The field of agency theory is the study of how shareholders can motivate management to accept the prescriptions of the Shareholder Wealth Maximization (SWM) model.
If management deviates too much from SWM objectives of working to maximize the returns to the shareholders—the board of directors should replace the management.
In cases where the board is too weak or ingrown to take this action, the discipline of the equity markets could do it through a takeover.
This discipline is made possible by the one-share-one-vote rule that exists in most Anglo-American markets.
Shareholder Wealth Maximisation (SWM) Model
(The Anglo-American (US, UK, Canada, AUS, NZ) markets are characterised by a philosophy that a firm’s objective should be to maximize shareholder wealth.)
The firm should strive to maximize the return to shareholders, as measured by the sum of capital gains and dividends, for a given level of risk.
Attempt to minimize the risk to shareholders for a given rate of return.
Stakeholder Capitalisation Model (SCM)
Continental European and Japanese markets are characterized by a philosophy that all of a corporation's stakeholders should be considered, and the objective should be to maximize corporate wealth.
Thus a firm should treat shareholders on a par with other corporate stakeholders, such as management, labor, the local community, suppliers, creditors, and even the government.
The goal is to earn as much as possible in the long run, but to retain enough to increase the corporate wealth for the benefit of all.
The control of the firm
Broad operation concerned with choosing the board of directors and with setting the long run objectives of the firm.
Corporate governance is the process of ensuring that managers make decisions in line with the stated objectives of the firm.
Management of the firm concerns implementation of the stated objectives of the firm by professional managers employed by the firm.
In theory managers are the employees of the shareholders, and can be hired or fired as the shareholders, acting through their elected board, may decide.
Ownership of the firm is that group of individuals and institutions that own shares of stock, and who elected the board of directors.
Market for Corporate Control
The corporate governance of the organization is the way in which order and process is established to ensure that decisions are made and interests are represented, properly, for all stakeholders.
Separation of ownership from management raises the possibility that the two entities will not be aligned in their business and financial objectives.
Corporate Governance Failure (US, EUR)
Prestigious auditing firms missed the violations or minimized them possibly because of lucrative consulting relationships or other conflicts of interest.
Security analysts and banks urged investors to buy the shares and debt issues of these and other firms that they knew to be highly risky or even close to bankruptcy.
Top executives that were responsible for the mismanagement that destroyed their firms, walked away (initially) with huge gains on shares sold before the downfall, and even overly generous severance payments.
Do markets appear to be willing to pay for good governance?
Results indicate in certain circumstances the market may be willing to pay a small premium, but in general, the results to date have been unconvincing.
Ownership of organisations that are created distinctly for the purpose of commercial activities, rather than the multitude of other social, civil, and regulatory activities of government.
State, government of civil society
MNE Operational Goals
Maximisation of consolidated after-tax income
Minimisation of the firm’s effective global tax burden
Correct positioning of the firm’s income, cash flows, and available funds as to country
Initial Public Offerings (IPOs) (Majority)
Movements of share listings from one exchange to another
Spinouts from larger firms
New listings from smaller non exchanges (bulletin boards)
Forced delistings (equity no longer meets exchange requirements on share price or financial valuation)
Mergers (two firms combine, eliminating a listing)
Acquisitions (the purchase results in a reduction of a listing)
Corporate Governance Goals
Equitable treatment of shareholders
Stakeholder (employees, creditors, community, government) rights