There are obvious conflicts in relation to earnings with the corporate form of o
ID: 2394576 • Letter: T
Question
There are obvious conflicts in relation to earnings with the corporate form of ownership between would be most challenging and how would you handle it? Do you think you are capable of putting the corporate interest before your interest? There have been many examples (Enron, Worldcom) where individuals were not able to do so. You original post and 0, 3 or 5 points for your response post. To receive the 5 points for the response, you must respond to another po own personal will receive 0, 5, 8 or 10 points for your
Explanation / Answer
Conflicts between a company's management and its shareholders are usually referred to as agency costs and are borne by shareholders. Activist shareholders and increased corporate governance increasingly deal with agency-related conflicts, but these conflicts can be especially intense for shareholders of smaller, closely-held companies.
The board should play a central role in the governance of the company. It performs the following functions:
- guiding corporate strategy
- monitoring managerial performance and replacing managers if necessary
- ensuring that the corporation obeys the applicable laws
- establishing a code of corporate ethics
- overseeing systems to achieve an adequate return for shareholders
- monitoring and managing potential conflicts of interest of management, board members and shareholders
Boards have a duty to act in the best interests of the company and its shareholders, while dealing fairly with other stakeholder interests, including those of employees, creditors, customers, suppliers and local communities. Corporations should recognise that the contributions of stakeholders constitute a valuable resource for building competitive and profitable companies, contributing to the long-term success of the corporation. The rights of stakeholders as established by law or by mutual agreement should be respect
The board and the shareholders get conflicts in the following issues
Returns for Shareholders
Your shareholders desire minimized taxes, as opposed to maximization of shareholder wealth. Management teams sometimes exploit this by setting salaries in excess of industry norms, presumably because compensation expenses are tax deductible and lower taxable income. It can be difficult to balance the return requirements of your shareholders with different long-term goals and tax situations. Your business could also form a plan that comes at the expense of shareholder returns. Common examples fueling these decisions include concern about leaving a legacy, engaging in “empire building," which involves acquiring companies at a fast pace, even if it involves taking on too much debt, or sacrificing profitability
Capital and Debt
There may be a constant tug-of-war between your and your investors over the company’s capital. Shareholders often view excess cash on a company’s balance sheet and agitate for its return to shareholders in the form of cash dividends or the repurchase of shares, which boosts stock values. However, you may be very hesitant to do so, sometimes rightly so. You should not repurchase shares simply to appease shareholders, but only when the company’s shares are undervalued. Also, you may want to raise capital to invest in new projects while shareholders view this as a threat. Issuing new shares can dilute existing shareholders’ stakes, and issuing debt can increase leverage risk and, therefore, the risk associated with the company’s stock. Shareholders should always read management reports on financing closely and examine the statement of cash flows to understand the methods of financing the business is using.
Risk Assessment
Your management team may be more willing to take on higher levels of risk, — operating, financial or investing — while your shareholders desire maximized returns in the form of capital gains and dividends. Shareholders are generally risk-averse, which is viewed as prudent and conservative. If your management team receives a large portion of its compensation in annual salaries and stock options, managers have less to lose because salaries are constant, and stock option values rise in response to increased volatility, a form of risk.
Control of Debt and Equity
Management teams sometimes alter capital structures -- the mix of debt and equity financing employed -- in ways that preserve a level of control rather than a mix that maximizes wealth for your shareholders. Another example is poison-pill amendments adopted by boards of directors in support of a management team that purposely causes the company’s shares to lose substantial value in the event of a hostile takeover, offering high returns to shareholders at the expense of your company's leaders.
In dealing with corporate governance issues, countries use a varying combination of legal and regulatory instruments, voluntary codes and initiatives, depending in part on history, legal traditions, efficiency of the courts, the political structure of the country and the stage of enterprise development. Many countries, hoping to minimise compliance costs and to provide greater flexibility within a market framework, have developed and sought to promote greater use of voluntary codes and initiatives to improve their corporate governance. Some countries have also sought to implement their codes through “comply or explain” provisions that do not require compliance, but require an explanation when the provision is not followed. In some countries, stock exchanges have imposed corporate governance requirements through their listing requirements. Corporate governance institutes or institutes of boards of directors have also been established in many countries, with an aim to promote awareness and to train directors to understand better corporate governance objectives and requirements. Some institutes have also engaged in media training programmes as another avenue for increasing public understanding of corporate governance.
- Legal, regulatory and institutional framework
- Equitable treatment
- Protecting shareholder rights
- Shareholder influence with the decision taken by the management
- The role of the board and the rights of stakeholders need to be kept in mind
- Voluntary private initiatives
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