公司治理-Corporate-Governance.docx

CORPORATE GOVERNANCE 25Corporate GovernanceDefine and Explain Corporate Governance a Function(s) and a Mechanism(s) and Evaluate the Role of Corporate Governance in a Chosen Case Organization Student Name: Student Number: Lecturer: Date: 20/12/2015Table of contents1. Introduction32. Literature Review.52.1 Definitions of corporate governance.52.2 Mechanisms of corporate governance.102.2.1 Internal Mechanism.112.2.2 External Mechanisms.13 2.3 Evaluation of corporate governance.133. A Shell Case Study.163.1 The principle-agent problems and key stakeholders of Shell.163.2 Ways to balance stakeholders interests.173.2.1 Ways to balance internal stakeholders interests.173.2.2 Ways to balance external stakeholders interests.183.3 Comments on Shells Corporate Governance policies.204. Conclusion.225. Reference231. IntroductionModern corporate situations are characterized by the globalization of technologies and information, posing a challenge for corporate management. The distribution of rights and responsibilities among different participants in the corporation and the rules and procedures for making decisions in corporate affairs are becoming vital important. In such a defined context, corporate governance tends to evolve from the corporations objectives. The form of a corporate can be dated back to several centuries ago, while since Adam Smith, many problems about corporate have been put forward. The study of corporate governance appeared with the emerging share market. In the 1980s, the concern of corporate governance reached an unprecedentedly high level. The reasons can be drawn from the worldwide privatization wave, the Asian financial crisis, several corporate scandals and an increasingly severe corporate credit. Since then, it became a heat topic and received attention from all circles. According to Douglas Branson, a famous law professor at the University of Pittsburgh, when he published the first book about corporate governance, there had been no relevant book on corporate governance. But now, even many professional ideas and suggestions have been raised. From the international background, a general function of corporate governance can be drawn, that is to monitor the actions, policies, practices, and decisions of corporations, in an attempt to achieve the interests of stakeholders. The importance of study on corporate governance cannot be overestimated, for it can both help people learn better the problem itself, but also provide guide for a corporate. Following the targets of management powers and shareholder involvement, this paper intends to study further corporate governance. Based on a deductive approach, this paper is composed of two distinct but strictly connected parts: the first theoretical part will define the concept, explain the mechanisms and pose the evaluation of corporate governance. The second case part consists of a constant analysis of Shell, adding practicality and applicability to the study. 2. Literature Review2.1 Definitions of corporate governanceAlthough people from different spheres have made numerous comments and tried very hard to define the term “corporate governance”, they have never reached a consensus. A possible reason is that this term covers such a wide range of economic phenomena that it is really hard to give an exact definition to it. Some experts hold the view that corporate governance refers to the description of the governance quality inside the corporate while others think that it should be defined as the process of restricting the corporate management. However, things can be very different from the perspective of investors because investors may regard it as an inspiriting factor for the corporate to behave in accordance with the corporate ethics or to make full use of the stock rights as an investing skill. Due to the fact that different people have different interest and advantages in this field, they may have different definitions. Hart (1995) is the economist who clearly put forward the problem of corporate governance in theory at an early time. According to his analysis, there are two factors contributing to the necessity of the existence of corporate governance. The first one is the subject of agency, involving members in the corporate such as the owner and the manager. The other factor is the existence of transaction cost which leads to the result that the subject of agency mentioned above cannot be solved by signing contracts. If there is not the subject of agency, there will be no need to inspire before the operation and no dispute to be solved after it. If all the problems-the use of the capital, the change of the manager- have been solved by a complete contract, then the existence of corporate governance will be of no use because it is a mechanism that focuses on the solutions to the issues or disputes that are not included in the contract. Shleifer Vishny (1997) focuses on the impossibility of the complete contact between investors and operators. Due to the fact that most of the possibilities in the future cannot be predicted properly, it is impossible to sign a complete contract over the issues of how to use the capital provided by the investors and how to distribute the profits brought by the operators who provide the corporate with professional human resources. As is often the case, the residual control right-the right to make decisions under the circumstance when the contract has not predicted all the possibilities- should be reserved to the investors. However, the fact is that the investors are always lack of the capabilities of making decisions and they cannot have adequate information needed to make such decisions. Therefore, the de facto control is always in the hands of the operators who have the right to freely dispose the capital from the investors. Shleifer Vishny points out that this right of capital disposal has caused various kinds of deprivation of the investors from the operators. As a consequence, corporate governance is needed to abate this problem and to reduce the expensive cost caused by this. Based on all the analysis above, Shleifer Vishny defines corporate governance as the various ways adopted by the investors to guarantee their profits. This definition is narrow but is widely accepted. Zingedes further explains the significance of corporate governance by using the method of incomplete contract. He points that in the Arrow-Debreu economy, all the decisions are made before the operation and are implemented later. Therefore, all the disputes are solved before the operation and there is no room for the existence of governance in the general sense and the so-called corporate governance in the specific sense. However, things are quite different if the contract is incomplete. Under this circumstance, corporate governance will have an influence on the distribution of the rent and the efficiency of the economy by the incentives, the inefficient bargain and the risk avoidance. Zingedes emphasizes that the theory about corporate governance is the theory about the corporate. His definition of corporate governance is much wider than that of Shleifer Vishnys. He defines corporate governance as the aggregation of a series of complex conditions which have an effect of the final consequence. Therefore, the profits and protection of other stakeholders except for the shareholders are also included naturally and logically. Tyrol (2001) uses the method of complete contract to analyze the incentives in corporate governance and uses the method of incomplete contract to analyze the control in corporate governance. He holds the view that a good corporate governance structure should be the one which chooses the best manager who is capable of guaranteeing the profits of the investors. This is the so-called optimized allocation of incentives and the rights of control. As far as Tyrols concerned, the traditional definition of corporate governance which mainly focuses on the profits of the shareholders is too narrow in economic analysis. Therefore, he defines it as the system design which induces or forces the managers to internalize the profits of all the stakeholders. He also believes that the profits of all the stakeholders including the investors should be included while designing the incentive and control structures. However, Tyrol cannot find or design codes of conduct for the managers to guarantee the profits of all the stakeholders. Masahi ko Aoki (2001) enriches and extends Tyrols definition by defining corporate governance as the self-enforcing rules (formal ones and informal ones) that control the decisions of the stakeholders. The core of this mechanism is the managers prediction about other participants reactions to the strategy when the business performance is not that good. What should also be mentioned here is that he believes that these predictions before will have a restriction on the managers behavior.Mathiesen (2002) holds the view that corporate governance is about how to improve the effective management of the corporate by some incentive mechanism such as contracts and organizing and design. Or we may say it is about how to achieve a competitive rate of return by motivating the corporate managers.OECD (1999) thinks that corporate governance is a system that guides and controls the corporate and it should also include relative regulations and procedures that stipulate the specific rights and obligations of different participants, including the board of directors, managers, shareholders and other stakeholders. Whats more, the different parties should adhere to these regulations and procedures while making decisions about the corporate business. According to Allen (2002), corporate governance is different in different countries. For example, in England and America, corporate governance refers to whether the corporate pursues the profits of the shareholders while in Japan, Germany and France, it mainly focuses on whether the corporate is run with the concern of the stakeholders profits. No matter what the definition of corporate governance is, the principle of it for economy theorist is the assignment of the rights and obligations of the different beneficiaries. Therefore, in this sense, corporate can be defined as the nexus of contractual relationships among different beneficiaries. This definition is revolutionary because it changes peoples understanding of law and the law itself. The fundamental principle of corporate governance in America is that the contract between shareholders and the corporate has stipulated the optimization of the value of the corporate as the responsibility of the managers and the directors. Almost all the countries around the world are amending their viewpoints about corporate governance and it is becoming more and more essential for a corporate to behave well. A mistake or misunderstanding may do great harm to the development of the corporate and thus people are paying more and more attention to the study of corporate governance.2.2 Mechanisms of corporate governanceGovernance mechanisms are means for carrying out governance and remedies to the risks of loss of control over the management of an enterprise. Many process are including in these mechanisms, such as monitoring the actions, policies, activities, and decisions of companies, agents, and stakeholders. The basis of the modern corporation is that shareholders purchase stock and professional managers provide decision-making. Through this modern public corporation form, an efficient corporate governance is built.According to Denis (1997), the corporate governance can be divided into two aspects: the internal governance and external governance. The internal governance mainly deals with the corporation governance characteristics, namely the board of directors, ownership structure etc.; the external governance is related to the market for corporate control and legal system.2.2.1 Internal MechanismIn terms of internal governance, different aspect of internal governance, such as the board of directors, ownership structure etc., should be treated the same. The board of directors represents the control system, performing the dual roles of monitoring and ratification of a corporate (Fama and Jensen, 1983). The component of the board of directors is insider director, affiliated outside director and independent outside director. The role of the board of directors is to monitor and evaluate and determine decisions and strategies, thereby ensuring that managers pursue the interests of the shareholders. Lipton and Lorsch (1992) and Jensen (1993) were put forward that the board of director worked as an independent control mechanism. They also suggested an optimal size of the board. Another professional, Yermack (1996), connected the size to the corporate value. But there are many experts who do not agree with the relationship, such as Beiner (2004). Besides, the discussion about the proportion of the directors are a lot. A universal concept is that the board will be much more efficient if the majority of its members are outside independent directors (Beasley, 1996; Peasnell et al., 2003). If the manager of a corporate is not the board director, its board members will carry out their mission more freely and efficiently (Beasley and Salterio, 2001; Dechow et al., 1996).Since the 1980s, many experts did a lot experiments in order to find the relationship between ownership and performance. Stiglitz (1985) argued that concentrated ownership played an important role in managers pursuing value maximizing strategies. McConnell and Servaes (1990) found a positive relationship between institutional ownership and Tobins Q. However, on the opposite, Beiner et al. (2004) even find a negative relationship between blockholdings and firm performance in the case study of Swiss firms.2.2.2 External MechanismsThe external governance lay great emphasis on the policies. Different policies will on different degree shape corporate governance. Morck and Yeung (2009) compared various corporate governance in different countries, from the aspect of diachronic angle. A large number of researchers analyze the relationship of the corporate governance, protection of the investors and the firms performance. Klapper and Inessa Love (2004) put forward the concept of Anti-director Index. Tirole (2001) did a research from a more expand aspect. He argues that stakeholder governance is a kind of mechanism that will make the managers consider stakeholders.2.3 Evaluation of corporate governanceThere is one question that bothers many people, namely which corporate governance is the best? It is hard to tell, for different corporate governance may survive according to its governance system and economic situation. For instance, distinctive mode of corporate governances are applied in the US, Japan, and France. However, there must be some universal characteristics in the evolution of corporate governance.Roe (1994) points that politics exerts great influence on American corporate governance. He provides a detailed account on how the American political system shaped large investors, for instance, some bank owners, pension companies, insurance enterprises etc. Grundfest (1990) and Jensen (1993) views it as a feedback of the shareholder policies in the 1980s. These shareholder policies heavily suppress the large investors (Douglas, 1940; Coffee, 1991). At the cost of the interests of large investors, the hostile policies boosts the development of small shareholders (Bhide, 1993). A conclusion drawn by Roe is that the American political system has an impact on corporate governance, for its discouragement of the large investors. The same story is shared with Germany and Japan, which are heavily destroyed during the World War II. Both of them reconstruct their systems of economies at the end of the 19th century. Under the financial help from the United States, German banks recovered remarkably powerful (Gerschenkron, 1962). Germany discouraged the introduction of disclosure rules, prohibitions on insider trading, and other protections of minority shareholders. All this measures prevent these investors becoming great economic and political forces. Through this political and economic channel, the law system has developed to adapt to the prevailing economic force. From here, we can see evolutionary talk on efficient corporate governance do not reach an agreement.The discussion of legal protection for investors and ownership concentration are of great significance for governance. Some successful corporate governance systems, which are applied in the United States and Germany, have proved to us that a combination of significant legal protection of some investors is necessary. This combination separates investors from governance systems in most cases. Countries who can only provide insufficient legal protection of investors will be stuck in little external finance. Therefore, the legal protection of investor rights is one essential element of corporate governance. Meanwhile, no relevant evidence can prove that which one of the successful governance systems is the most efficient.3. Enron Corporation Case StudyRoyal Dutch Shell plc, commonly known as Shell, is an AngloDutch multinational oil and gas company headquartered in the Netherlands and incorporated in the United Kingdom. It is known as one of the most valuable companies in the wor