Corporate Governance and Stewardship

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Questions and Answers

What is the primary responsibility of the board of directors in stewardship theory?

The board of directors is responsible for overseeing the conduct of the business and supervising management.

How does risk propensity affect the adoption of stewardship mechanisms?

Risk-taking owners may assume that executives favor stewardship mechanisms, complicating their adoption.

According to shareholder approaches, what are corporations primarily responsible for?

Corporations are primarily responsible for obeying the law and maximizing shareholder wealth.

What is a key criticism of the shareholder model in maximizing societal utility?

The assumption of perfect competition within the shareholder model is considered tenuous. Signup and view all the answers

What does stakeholder theory argue regarding the responsibilities of corporate governance?

Stakeholder theory argues that corporate governance has responsibilities to parties beyond just shareholders. Signup and view all the answers

How do agency costs function as a method of control in corporate governance?

Agency costs serve as insurance against the self-interest behaviors of agents when board power can’t be extended. Signup and view all the answers

What is the relationship between the Anglo-American model and the shareholder approach?

The shareholder approach is most logically compatible with the Anglo-American model of corporate governance. Signup and view all the answers

When did stakeholder theory of corporate governance begin to take shape?

Stakeholder theory of corporate governance dates back to the 1930s. Signup and view all the answers

How does good corporate governance increase market valuation according to the McKinsey Survey?

Good corporate governance increases market valuation by enhancing financial performance, improving transparency, and boosting investor confidence. Signup and view all the answers

What key role does transparency play in corporate governance?

Transparency reduces the risk of boards acting in self-interest and assures stakeholders of fair and ethical dealings. Signup and view all the answers

What are the primary responsibilities of a board of directors in corporate governance?

The board is responsible for ensuring accountability, overseeing management, and maintaining compliance with regulations and ethical standards. Signup and view all the answers

Explain the concept of 'one share-one vote' in the context of shareholder equality.

'One share-one vote' ensures that all shareholders have an equal say in corporate decisions, preventing disproportionate control by large stakeholders. Signup and view all the answers

What is the purpose of the Sarbanes–Oxley Act regarding corporate governance?

The Sarbanes–Oxley Act aims to improve the accuracy of financial disclosures and restore investor confidence by enforcing stringent governance standards. Signup and view all the answers

In agency theory, what challenges arise between shareholders and management?

Challenges include potential conflicts of interest as management may prioritize personal benefits over shareholder value. Signup and view all the answers

What principles underpin stewardship theory in corporate governance?

Stewardship theory advocates that managers act as stewards of the company, prioritizing long-term stakeholder interests over short-term profit-making. Signup and view all the answers

How does the independence of directors contribute to effective corporate governance?

Independent directors provide unbiased oversight and reduce the likelihood of conflicts of interest in board decisions. Signup and view all the answers

What challenge does Agency Theory face when aligning the interests of shareholders and stakeholders?

Agency Theory struggles with the divergence of interests, leading to potential conflicts between management's objectives and shareholder requirements. Signup and view all the answers

What are the guiding principles of Stewardship Theory in corporate governance?

Stewardship Theory emphasizes that managers are stewards of the firm, prioritizing the long-term interests of the organization and its stakeholders over personal gains. Signup and view all the answers

How do financial disclosure requirements relate to stakeholder theory?

Financial disclosure requirements ensure transparency, enabling stakeholders to make informed decisions regarding the firm's operations and governance. Signup and view all the answers

What vital role do boards of directors play in managing stakeholder interests?

Boards of directors provide oversight, guiding management to align corporate strategies with stakeholder interests while managing risks and adhering to ethical standards. Signup and view all the answers

How does the concept of shareholder responsibilities differ from stakeholder responsibilities?

Shareholder responsibilities focus primarily on maximizing financial returns for owners, while stakeholder responsibilities include considering the needs and interests of all parties affected by corporate actions. Signup and view all the answers

What is a major criticism of Stakeholder Theory regarding stakeholder definition?

A significant criticism is the ambiguity in defining who qualifies as a genuine stakeholder, which complicates the application of the theory. Signup and view all the answers

In what way does Stakeholder Theory conflict with the Anglo-American model of corporate governance?

Stakeholder Theory often conflicts with the Anglo-American model by emphasizing the importance of non-shareholder groups, challenging the primacy of fiduciary obligations to shareholders. Signup and view all the answers

What role does sociological theory play in understanding corporate governance?

Sociological theory examines board composition and the distribution of power and wealth within society, shedding light on governance dynamics and stakeholder relations. Signup and view all the answers

Study Notes

Stewardship and Corporate Governance

Stewardship involves board responsibility to oversee business conduct and manage day-to-day operations, ensuring issues don't go unnoticed.
Directors act as guardians, preventing lapses in corporate governance.

Risk Propensity and Agency Costs

Adoption of stewardship mechanisms is hindered by principals' risk-taking behavior.
Owners who are risk-averse may withhold power from executives to mitigate agency costs, serving as insurance against self-interested actions.

Shareholder vs. Stakeholder Approaches

Shareholder approaches assert corporations mainly have the responsibility to obey laws and maximize shareholder wealth.
Stakeholder models argue corporations owe duties to various parties, enhancing overall societal utility.
Shareholder model effectiveness is questionable due to reliance on the assumption of perfect competition.

Stakeholder Theory

Originating in the 1930s, stakeholder theory blends economics, behavioral science, and ethics to account for diverse interest groups in corporate governance, including employees, customers, and society.
This theory draws from various theoretical frameworks (e.g., ethics of care, social contract theory) but often lacks a solid foundation in any single theory.
Tension exists between stakeholder responsibilities and traditional Anglo-American governance models prioritizing shareholders.

Criticisms of Stakeholder Theory

Defining "stakeholder" is challenging, leading to ambiguity about who qualifies.
Stakeholders can include a wide range of entities such as employees, consumers, suppliers, and activist groups.

Sociological Theory

The sociological approach analyzes board composition and its implications for power and wealth distribution within society.

McKinsey Survey on Corporate Governance

A McKinsey survey of 188 companies across six emerging markets linked good corporate governance to increased market valuation.
Key benefits of good governance include enhanced financial performance, transparency, and elevated investor confidence.
Performance metrics include:
- Accountability through transparent ownership and board structures.
- Timely disclosures and independent directors to ensure transparency.
- Shareholder equality, implementing a “one share-one vote” principle.

Sarbanes-Oxley Act, 2002

The Sarbanes-Oxley Act (SOX) was enacted to establish governance standards and protect whistleblowers reporting fraud.
Anticipated to restore investor confidence following corporate failures.
Key provisions include:
- Formation of the Public Company Accounting Oversight Board (PCAOB).
- Reporting of the PCAOB to the SEC (Securities and Exchange Commission).
- Establishment of an audit committee dedicated to overseeing audits.
- Regulations on conflict of interest for CEOs, CFOs, and other executives.
- Rotation of audit partners every five years.
- Restrictions on non-audit services to maintain audit integrity.
- Requirement for CEOs and CFOs to affirm accuracy of financial reports.

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Description

This quiz covers the principles of corporate governance, focusing on the stewardship role of the board in overseeing business conduct and management. Explore the challenges and risks associated with adopting effective stewardship mechanisms within an organization.