Forms of Business
and Conflicts of Interest
Forms of Business
and Conflicts of Interest
Management–shareholder Conflicts
Director–shareholder conflicts
CG AND FIRM PERFORMANCE
Bank’s Hierarchy
2. Corporate Governance
system of principles, policies, procedures
clearly defined responsibilities and accountabilities
used by stakeholders to overcome the conflicts of interest
System of governance to create balance of interest between
agent and principal
4. Overview of CG
Quality of CG affects value and Risk of the business
Effective CG is essential for the efficient functioning of markets
CG eliminate or mitigate conflicts of interest
Ensure Efficient usage of business assets
Delineation of rights of SH and SH
Clearly defined manager and director governance responsibilities
Identifiable and measurable accountabilities
Transparency and accuracy in disclosures
Fairness and equitable treatment in dealings
Agency Problem
Agency Cost
Value of the Business at stack due to agency issue
5. Forms of Business
and Conflicts of Interest
Corporation
Partnership
sole proprietorship
• Who bears governance risk in a sole
proprietorship
• Creditors, including trade creditors,
have the highest risk with respect to
governance
• Who bears governance
risk in a sole
proprietorship
• Creditors, including
trade creditors, have the
highest risk with respect
to governance
Corporations account for
most business revenue around
the world.
agency relationship
The form of business will dictate, in part, the relationship
between the owners of the business and management
7. Management–shareholder Conflicts
Bottom line: there may be agency costs in terms of the explicit and implicit
costs when managers do not act in the best interest of shareholders
Managers may consume excessive privileges, or in effect, take
advantage of their position to spend excessively on things for
themselves.
Managers may be more interested in expanding the size of the
business, bonuses based on earnings, taking on excessive risks, or job
security.
• Shareholders trust management with funds from reinvested earnings or
newly issued stock, which management invests
The predominant objective is to maximize shareholders’ wealth.
Issue: Managers are human!
1
2
3
4
5
6
8. Reviewing audit contracts and financial contracts, establishing
man management compensation
Disciplining poorly performing managers.
Approving mergers and acquisitions,Approving audit contracts
Monitoring managers,Approving strategies and policies
Director–shareholder conflicts
The board of directors are an intermediary between the shareholders and management, and represent
shareholders’ interests by
9. CG AND FIRM PERFORMANCE
Capital
Adequacy
Credit RiskLiquidity
Risk
Operational
Risk
Market
Risk
Country
Risk
Financial
Crisis
Risk
Audit
Quality
Country
Level
Governance
10. Real Economy
GDP growth
Inflation
Financial sector
Growth in bank
credit
Bank leverage
ratios,
NPLs
Profitability
measures
ROA, ROE
Firm Performance: Financial Stability (FS)
• Most cited
measures of FS
in Banks,
• Under
consideration in
contemporary
research on
banks
Financial system considers as stable when there is no presence of volatility
Also explains in terms of smooth functioning of financial system etc.