by this divergence of interest between the shareholder and the managers (principal and agent) are kept to the barest minimum. Other mechanisms by which this divergence of interest is minimised include an assortment of codified rules both domestic, regional and international which seek to regulate transparency, disclosure, accountability etc. discussed later on in the essay. In identifying the inherent problems within this concept, it is also important to identify where this conflict arises within the context of the firm. Although there are various instances where a conflict between the parties may present itself, McColgan (2001) has been able to identify 4 key areas where extensive theoretical and empirical research has been conducted, from which these agency conflicts emanate. He has identified these areas as moral hazard conflicts, earnings retention conflicts, risk aversion conflicts and time-horizon conflicts. Moral hazard conflict as proposed by (Jensen) follows the notion that as the ownership stake of a manager decreases within a company, it raises the tendency to increase consumption of perquisites. This mainly applies to large corporations with dispersed ownership with an insignificant amount of the company shareholding held by the manager(s). According to Shleifer and Vishny (1989), a manager may, instead of objectively selecting investments or projects to be undertaken by the company, this selection may be done with a leaning towards areas directly aligned with the managers skill set. This increases his value to the company and vice versa and allows room for increased demands on remuneration. Another factor that may be responsible for the risk of moral hazard conflict is cash flow as Jensen (1986) is of the opinion that high cash flow level will also increase the likelihood of moral hazard as managers who are under no immediate obligation to make investments are more likely to incre ase consumption of perquisites due to the added difficulty in supervising corporate expenditure. A lack of managerial effort also applies here because the smaller the equity held by a manager, the more his motivation to work will dissipate and this is detrimental to company value. The earning retention hazard moves the focus away from one of aversion of effort as argued by (Brennan, 1995b) or lack of motivation or objective investment as espoused by the moral hazard conflict theory but instead sees the source of conflict in this case as resulting from the preference of managers to retain earnings for driving growth rather than cash distributions which is preferred by shareholders. A relative association has been determined connecting the size and a company and the compensation of managers thus creating an inducement for managers to focus on size growth and neglect growth in term of returns to shareholders. A third area identified as a potential originator of conflict is one related to timing. In general, shareholders are more concerned with the companys performance in terms of cash flow as projected into an indefinite future as opposed to managers who are seemingly only interested in cash flow projections for the period of their employment or contract. As a direct result of this, the managers have an inclination to engage in mostly short term projects at the expense of long-term projects. The problem becomes more visible in the build up to when the senior management personnel draw nearer to their disengagement or retirement. A typical example is the significant decline in research and development involvement which is a long term investment that usually has a negative impact on management compensation. A study by Dechow and Sloan (1991) indicate that there is a decline in this sort of investments as top management reach disengagement and explains their findings to be linked to the fact that the manager will not be available to partake in the benefits of such investments. Risk aversion conflicts arise as a result of managers being overly cautious of involving in projects that may put their self interest at risk. The Costs of Agency As explained in preceding paragraphs, the agency theory proposes that as a result of widely dispersed shareholdings, the stockholders are left with no choice but to delegate executive and other decision making authority to professional managers hired for purpose. However, these managers have a tendency to pursue their own interests which conflict with those of the stockholders who are more interested in avoiding firm specific risks. This conflict or divergence of interest most times results in the owners taking out certain measures to minimise the effect of this conflict. The costs of providing these checks and balances to ensure that managers do not abuse their authority or even the costs of managers allocating to themselves excessive perquisites at the expense of shareholders and the cost of monitoring and dealing with any such infraction can all be classified as equity agency costs. As succinctly put by McColgan (2001), Agency costs can be seen as the value loss to shareholders, a rising from divergences of interests between shareholders and managers. Agency costs are a sum of various parts and as posited by Jenson and Meckling (1976), monitoring costs, bonding costs and the cost of residual loss are the sum parts of this cost. I will further expatiate on these three sub groups as in my opinion, they satisfactorily cover the main heads under which agency costs are incurred. Monitoring Costs Where a principal delegates decision making authority, particularly executive or financial, to his agent it is important that there a mechanisms in place to check any excessiveness, misuse of authority or bad decision making. In other words, the agent is monitored. These monitoring costs are thus, the expenses incurred by the principal in the process of evaluating, examining and even managing an agents activities. Such costs may include but are not limited to the cost of conducting regular audits, the cost of developing reporting lines along the hierarchy of managerial staff, sometimes the hiring of external consultants and will even include the cost of disciplining erring managers. The burden of paying these costs is on the principal. However, Fama and Jensen (1983) have submitted that this burden is eventually passed on to the agent as the monitoring costs will have a direct impact on the agents remuneration. Asides these methods mentioned above, there are other self-regulatory mon itoring mechanisms that are imposed by statute. For example, domestic regulations under various sections in part 16, chapters 1 and 2 of the Companies Act UK 2006 stipulate the mandatory requirement for company accounts to be annually audited. Similarly recommendation contained in the Cadbury report of 1992 (reporting and control mechanisms) and the Greenbury (1995) reports on corporate governance are usually also employed. The requirement under the Combined Code 2010 dubbed comply or explain means that a company, in the event of non-compliance must disclose and explain its reasons for not doing so which in itself is capable of attracting to the company sufficient attention from regulatory bodies to provide a certain level of monitoring. Within a corporate structure, probably the most effective monitoring mechanism over the agent (managers) is the board of directors. The board is usually made up of individuals who possess the necessary skill and expertise required to carry out this duty. They must also be properly incentivised. Denis, Denis and Sarin (1997) are of the opinion that for monitoring to be effective, the mechanism employed must prove a formidable challenge to managements control of the company. However these mechanisms must be deployed in such a manner as to strike a perfect balance with regard to the peculiarities of the firms working environment as too much interference or over-monitoring will invariably restrict managerial independence and may have an adverse effect on the companys performance Burkart, Gromb and Panunzi (1997). Bonding Costs. As posited by Fama and Jensen (1983), the notion that agents eventually bear the burden of monitoring costs makes it more likely that they will initiate internal framework to ensure an alignment of interests between the agent and the principal or recompense for any eventual divergence if not. The cost of setting up structures of this nature and implementing them are known as bonding costs. Examples may include developing enhanced marketing strategies towards set profit targets, improved dispersion of information to the principal or even budgetary considerations and expenditure that are in sync with the principals objectives. These costs are borne solely by the agent, but are not always financial as they usually involve a re-alignment of corporate strategy to realise the principals interests. The relationship between monitoring costs and bonding costs are relative as a marginal increase in bonding costs will invariably lead to a marginal reduction in monitoring and its associated cost s. Denis and Kruse (2000) are of the opinion that the optimal bonding contract should aim to entice managers into making all decisions that are in the best interests of the shareholders. This is the most desirable outcome which would lead to a drastic reduction, or even wishfully, an elimination of the agency problem itself. However a more realistic outcome would be that bonding provides a means of making managers actually meet the expectations of shareholders to a certain extent even if not completely. McColgan (2000) remarked on a particularly interesting bonding structure popular in the UK which is imposed upon management; the requirement of closely held companies to distribute all income after allowing for business requirements (declaration and distribution of dividends) and was of the opinion that it presented the problem of retention of earnings in UK companies. He however concluded that the effectiveness of bonding structures may be treated with scepticism as it is a mechanis m utilised at the discretion of management. Residual Loss As we have noted earlier in this essay, it is practically impossible to prepare and guard against all conflicts that may emerge between shareholders and managers, thus the development of the notion that their relationship consists a multiplicity of constantly renegotiated contracts. Therefore, it is an acceptable conclusion that regardless of the outcomes of monitoring and bonding, a divergence of interest between managers and shareholders would still exist and any expenditure made in the resolution of these remaining conflicts are still reflected under the costs of the agency relationship. These remaining costs are known as residual loss. These costs remain because enforcing contracts between the principal and the agent is as mentioned earlier, very costly and in practice; far outweighs the advantages to be achieved from enforcement. It is practically impossible to fully contract for every contingency by way of conflict that may arise as a result of the agency relationship therefore a balance must be struck between over monitoring of management which leads to restricted initiatives, and enforcing contractual mechanisms designed to reduce agency problems in order to achieve the optimal level or residual loss. The Mitigation of Divergence The main challenge arising from this agency problem is how to induce the agent to act in the best interests of the principal or, in the context of corporate governance, how to mitigate the divergence of interest between shareholders and managers. Empirical and theoretical research has shown that a principal can limit the agents divergence from his interest by incurring both monitoring costs; designed to restrict deviant activities of the agent, and bonding costs; designed to ensure the agent does not take any action detrimental to the principal. So in mitigating this divergence, both monitoring and bonding costs are necessarily incurred by the principal. The common solution is usually to provide sufficient incentives for managers that would align their interests with that of the shareholders but it must be noted that asides the advantage of mitigating the clash of interest, this policy carries along with it, a secondary negative effect in the sense that managers would now only look t o the short term benefit they would stand to gain based on the incentives offered them and will not look into engaging in long term projects. This can be detrimental to business activity. There however arises the issue of effectiveness with regard to these mechanisms. The test of effectiveness propagated by Denis and Kruse (2000) is simple and constant in determining the relevance of any of these mechanisms in the context of the corporation and is in two parts. First, does it effectively narrow the gap between the interests of managers and shareholders? Secondly, does it have a significant positive impact on corporate performance and company value? If these two questions are answered in the affirmative then the issue of effectiveness is resolved. There are several different methods that may be employed to mitigate issues of divergence. Here we will focus on three of the more prominent methods that were highlighted by Crutchley and Hansen (1989). The first method is by increasing the managers equity ownership in the firm which would directly result in an alignment of interest between the shareholder and the manager. This method can be particularly effective because where the manager now has an equity stake in the firm; he would share the same expectations as other shareholders thus closing the gap of divergence. Monitoring costs would also be invariably reduced as a direct consequence. This method is however in itself not costless and the increase in a managers equity stake is relative to reduced diversification of his personal wealth and the balance would be an increase in remuneration. The second method proposed to assist in mitigating divergence is to increase dividend payments. This may seem unrealistic and maybe even unrelated to mitigating the divergence of interest but according to Easterbrook (1984) the rationale behind this is that the lower the financial resource available to the managers, the higher the chances of the company having to seek external equity capital. This would entail venturing into the capital market to raise funds either by way of private placement or public offer. In this case, the company would become subject to rules regulating capital market operators and therefore managers would be more closely monitored by relevant stakeholders including prospective or new investors and relevant government agencies like the Securities and Exchange Commission. This increased monitoring would motivate managers who are intent on retaining their positions to redirect their actions to be more in line with the interests of shareholders. Another method of r educing the costs of agency to result in diminishing divergence of interest is the use of debt financing. Jensen and Meckling (1976) indicated the importance of this method by explaining that using more debt finance reduces total equity financing, which has a diminishing effect on the level of the manager-stockholder conflict. In what was referred to as the control hypothesis he submits that by replacing dividend payments with debt issue managers are bound to apply future cash flow to shareholder recipients of this debt in ways otherwise unachievable by dividend payments. The controls are increased in this case because where the agreement to repay principal and interest is not maintained, shareholders reserve the right to initiate insolvency proceedings. Debt financing also reduces the cash resource available to be fritted away at the discretion of the managers. It further enhances efficiency as the constantly looming threat of redress as a result of failure to service debt payments also act as a sufficient motivational tool in making the firm more efficient. In this case the managers are more concerned with policy behaviour that will further the interest of creditors which in turn reduces the likelihood of incurring agency costs. However, debt financing may give rise to certain debt agency costs which may include the cost of contractual protection and insolvency proceedings or bankruptcy. Conclusion In conclusion we have looked at the concept of separation of ownership from control and the notion of an agency relationship that develops as a direct result. The agency theory and its inherent problem being that of an ultimate divergence of interest between the shareholders and managers, the control of which leads to expenditures termed the costs of agency have also been summarily discussed with suggestion proffered to assist in the mitigation of this divergence. It is however a contrasting outcome that despite the existence of a myriad of problems afflicting this agency theory imbibed in the separation of ownership from control, the model still remains very popular within todays modern firms and corporate governance structures. The simple explanation is that popularity of this corporate governance structure can in any case be ascribed to the continuous development of institutional control mechanisms both internal and external which are specifically targeted at resolving or minimisi ng these conflicts as they arise.

CMGT556 Week 1 Individual Assigment Essay - 754 Words

Artificial Intelligence Vita Olmsted CMGT/556 - Enterprise Models June 24, 2014 Jeffrey McDonough Artificial Intelligence Artificial Intelligence (AI) is the branch of computer science, which concentrates on the intelligence of machines, and involves applying the principles of reasoning, knowledge planning, learning, communication, perception, and controlling objects to emulate the human brain. The most recognizable AI application is robotics from Hollywood cinema, and includes films such as; I Robot, Transformers, Wall-e, WarGames, A.I., The Terminator, Robocop, Iron Man, and Star Wars to name a few, which is fictional not an actual representation of AI. Robotics applications is only one of three aspects of AI, which also includes†¦show more content†¦Examples include; Equipment Calibration Help Desk Operations Software Debugging Medical Diagnosis Design/Configuration - Systems that use existing constraints to help configure equipment components (Murugavel, 2014). Examples include; Computer Option Installation Communication Networks Selection/Classification - Systems that help users select options from large or complex sets of alternative (Murugavel, 2014). Examples include; Material Selection Delinquent Account Identification Information Classification Suspect Identification Process Monitoring/Control - Systems that monitors and controls processes or procedures (Murugavel, 2014). Examples include; Machine Control Inventory Control Production Monitoring Chemical Testing Neural Networks Neural networks emulate the human brain’s neurons, which is a mesh-like network of interconnected processing components. This allows the system to process numerous pieces of information at the same time, and can learn to understand patterns within the processes, which it can use to solve related problems on its own. Examples include; Military Weapons Systems Voice Recognition Check Signature Verification Manufacturing Quality Control Image Processing Credit Risk Assessment Investment Forecasting Data Mining

Nickel and Dime, Barbara Ehrenreich free essay sample

In the expo, Nickel and Dime, Barbara Ehrenreich questioned the â€Å"uplifting benefits† of unskilled adults working in a low-wage economy. Ehrenreich’s undercover journalism was her scientific methodology of choice to capture firsthand the experience of poverty in order to prove her theory that it is mathematically impossible for welfare recipients to survive in the low-wage workforce. While following Barbara Ehrenreich journey in â€Å"Nickel and Dimed† I realized how certain aspects of a society can determine economic or personal success. Money and wealth are needed to accomplish many things that make a person powerful. These patterns of inequality structure society into different levels or social strata. Barbara Ehrenreich went out to prove that lower class individuals are struggling due to limited means and social inequality. Ehrenreich’s social-conflict theory implies that society is structured to benefit a few at the expense of the majority. This is the indicator as to why poverty is the factor in keeping the unskilled powerless. We will write a custom essay sample on Nickel and Dime, Barbara Ehrenreich or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page For instance, education is the form of power where money is needed to accomplish. Therefore, unskilled adults will never be able to progress in the jobs currently available to them. Barbara Ehrenreich first establish credibility of her knowledge of economic living conditions for poor adults to prove to her audience that she in fact has done her research on this topic. She researched that in 1998 the National Coalition for the Homeless reported that the necessary wage on average nationwide would be $8. 9 in order to afford a one bedroom apartment and that the odds of common welfare recipients landing a job that pays such a â€Å"living wage† were about 97 to 1. Ehrenreich experienced this statistic first hand when she set out job hunting in Key West, Florida where she applied to 20 different jobs, ranging from waiting tables to housekeeping. Though Baraba Ehrenreich shows obvious knowledge of her subject, she does not use substantial logic to her practice nor show instability in her research. Her methodologies and actions were some what unorthodox in practice. This did not seem to be a social experiment that was to recreate a poverty social scenario, that 4 million women were about to be forced experience. Ehrenreich admit that she had several advantages over her fellow co-workers. She used her ability to start off with a starting set of money to set up a job; meaning, that she had already set aside money to provide rent, deposit, and expenses such as food and gas. However, most low wage workers do not have this luxury. They are generally forced to work pay check to pay check and don’t have time to save up to store extra money for later. Ehrenreich’s scientific mathematical theory was flawed by her safety net. Ehrenreich should have presented her evidence topically; for example, she could have interviewed each of the single mother and manager she met along the way. Barbara Ehrenreich’s interaction with her co-workers was her strong points in this expo. They provided factual information on how people who earn a low income wage actually lived, and how troubled their lives actually were.

The Birling family and Gerald Essay Example For Students

The Birling family and Gerald Essay Examine carefully the characters of the Birling family and Gerald, how do they share the characteristics of their class, how do they respond to the inspectors revelations   Mr Birling is a middle class, self-made man. He sees himself as being above all working class citizens in his factory and his employees. He is not jealous of his wife but he does envy her position in social standing, he is also in envoy of Mr Gerald Croft, because he has a knight hood at such a young age, and Mr Birling is only just been considered for one. His wife was born into money and in to a rich household. He is a self-made man which means that he has worked for all that he now owns. He is awaiting knight hood from the queen, which would put his social standing Even higher because it would give him a title, Sir. Gerald Croft was engaged to Mr Birlings Daughter, Sheila. The marriage would combine two of the big companys together, Croft LMT. and Birlings.  When the inspector calls throughout the play the main thing that Mr Birling seems to be worried about is the chance of a public scandal, which would mean that his knight hood could be taken away, and not of the girl. As soon as the inspector enters the dining room Mr Birling tries to show off is influence and power, I was an alderman for years- and lord mayor 2 years ago, im still on the bench So I know the Bromley police officers pretty well.  This is an obvious attempt to intimidate the inspector, The inspector replies to this quite subtly,  Quite so.  This upsets Mr Birling greatly, as he was trying to show power and the inspector ignored him. When the inspector accuses him of knowing Eva, he denies all knowledge of her, but then when he is shown the photo he still denies it to start with. This behaviour by Mr Birling Shows that he would rather lie, and not risk any trouble than to tell the truth. I think that Prestley is trying to show a section of society through Mr Birling.  Mrs Birling is a higher -middle class lady. She was born into a good family and unlike her husband, she was handed every thing that she has from her rich heritage. But she is socially lower than Gerald. She uses her social power against people who are lower than her. When eva came to her for help, it was Mrs Birling who had the power to turn her away and make sure she did not receive any help, and that is what she did.  When the inspector calls she is not in the room but in the living room talking to Sheila about wedding dresses. When she enters the room and sees the inspector she is surprised but not shocked. She acts the same way when she hears the news. This shows us that she doesnt care about any thing much unless it affects her directly.