corporate-governance(1).doc

12The analysis of corporate governanceStudents name:Zhe FengStudents class:商务1102 (International Business1102)Students number:11550739Instructor：Jason LiPingWangJune 5(th),2014ContentsIntroduction.3 1. Explain the term “Corporate Governance”.32. Discuss the agency problems and identify three internal corporate governance approaches to address this problem.42.1 Definite principal-agent.42.2 Definite agency problem.52.3 Identify three internal corporate governance approaches that help address agency problem.63. The example of a corporate governance failure.73.1 YingGuangXia myth.73.2 The myth of burst.84. Recommendations for this corporate governance failure.94.1 promote equity diversification, eliminate the systematic problem resulted from internal control.94.2 highlight the central role of the board of directors.94.3 Strengthen the company board of supervisors supervision function.105.Conclusion.116.Reference.11IntroductionThe main purpose of this essay is that let us to explain what is corporate governance and discuss the agency problem in large companies, also, give my recommendations on how to avoid corporate governance failure.I will talk about each question one by one.Now，please let me to solve the first question.1. Explain the term “Corporate Governance”Corporate governance refers to the system of structures, rights, duties, and obligations by which corporations are directed and controlled. The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and procedures for making decisions in corporate affairs.(OECD. Retrieved 2013-05-18).In my opinion, corporate governance is the specific problems generated in the interaction of senior managers, shareholders, directors and other stakeholders. And the core of corporate governance problem is who should get benefits from senior management. There are two key elements for corporate, one is supervise senior managers performance, and the other one is ensure managers responsibility for shareholders and other stakeholders.Corporate governance is the link between stakeholders who participate in decide the developing direction and performance of the company.Therefore, it is about the way to use company power to realize the interest of stakeholders, and in the situation that does not impede entrepreneurs innovation power.Although there are too many definitions of corporate governance, we can conclude them into the following sentences.Corporate governance gradually pay attention to considering the stakeholders, but shareholders is still its logical starting point of the problem analysis; Also, it emphasis on the innovation freedom of the management and responsibility to shareholders and other stakeholders;Whats more, it seeks the chance from the enterprise internal to improve corporate governance structure and achieve the first two goals.The essence of the corporate governance structure is that mainly aimed at the link between each related stakeholder and contract arrangement, and covers markets and internal governance structure two parts.To sum up, the company governance structure includes the internal structure and market mechanism of corporate governance,it is a contact for a series of system arrangement and organization system of each stakeholders.Then, lets talk about the problems that corporate governance should study and solve.From the point of improving enterprises performance, the problems can be divided into two types, first is the compatibility problems of internal managers and shareholders interest with its outside investors interest and social interest.The second is the manage problems of managers, which are the decision- making mistakes resulted from enterprise leaders management ability, their thinking ways and faults of environment requirements.From the point of benefit mechanism, corporate governance should answer the question which enterprise system is the most beneficial to ensure that investors interest in the enterprise assets get due protection and they can get a reasonable return on investment.(WeiAn, 2012).Also, there are two main models of corporate governance, one is Anglo-American model. And the other one is Franco-German model.Anglo-American corporate governance structure is often referred to as Unitary Board System, its characteristic is that the business executive mechanism and supervision mechanism are combined as one, the board of directors has both business executive function and the supervision function.The characteristics of Franco-German model is double commission system“, the corporate governance structure is mainly composed of executive board (the board of directors, the equivalent of Americas senior management or executive committee) and supervision of the board of directors (the board of supervisors, the board of directors of the equivalent of the U.S.).2. Discuss the agency problems and identify three internal corporate governance approaches to address this problem.2.1 Definite principal-agentFirstly, let me describe what is principal-agent.Principal-agent, refers to a kind of contractual relationship, under the contract, a person or some people (the trustee) authorize another person (the agent) to maximize the utility of the principal goals and engage in certain activities, including some decision-making rights granted agent, use incentives to attract agent, and supervise the agent and so on. (ZeYao & Rui, 2012). The characteristics of principal-agent are: Principal-agent is based on the mandate of the trustee which has the decisive significance in principal-agent; Principal-agent occurs mainly in the field of economy, such as in business, industry, trade, management and other market behaviors are widely use principal-agent; Principal-agent agent has both natural person and legal person, there are many different kinds of agents; Usually, principal-agent is need to be paid.2.2 Definite agency problem.After we know what is the principal-agent, we can more clear definite agency problem.Agency problem refers to the agent objective function and the principal objective function are inconsistent, plus the uncertainty and information asymmetry, agents may deviate from the principal objective function and the principal difficult to observe and supervise, so presents the phenomenon thant agent harm the principals interests. (GuoPing, 2008). The reasons why agency problem exist has three points. Firstly,the information asymmetry between principal and agent.From the view of principal, they dont know exactly about agents knowledge and ability, they cannot conduct a comprehensive supervision to the degree of agent behavior such as whether agent is hard work, or whether agent has presence of opportunism. From the view of agent, they hide some information for their own benefits. Secondly, responsibility asymmetry between principal and agent.For principal ,they lost the control of enterprise management, but they directly to bear the consequences of corporate profit and loss. For agent,they control the enterprise management, but to enterprises profit and loss they are not directly liable. Thirdly, the objective function between principal and agent is not consistent. Shareholders want to realize the maintenance and appreciation of the capital, maximize capital returns and increase the value of the company, their target is monetary earnings. But for agent, they want to gain higher wages and bonuses; As far as possible to improve office conditions, social status and reputation, their targets contain monetary and non-monetary benefits. (Nv, CuiJuan & Jing, 2013).2.3 Identify three internal corporate governance approaches that help address agency problem.To solve agency problem, there are two ways in general direction.The first one is build supervisory mechanism, the second one is build incentive mechanism. Just now to talk about some specific solutions to help address agency problem.In the part of building supervisory mechanism, company can set up board of directors, members of the board of directors are the legal representative of shareholder interests. If the board of directors and management are independent of each other, then the board is an effective mechanism of dealing with the agency problem.But due to listed companies have dispersed ownership structure and the manager will usually choose directors may be friendly to them.In Britain, that the board of directors including at least three outside directors, and board chairman and chief executive for someone must be different. In addition to outside directors, the board chairman and chief executive of independent setting further strengthen the independence of the board of directors. Board of directors will supervise agents for their performance, and prevent the opportunism to a certain extent. Agent has more responsibility for shareholders and they need to try to improve companys profit.Also, in the part of building incentive mechanism, company can use the way of incentives contracting.Managers earnings lack of sensitivity to changes in shareholder wealth. Between management control and cash flow ownership will further expand the agency problem. If the managers of dispersed ownership of company without rights and interests, then they will use the ability and power to seek self interests.Company can let them have the ownership of the company, such as stock options and performance share incentive contracts. However, senior managers will abuse incentive contracts, for example by manipulating accountant to do a fraud,sometimes even with the help of acquiescence from the auditor to change the investment strategy for their own huge profit. So, It is necessary to set up an compensation committees independent by the board of directors to carefully design managers incentive contract, and trying to control the behavior of managers.Whats more, the third method to deal with agency problem is increase the maount of equity that managers have.With managers increasing holdings of shares, the companys value also increase orginally, because the interests of managers and outside investors alliance will become more closely, whcih will reduce agency costs. However, once managers holding shares exceeded certain limit, the value of the company may start to slide because managers tend to implement management defence countermeasures. All in all,the amount of managers holding shares have a middle range, within the scope, the management defense effect will play an important role. Through the method taht give managers some companys shares will help to motivate their performance, because managers become the stakeholders of the company, their performance will directly link to their earnings, sometimes it will reduce agency costs.3. The example of a corporate governance failure.In this part, i will give an example that really happened in our life, and then describe and analyze this example, also give my recommondations at the same time.3.1 YingGuangXia mythYinGuangXia called the company GuangXia (yinchuan) industry co., LTD., the stock short name ST GuangXia (000557). YinGuangXia companies listed in June 1994, because of its outstanding performance and attractive prospects, known as Chinas first blue chip. In August 2001, caijing magazine published YinGuangXia trap, YinGuangXia fictional events financial statements wae exposed. Expert said, tianjin GuangXia German export credit trading company for the output of impossible production, impossible price, impossible products. In tianjin GuangXia extraction equipment capacity, even if the machine run day and night, also could not produce the number of claims; Tianjin GuangXia extraction products export price ridiculously high to fictitious; For some products of export contract to Germany, cannot extract with supercritical carbon dioxide extraction equipment. (Jing, 2001).YinGuangXia originally a small workshop, since 1999 it to be concern of the market gradually.It became big winners during 1999 2000, from its share price to earnings, have hit a stunning record: in 1999, YinGuangXia earnings per share 0.51 yuan. Shares were start at 13.97 yuan from December 30, 1999, all the way of insuring, and rose to 35.83 yuan on April 19, 2000.On April 20, 2000 the Ying GuangXia implemented a rich capital accumulation fund turn add equity plan, for every 10 shares turn add 10 stocks, shares was right to fill.Filling in December 29, 2000,the price of rights hit a high record of 37.99 yuan, in addition to the right in front of the price is 75.98 yuan, the year rose 440%, rise range held the second in Shanghai and Shenzhen two city.（FGJ, 2011）In the field of Social Stigma, company has formed the development of the hi-tech industrialization with the characteristics of biological resources, which has achieved good ecological benefits, social benefits, science ,technology and economic benefits, which cause the extensive concern of the society from all walks of life and the consistent high praise.3.2 The myth of burstAccording to the survey of the caijing magazine, YinGuangXias market profit myth which was spread from the begining of 1999 began is false.One is the profit false is obvious,rely on the March 2001 YinGuangXia announcement, Germany Honest company havs signed a contract with YinGuangXia for three consecutive years, 2 billion yuan RMB a year: YinGuangXia 2001 per share profit will reach 2 to 3 yuan.Raw material cost added up to only 350 yuan per kilogram, but sold to Germany, can sell for 3440 yuan to 4400 yuan, so the high export prices to tianjin GuangXia extraction products is ridiculous.Second is the tianjin customs check the key evidence: Tianjin GuangXia exports only $4.8 million in 1999, and 2000 was only $30000. This suggests that its claim to export 56.1 million 1999 mark, export 180 million 2000 mark were purely made up. Thirdly, it is expected that the German buyers to sign the contract of 6 billion as a one hundred - year - old company, but in fact it is a small trading company which registered capital only 50000 mark; Forthly, its alleged export earnings of supercritical extraction products, in the production of products and prices are not confirmed by experts on the possibility. Whats more, If tianjin GuangXia really have such a large volume, according to the current tax law, they should deal with at least tens of millions of the export tax rebate to the relevant authorities, and reflected in the financial statements. The fact is from the annals of YinGuangXia could not find any entries of export tax refund.4. Recommendations for this corporate governance failure.For this corporate governance failure, I think there are three recommodentions can help them to avoid it. Firstly, promote equity diversification, eliminate the systematic problem resulted from internal control. Secondly, highlight the central role of the board of directors. Thirdly, strengthen the company board of supervisors supervision function. Now, let me discuss them one by one. (CongEn, 2008).4.1 promote equity diversification, eliminate the systematic problem resulted from internal control.Ownership structure is the basis of the perfect corporate governance, it determines the shareholder structure, ownership structure, and the identity of major shareholders,result in the way and effect of shareholders exercise their powers have larger difference, which has a great influence on the formation of corporate governance modes, operation, and performance, in other words, it has directly influence on the internal supervision mechanism in the corporate governance.Through setting up ownership structure to prohibit and correct state-owned shareholders abmoral behavior, let company focus on the pursuit goal of enterprise economic benefit, is one of the important rules of state-owned enterprises should follow. Ususlly, promote equity diversification, introduce multiple shareholders, including other state-owned shareholders especially non-state-owned shareholders, is advantageous to the owner function in place and form a reasonable corporate governance structure. Have multiple shareholders for keeping balance,is easy to separate government functions from enterprise management, make the enterprise goals to focus on the pursuit of economic benefits.4.2 highlight the central role of the board of directors. In the chain of ownership organnisations-board of diretors-CEO, the board of directors is the core for power distribution. The board of directors is regarded as an important internal governance structure mechanism, manage for the manager to make decisions, determine the level of senior management and structure, supervise company internal control and financial management system, determine the companys main s