Exam practice short essay questions (International corporate governance) Example


International Corporate Governance

  1. Agency Conflict

Managerial resposibility to stakeholders is very critical. However, corporate manmagers have been keen to respond to the needs of shareholders and neglect the concerns of other stakeholders. In the case of community sorrounding the operations of a nuclear power plant, the aspect of social responsibility comes affront (Fama & Jensen 2003). The plant needs to practice business ethics that govern the concerns of local communities in addressing externalities relating to effects of radiation to extension of benefits of nuclear energy. Similarly, managers are accountable to product liability and responsibility that comes with pharmaceutical products taken by children without proper prescription. This can be costly to the company who loses license to operate or lose of customers hence affecting the profits of shareholders (Dalton 2001). Pensioners too need to be handled with care as they have given the company consistent profits in the past years. However, managers should be accountable to shareholders on how much and why confessional fares should be provided to pensioners during peak periods. These are withdrawals that will affect the cash book and eventually the balance sheet. Lastly, shareholders need to know any training needs of employees. It will be absurd to allow employees to undertake part time studies within working hours. This will reduce productivity and affect the daily outputs of the company. Secondly, providing for such employees the financial support during working hours will deplete the disposable budget on training and development with no certain returns (Dalton 2001). Managers need to update the Shareholders on issues regarding these decisions and why they were taken. If it remains unfulfilled it will lead to agency conflicts.

2. Managers and Shareholders Interest

Agency theory provides for managers to be accountable to their shareholders by honestly disclosing all the information regarding any financial transaction made within the financail year. Granting share options will further alienate and distant the relationship between managers and shareholders (Fama & Jensen 2003). Executive remuneration consultants may have vested interests in the company by advicing the management on certain decisions that favors their intentions. Conflict of interest will arise when these managers conspire with consultants to grant share options to the executive. It should be treated as fraud which is a criminal offence. Granting these options negates the Agency theory.

  1. Agency, Stakeholder and Stewardship Theories

Managers are accountable to all the interests of the stakeholders. Agency theory help to build on the aspect of management that proper governance structures should be put in place to guard the interests of shareholders since managers are not in to maximize their returns on investment. It provides for a favorable compensation plan and free decision making by managers. However, manager assume an oppotunitsic behavior and pursue own interests at the expense of shareholders. Stewardship theory on the other hand, provides for the CEO to chair the board which likley leads to agency loss and managerial opportunism (Donaldson & Davis 2004). The advantage lies in the pursuit of rewards and avoiding punishment since organizational role holders are motivated and attains corporate prestige. Individual self-esteem is merged since the interests of managers and owners are integrated. Lastly, stakeholder theory offers the basis of business to communities in which if dysfunctional or impoverished affects the proper functioning of the business. It allows for self-less interest but does not maximize shareholder profits.

Reference list

Dalton, D R 2001, CEO duality and organizational performance: a longitudinal analysis, Strategic Management Journal, 12, 2, 155–160.

Donaldson, T & Davis, R 2004, Stewardship theory, Journal of Business Research, Vol. 16, No. 1. pp 65.

Fama, EF & Jensen, M C 2003, Separation of ownership and control, Journal of Law and Economics, 26, 301–325.