The Business School

International Accounting & Analysis

Financial Reporting & Analysis

CORPORATE GOVERNANCE
ESSAY
Lecturers: Dr Phyllis Alexander
Dr Suranjita Mukherjee
Mr Graham Wilkin

HUY NHAT TRAN

4568916

7th JANUARY 2015

With the development of global economy, it can be clearly seen that the
contribution of corporate governances has been become one of main elements in

economic increase generally. Therefore, the existence of popular problem about

strategic management and business should become the critical argument in modern
economic area. Recently, the relationship between principal and agent is not only one
of critical problems in corporate management but also in economic area totally, what
the conflict of interest between principal and agent is and how to evaluate the role of
CEO, Chairperson and board of directors. The problem centers around whether there
is an balance of power between principal and agent or how the potential conflict of
interest appears in corporate governance. As PWC (2012) identified that there are
more 43% of S&P500 boards are split the role currently.
First of all, in the corporate governance, principals are the owners and agents are the
managers. In term of the definition of principal and agent problem can be seen as the
problem of agents motivation to act on behalf of principal. Agency problem existence
in the lot of different area, especially, in the corporate governance, managers act on
behalf of shareholders or owners. Principal and agent problem arise when the
relationship between managers and owners are not suitable perfectly together and that
lead to the conflict of interest easily. Moreover, managers may be attracted by their
own benefits more than the owners. As a result, the conflicts of interest are
unavoidable in corporate governance. For instance, managers often take all
responsibility in controlling all expenses of business and run the business from the
ordered task by principal but they may not receive enough benefit from these efforts
(Bebchuk.L and Fried.J,2004). This may create a trend that the agents have less
motivation to into the job; the managers might not spend all of their ability to
maximize shareholder wealth as they act on their own behalf.
Furthermore, the managers have more information than principal (asymmetric
information); it means the owners are at a disadvantage in practice; the owners may
not ensure that whether the managers are always acting in the owners interest. In fact,
the managers may accept an excessive risk rate in the particular project if they receive
the critical interest from this decision as a high bonus in case of success. On the other
hand, the principal may loose a lot of money because of agents decision in case of
failure. This kind of moral hazard relevant to managers actions that lead to the
growth in risk is not publicly shown. Blair (1966) defined that the owners must
monitor the agents and governance arrangements must support some checks and
balances to ensure they do not misuse their power. The costs of monitoring and

punishing mangers to prevent misuse are the gap from the owners interest by the
agents has been called agency cost.
In general, the different mechanisms may have the various interest connections of the
managers with those of owners. The owners may use commissions, performance
measurement, profit sharing and share bonus in employment.
According to Donaldson.L and Davis.J (1991) mentioned about an implication of
agency theory that where CEO (managers) duality is retained. It can be seen that the
shareholder (owners) benefits can be protected by the interest connection of CEO and
the shareholder by a suitable encourage scheme for the CEO such as a long system of
long-term bonus additionally to annually salary. As a result, the presence of long-term
bonus could maintain the managers interest with their owners and prevent the loss of
owners interest which otherwise has a negative relationship with long-term
compensation. On the other hand, the effect of manager duality on owner returns and
corporate performance may depend on some other factors such as size and complexity
(Fama and Jenson, 1983) have been unidentified yet. While Chitayat (1985) stated
that the motivation of managers is not a main problem and the more critical factors
affecting firm performance and owner returns is the design of corporate structure so
the agents make effective actions. The key point is not to increase the control and
monitoring of management but rather to authorize executives.
In term of separation of ownership and control, the evaluate role of CEO, Chairperson
and board of directors may provide the general vision which may contribute to
identify the barrier between principal and agent clearly. First of all, the board of
directors takes responsibility for identify the firms aim and the future plans and the
strategies to reach those aims, as well as monitoring the way how to achieve aims
planed; considering the CEO with suitable leadership requirements. With regard to the
assessment of the board in corporate business, with the supporting of audit committee,
the board may be satisfied with the financial performance that is prepared via
effective corporate managers. According to Epstein and Roy (2006) stated that there
are three main objectives must be achieved by effective boards: (1) Create
professional strategic guidance to make sure the firms growth and success. (2) Make
sure accountability of the firm to shareholders, customers, suppliers and regulators.
(3) Ensure that greatly qualified executives are managing the company. Moreover, the
Combined Code (2008) defined that the boards responsibility is general leadership of
the firm within the framework of effective and careful controls, which may risk to be

managed and assessed (para A.1). Directors would make decisions in the
corporations best benefit.
Furthermore, the board of directors should have formal meetings and plans that are
the chances for the board to have conversations for making important decisions. It can
be clearly seen that the roles of CEO and chair should be separated to ensure that the
power should not be controlled totally by one person. A balance between nonexecutive and executive directors is maintained by the board. All directors have
opportunities to take independent formal advice and make accession to the company
managers. Especially, in UK law, the boards can act in the great faith in the benefits of
the firm, and exercise skill and care in practicing their duties.
One of other important position in the company, which may have critical effects on
running business, is the chief executive officer (CEO). Evaluate the role of CEO may
help to reduce the agency problems. CEO takes responsibility for operating the
corporations business and earns annually income. They set up the companys
strategic aims within the running schedules and plans, which are accessed and
provided the budgets by the board of directors. CEO makes decisions, which depend
on not only considering long-term interest of company but also the advice from other
director and outside advisors. In addition, CEO also leads the strategic plans, which
may be presented and reviewed in front of board and these strategies can be
development and changed as necessary in operating business. Last but not least, in
managing risk, CEO identifies risks what may happen in business and provide overall
risk profile to board because that may affect the shareholder wealth directly.
CEO and Chairman position should not be one person that may give an individual to
much power. In addition, it is also discouraged that the CEO become the chairman of
same corporation after retiring. The chairman position should be independent.
According to Combined Code (2008) mentions that the chairperson should not
become chief executive of the same corporation. If in case, a board make a decision
that a chairperson should become a chief executive, the board should have a formal
discussion with major shareholders in advance and point out critical reasons to
persuade shareholders in the conversation and in the next annual company
performance. (para A2.2)
Additionally, that retiring CEO is still appearing in a board of directors as chairperson
may not only make a lack of independence but also cause problems. It is no doubt that

chairperson tend to involve the operating of company rather than the operating of the
board as chairpersons role.
In term of Chairman, this person is elected by the board and expected to act as
corporations representative that will take part in the presentation of the firms
strategies and campaigns to the world. To maintain the leading role in the identifying
the ability and structure of the board, this will contribute to access to overall size of
the board, the balance between non-executives and executives, the experience and
personality of the directors. This position takes responsible for the operating of the
board and makes sure that the board meets frequently for updating information in
general. Those director have access to all data they need to support the formal board
meetings, that each director may has opportunity to present in front of a board of
directors. Cadbury. A (2002) stated an important difference between Chairman and
CEO that chairman is responsible for the authority of the board and the chief
executive will take responsibility for the authority delegated to CEO by the board of
directors. Chairman acts authority on behalf of the board and CEO has personal
authority in line with association of their appointment.(p99) The chairman should
organize meetings with the non-executive directors without the executives present. In
the Business Roundtable (2005) mentioned that the chairman is responsible to be
leader who can preside at the board meetings. Furthermore, the chairman also has key
role in monitoring performance evaluations of board and chef executive officer, being
a link for communication with shareholders and help the board of directors in difficult
situations.
In conclusion, it can be clearly seen that there is existence of conflict of interest
between principal and agent. In the controlling the managerial disadvantages, a board
of directors should be independent of CEO and create encouraged solutions to blind
managers interest to those shareholders. In regard to the roles of corporate
governance, the board of directors not only runs and controls the corporation but also
is the connection between investors and managers. Moreover, it is encouraged to
separate the roles of CEO and chair so that prevent too much power authorized in one
person. While chef executive officer takes responsibility for operating the business,
the board of directors takes responsibility for operating the board. The board should
combine a number of independent non-executive directors that may maintain the
balance between the shareholders and managers, additionally; their experience and
professional knowledge can also improve the value of board.

REFERENCES:
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Twenty-first Century, Brookings Institution, Washington.
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Available
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Cadbury. A ,2002. Corporate Governance and Chairmanship: A Personal View.
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PWC , 2012. Key issue: CEO and board chair roles[online]. Available from:
http://www.pwc.com/us/en/corporate-governance/board-leadership.jhtml [Accessed
26th December 2014]