Principle-agent Problem in Shareholders and Managers

Principle-agent Problem in Shareholders and Managers This essay identifies the principle-agent problem between shareholders and managers. It also overlooks UKs corporate governance compared to Germany and Japan. Furthermore effectiveness of UKs system will be analyzed amid recommendations to reduce the vulnerability. Economic theory speculates that a firms goal is to capitalize on shareholders wealth; achievable with entrepreneurial firm since owners are managers. However, ownership nowadays is significantly diluted, with companies owned by large shareholder groups. This causes the separation of ownership and management which hinders the relationship between shareholders and managers; where managers replace shareholders interest with their own. This may be due to information asymmetry  [1]  where managers have the power to act in accordance to shareholder needs. This is known as the agency problem and is common in modern corporate. Under this theory the relationship is formed through a binding contract whereby principals (shareholders) appoint the agents (managers) to execute services with authority to make decisions. However such contracts are imperfect as the impracticality to include every action of the agent whose decisions has an impact on their and the principals benefits. Thus, self interested behaviour arises in organisations as the interest of both parties diverges, i.e. principals interest regards maximisation of shareholders wealth (profit maximisation) whereas agents interest lies in own utility maximisation (bonuses/promotion). Shareholders permit managers to run the firms assets; resulting in a conflict of interest. The fundamental problem therefore is to align the interests of both parties. Furthermore, principals expect board of directors to base their decisions on maximising equity value. However the board of directors expect managers to follow strategies that support their goals. This situation illustrates that shareholders have no direct input into the operation and therefore have no power to tell managers what to do. This issue arises because of the separation of ownership and control and therefore managers are able to pursue goals beneficial to them and unfavourable to shareholders. Overall, detachment between the two parties increases lack of goal congruence. The question arises as to why shareholders do not monitor management? There are three reasons why taking control causes difficulties. (1) Expensive to monitor managerial activities as obtaining information is difficult (2) disgruntled shareholders are unable to pose threats in order to reduce undesirable managerial behaviour i.e. hiring an outside member and (3) dispersed shareholders have an incentive to free ride. Keasy et al 1997 regards the above as economic costs to monitoring. These limitations pose problems for shareholder wealth since undesirable managerial actions takes place in the absence of control. Shareholders may introduce incentive packages which include profit related bonuses, performance, promotion incentives and encourage employees to buy shares which increase their wages, to encourage agents to make optimal effort. Due to the above problems, nations have developed systems which carry out independent monitoring and control of the firm in order to align the overall goal. OECD 1999 stated that corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance. In UK capital markets play a vital role where share prices advocates performance levels. Managements focus is to maximize shareholders wealth through the use of independent board of directors. The fear of takeover bids forces management to undergo effective actions. Approximately 50% of shares are held by institutional investors indicating dominant ownership. Cadbury Report 1992 states large proportion of shareholder ownership influence companys actions. In 2008 the Financial Reporting council developed the Combined Code i.e. various reports/codes pertaining good corporate governance. The most influential is Cadbury Report 1992  [2]  , was produced as the lack of monitoring management activities caused several scandals whereby executives acted in their interest. Initially, Polly Peck  [3]  went into liquidation after years of false accounting leading to scrutinizing of the financial aspects and accountability. However after the scams of BCCI and Robert Maxwell, they revised the relationship between boards, auditors and shareholders. The final report states CEOs and Chairmans of companies should be separated. Jenson 1993  [4]  states that if roles were mutual, conflict of interest would arise. Furthermore, 3 non-executive directors, two of whom should be independent  [5]  and an audit committee involving non-executives should be included. Companies were encouraged to follow these practises alongside the code of best practise which outlines other areas of concern. However the one size fits all problem was recognised by Cadbury causing all companies registered in UK to follow the comply or explain system. Companies should comply with corporate best practise or have legitimate reasons for non-compliance. Furthermore, the board must offer a full explanation to shareholders and explicate how their practises are consistent with shareholders. Its acceptable only when shareholders believe good governance has been achieved. Greenbury committee, formed to evaluate directors remuneration packages and the lack of disclosure of payments in the annual reports, commenced over publics anger regarding increases in executive pay. The report added to the Cadbury Code and advised (1) each board include a remuneration committee involving independent non-executives briefing shareholders annually and (2) directors should have LT  [6]  performance related pay, all disclosed in the annual accounts. Moreover, progress should be reviewed every 3 years to ensure companies are operating effectively. The Hampel committee  [7]  formed in 1998 suggested all previous principles should be collaborated into a Combined Code. Furthermore, the chairman of the boards should act as the leader, investors should consider voting the share and all remunerations information including pensions should be disclosed. The Turnbull Committee, created the next year, advised that directors should be held accountable for internal financial and auditing controls. Several reports have contributed to the Combined Code namely the Higgs review outlining the actions of non-executives. More recently, after the collapse of Northern Rock and the financial crisis that followed, the Walker Review formed a report concerning banking sectors. The Financial Reporting Council produced a new Stewardship Code in 2010. Germanys corporate system is mainly stakeholder oriented and diffuses away from shareholders interests. The objective is maximising stakeholder value thereby revealing several distinctive differences. Firstly, the banking sector is a major stakeholder. Charkham (1994) stated that banks hold a dominate position in financing and supervising companies for numerous reasons. (1) During 1870 companies were heavily reliant on credit. Banks began offering LT loans to LT clients who tied the companies, obtaining ownership and acting as shareholders within industrial firms. (2) Banks hold 25% of voting capital in large corporations and 28% of seats on the supervisory boards. (3) Banks are shareholder representatives, authorised to vote for their shares plus proxy shares  [8]  , giving further control. Consequently companies are unlikely to face takeovers, since banks will support them through financial hardships unlike in the UK. Secondly, co-operative culture is articulated under the Co-determination Act 1976 whereby workers obtain significant roles in the management process; known as work councils. Work council staff influence business actions and partake in decision making processes. Employees (elected by work councils) sit on the supervisory board when a firm has more than 2000 employees alongside shareholder representatives. This system reduces workforce conflicts by improving communication channels, increase bargaining power of workers through legislations and finally correct market failures. Overall productivity levels increase, with low levels of strikes as better pay and conditions entailing good industrial relations. Finally, Germany involves a two tier board compared to UKs one tier board. It includes a management board (Vorstand) where managers monitor daily operation and conduct of the firm. Plus a supervisory board (Aufsichtsrat) involving only non-executives  [9]  who monitor the management board responsibilities and approving decisions. Separation of the two increases the awareness of individual responsibilities and helps prevent management abuse. The downfall is having worker representatives on the supervisory board as they will opt for decisions beneficial for employees rather than company. For example closing down a factory may deem good for the company however problematic for redundant employees, making it is difficult to work in the best interest of the company. Germanys corporate system lies heavily on good industrial relations which considers its company, employees and public. It shows corporations are a social institution rather than an economic one as it does not put financial value for shareholders at the top of the list of policy objectives  [10]  . Shareholders are seen as one of many stakeholders and not just a privileged constituency. The Japanese corporate governance revolves around banking relations like Germany along with life time employment. There are prominent features including the intervention of government and close alliances between government and companies. Business and industrial activities are monitored by the Japanese Ministry of Finance, involving them in the management and decision process. Japanese corporate rely on main banks  [11]  which are all interlinked with firms, forming a concentrated ownership (shareholders). Prowse 1992 states that individuals hold 26.7% of a firms equity while corporations hold 67.3%. Unlike western countries, Japanese banks can hold equities up to 5%. The argument is by acting as lenders and shareholders, conflict of interests of debt providers and equity will be eradicated. Moreover banks hold these equities for long periods, building a LT banking relationship unlike UKs transactional banking. Furthermore, they are involved with the internal management by obtaining seats on the board of directors. They actively contribute in the decision process and act as insurers for companies entering financial difficulties i.e. bankruptcy or takeovers. Like Germany, banks form LT contracts with companies based on financial services and supervision and act as representatives for other shareholders through proxy votes. One major distinction in Japan is the Keiretsu system. Companies form close alliances mainly between banks, businesses and the government, by working towards each other success. The role of the government became important when they intervened in 1990s as Japan suffered a recession. The government wanted to restore the economy through its policies and regulations by improving the corporate governance to stimulate growth and investment. Germany and Japan both work toward the interest of the company and workers as a collective. However Japans board structure is different as all members consist of former employees excluding outside directors apart from bank officials. The boards have more members than UK and Germany as some companies have over 60 directors. This proves very effective as no domination of directors occur. According to Allen and Gale (2000), focusing on stakeholders rather than solely on shareholders, societies resources are being used efficiently as employees, suppliers and customers are taken into account. This enhances productivity, thus generating higher profits, benefiting the firm and shareholders. Since 1990 the UK have implemented many policies reforming the management and governance of companies. These range from codes, reports, regulation and legislations; but how effective are they? To ensure company interests are aligned with shareholders, UK has imposed various committees to monitor the effectiveness. For example, audit committees review audits annually and overlook financial relationships between companies and auditors. Nomination committees administer human resources and plans future directors. Compensation committees examine management actions and daily operations. Moreover the existence of institutional investors has its advantages as investing in firms they have incentive and motivation to monitor them. This leads to high performance levels which reduces agency costs. However, companies practise ST  [12]  profit maximisation without LT planning making companies underperform, therefore investors sell their shares and exit rather than voice their discontent (occurs mainly in Germany). Overall UKs approach in monitoring company interest is effective as companies have majority of existing shareholders through the need of committees. The Code of best practice gives shareholders confidence that companies are operating with high levels of transparency during decision making processes. From this, the comply or explain system was created, whereby some freedom is left for companies to make effective decisions. The gains from this is that (1) managers and shareholders follow the LT interest of both the company and owners (2) distinguishes the culture barrier individual firms face since there are different levels, size and ownership of companies, whereas code of best practice instils one size fits all rule. Moreover, codes are more effective than regulations as companies can grow whereas enforcing strict internal controls companies are limited to procedures. Furthermore, codes tackle more softer problems relating to best practise compared to regulations i.e. training and supporting directors in their role. The Cadbury Report reflects the above whereby The effectiveness with which boards discharge their responsibilities determines Britains competitiveness position. They must be free to drive their companies forward, but exercise that freedom within a framework of effective accountability. This is the essence of any system of good corporate governance. For this system to work effectively shareholders require full disclosure to facilitate them in their decisions and having rights when dissatisfied. Consequently companies must disclose information in their annual reports stating how they have applied the combined code and giving shareholders voting rights to discharge directors. All these requirements are set out under the company law making the system successful since it was adopted in EC  [13]  and included in the EUD  [14]  in 2006; outlining same principles. Empirical evidence show that UK has drawn close to the concept of good corporate governance. According to the FTSE ISS Corporate Governance Index and Governance Metrics International Reports, the UK has the highest average governance score out of all the countries. Moreover 94%  [15]  of UK pension Funds considered corporate standards in the UK has developed exceptionally. The following reforms revolve around two primary issues (1) lack of separation of management and control and (2) dilemma faced by non-executive directors in terms of monitoring. Accordingly UKs current reforms indicated the need for independent non-executive directors to minimise conflicts otherwise present. However, the disadvantage regarding this independence is, there is less incentive to spend a sufficient amount of time controlling company issues because they have no direct relationship with the company. In addition, doubts on how much knowledge they acquire also poses a problem. One possible pivotal solution that could be incorporated into UK governance is increasing the frequency and duration of board meetings. Company information is very broad and complex especially relating to LT financial performances, competitive position and organisational structure. Therefore it is vital that directors assign more time to assess the information and deem upon past decisions and events. It is recommended that directors meet on a monthly basis for continual supervision and allow directors to address all areas and ask specific questions that affect the future of the company. There are issues surrounding this proposal for example, preparation, however the more frequent the meetings the less time needed to prepare as oppose to the time needed for meetings held every quarter. Moreover, meetings should not be limited to a time schedule but rather should last until all aspects are covered. This method is very flexible for example meetings could last more than one day when a co mpany is in a difficult situation. The advantage is that opinions will be shared more openly and allows non-executive directors to be more involved; this should be carried when discussing the long term corporate strategy. Another solution is altering the composition of the board. In the Combined Code section A.3.2 it pronounces that at least half the board, excluding the Chairman, should comprise non-executive directors determined by the board to be independent. This does not specify the maximum number of seats in total. Therefore it is advisable that the fewer directors, the more likely that each director can play a dynamic and imperative role. The recommended number should consist of eight to ten directors in total. This is so that there is enough variety and sufficient array of viewpoints. When there are more than ten or twelve members on the board, there will be a free rider problem where some directors will stop preparing for meetings and rely on the work of others resulting in topics not being discussed in depth. Finally UK should consider adding a supervisory board like Germany and Japan as this will allow wider diversity among the decision making processes. Moreover it will reduce abuses from dominate directors since there is constant revision of management performance. Overall UK should cease to improve existing polices and the challenge lies in keeping UKs corporate governance an asset rather than a liability for companies.

So Much Media, So Little News

So much information, so little Idea The disease of new media has greatly shrink human minds that rub off on more and more people in this technology-accelerating world at present. Daily life nowadays has significant changed compare to ten years ago that office workers used to waiting for subway by reading a daily newspaper, housewives seating at balcony and reading a newspaper in the morning. But now, most people read news on their cellophane or television instead Of newspaper.What is rubbing off on their behavior? Peter Fun who is an pop-deed writer for the New York Times, writes about polysyllable on his essay â€Å"So much media, So Little Nevus†. Neal Gabbler who is a journalist and culture historian, writes about the relationship between big idea and post-idea world. On his essay â€Å"The Elusive Big Idea†, he argues that people don't care as much about ideas as they used to be. The connection between the two authors has one of the most important reasons that new m edia gradually twisted the true value of newspaper that smother big ideas.Thus, in order to correct the twisted value that media are rubbing off on news, the society needs to redefine the value of news and reexamine the concept of big ideas. The broadsheets offered daily coverage by publishing company, but no commentator or analyst gave any context and readers were left to make up their own minds. Peter Punt believes that there is barely people would create ideas on news, men sad truth is that while some of us are naturally curious about what we don ‘t know, an increasing number of readers and viewers want only reinforcement of what they already know. Pig. 1 98) Newspapers believed that their prime duty was to report what had happened the previous day and give a space to reader a way to think, to brainstorm rather than make argument to an event or judge on someone that post online. Were newspapers then better or worse? Certainly, they seem calmer, just followed a formula that required true story rather then come along with a high quality argument to rub off on reader and offer them a ready-made idea.Neal Gabbler argues a social fact that people loss attitude to create ideas in his say, â€Å"It's not because we are dumber than our forebears but because we just don't care as much about ideas as they did. In effect, we are living in an increasingly post-idea world that fewer people are generating them and fewer outlets are disseminating them, the Internet notwithstanding'(Pig 533) New media offers a way that what people can get idea from others immediately. Post-idea is a shortcut to make someone become lazy without thinking or taking advantage of technology as the modern science to make unceasing progress.But more and more people choose new media in order to save effort and expect a quick result, which is called the culture of instant gratification. New media provides a fast way to help them to get to know the others' opinion of news directly. Obliviousl y, newspaper is a better choice to help people create idea and prompt advance of society. Although 24-hour radio news stations had been established, TV equivalents were some years away. The pages may have been fewer, but the number of news stories was, if anything, slightly higher than in today's papers.Peter r-nut argues that people pay less attention on on what they not interest, â€Å"today's boutique media allow many people to skip news altogether. You can set your Internet home page so that it serves up only what you're interested in. â€Å"(pig 97) New media has diversity format of news, video, audio and fancy advertisement catches people's attention. Fun is pointing out a very important social trend in how people approach news media although they have the same nostalgia for the old days. People are seeking out information that confirms their own beliefs and interests as opposed to seeking to be informed†.This creates myopic views of the world resulting in corrupting. The prevalence of more and more â€Å"information isolation† is one of the causes of divisiveness. Like what Fun said the best prescription has always been a combination of what Want to know and what we Ought to know. Neal Gabbler proposes the reason why people would pay more attention on new media, â€Å"It keeps us in the loop, and keeps us connected to our friends and our cohort. Ideas are too airy, too impractical, too much work for too little reward. Few talk ideas. Everyone talks information, usually personal information. (534). New media takes more advantages from newspaper that could direct to readers mind. Newspaper still has a strong positive influence on both spread information and help inspire people's ideas, but the effect was less overwhelming. This was not just because newspapers had fewer intemperate columnists. It was also because even the miners' strike did not dominate page after page, creating a kind of emotional tsunami, as a similar issue might now. On the broadsheets particularly, width of coverage counted are more than PPTP of report.People have come to learn more and more and to be given more definite ideas about less and less. We live in a golden era of information when you don't have to passively rely on the news sellers but can go directly to the source yourself. New media effectively endows us with common eyes, ears, and brain. People should not blindly believe some rumored event occurred as described. Anything remotely of interest is available permanently available for anyone curious enough to look for its true different big idea.

American jail Essay

Prejudice is defined as â€Å"a partiality that prevents objective consideration of an issue (â€Å"Prejudice,† 2005). † A person may assume, for example, that all individuals suffering from AIDS are filthy and must be ignored; or all Africans are unintelligent. The Nazis had similarly supposed that all Jews are worthless and stupid, and therefore must be killed. As a matter of fact, prejudice can be based on gender, religions, cultures, geographical backgrounds, as well as race. Social psychologists define it as an attitude. It could be positive as well as negative. The positive type of prejudice is understood to result in the white privilege. It may also be directed at beautiful or rich people regardless of color. The negative attitude could similarly be directed at an individual or an entire society. Regardless, our attitudes known as prejudices are usually not founded in reason. People who foster prejudices normally believe that they are right to have negative attitudes toward certain individuals or groups of people. Such people justify their prejudices by offering various examples to show that they are right. A white man who has visited an American jail may say that he knows that all African Americans are bad people because most of the people in jail are African Americans. Racism – which is a form of a prejudice – thus intellectualizes the negative attitude of people toward people. Racism is actually defined as a belief system which states that individuals can be superior to others on the basis of race. This theory has led to much violence and genocide in the world. Still, most people have preconceived notions about other people with respect to their races. It takes a high level of education, perhaps, to believe in the essential equality of mankind. References Prejudice. (2005). WordNet: Princeton University Cognitive Science Lab.

The Cold War And The Soviet Union - 1645 Words

The Cold War was an ideological war between the two world superpowers, the United States and the Soviet Union, beginning after the Second World War. After the war, Germany was left defeated, while Britain and France were left drained and exhausted. Although, the United States and the Soviet Union were drained, they held considerable power, and both soon rose to superpower. The two became rivals through mutual distrust, and constantly competed for power. The Soviet Union wanted to spread Communism in Eastern Europe and the United States wanted to keep the peace. In 1946, an iron curtain separated Europe and Europe was divided into a West (western democracies and the United States) and East (Soviet Union and Soviet occupied territory).†¦show more content†¦West Germany built strong relationships with France, the United States, and Israel. It would also join the North Atlantic Treaty Organization in 1955, which restored most of the state s sovereignty. East Germany was establis hed as a Stalin-style Socialist state. It became a member of the Warsaw Pact and came to have one of the most advanced economies and standard of living in the Soviet-bloc states, though that s not saying much, as it still lagged behind West Germany. Free speech and opinions against the dictatorial regime were not tolerated, artistic and intellectual programs were strongly controlled, and the Allies were trying to be forgiving to the Germans for the Second World War while also insuring that the Germans could never again begin the expansionism that had led to the two previous wars. After Germany fell in World War II, Russia attempted to begin its expansion across a now weakened Europe. This causing the powers in Europe to become unbalanced and Russia replaced Germany as the country that was getting too big. Instead of England stopping this expansion, the Allies divided up Germany and were given temporarily control in order to gain control and monitor the land better until a new gover nment could be instated. While the Allies were still in occupation of the country, a council of the four powers made decisions. The representatives were responsible for carrying out the decisions of their allotted