This document discusses concepts related to company law and corporate governance. It defines corporate governance as the approach to decision making and implementation, which may relate to corporate, national, or local issues and includes both formal and informal groups involved in decision making. Examples of these groups in rural and urban areas are provided. The document also discusses the Maxwell and Polly Peck scandals which paved the way for corporate governance regulations. It defines agency theory and problems, such as conflicts between shareholders and management, and provides examples of agency problems at companies like Enron and WorldCom. Finally, it briefly discusses stakeholder theory and different models of corporate governance.

2. Company Law and Corporate
Governance
Umma Hania
Id: 19025
Department of Accounting & Information Systems
Faculty of Business Studies
University of Dhaka
12/05/2017 2

3. Company Law and Corporate
Governance

4. The concept of governance
The approach to decision making and its implementation;
It may relate with corporate world, international perspective, national, or even local
issues;
It includes analyzing formal and informal groups relating to decision making;

5. Let’s assume the decision is related to
RURAL AREAS
Thus the related groups may include
Landlord I Farmers I NGO I Political Parties
Example of governance

6. Now, Let’s assume the decision is related to
URBAN AREAS
Thus the related groups may include
Govt. I Media I Entrepreneurs I Political Parties I Donors
Example of governance

7. Corporate Governance
Maxwell and Polly Peck scandal paved the way for corporate governance;
Protecting shareholders’ rights over fraudulent managers – the problem called Agency
Problem;
Mr. Maxwell used pension funds of his Mirror Group as loans and thus disguised loans;
CEO of Polly Peck stole £29m from its account and the incident paved the way for UK
Corporate Governance Act.

8. Agency Theory
Here, agency problem results agency cost;
Discrepancy between the interest of shareholders and that of management is agency problem;
It happens as control and ownership are separate out there;

9. Example of Agency Problem
Company experienced less profit Directors want to increase their remuneration

10. Agency Theory
The cost resulting from agency problem is called agency cost;
Example includes paying additional remuneration beyond regular pay-scale to motivate them to
work for shareholders’ interest.
Another example includes hiring external auditor to verify the management assertions.

11. Problem with Agency Theory
Complex relationship between owners and management in case of large organization.

12. Improving Corporate Governance
Fair and accurate financial disclosures
Financial and non-financial disclosures show the actual financial health of an organization
Efficient independent board of directors
Deals best with legal and regulatory issues, and go for shareholders’ value maximization.

13. Stewardship Theory
The stewardship theory of corporate governance
discounts the possible conflicts between corporate
management and owners and shows a preference for
a board of directors made up primarily of corporate
insider.
Do you have any idea about stewardship
theory?

14. Stewardship Theory
based
on

15. Stewardship theory assumption
Manager basically trustworthy and attach
significant value to their own personal
reputation.

16. Stewardship theory Reduce the following basics:
Not motivated by individual goal but rather motivated
aligned with the objectives of the principles
Steward behavior will not depart from the interest of
his or her organization
Control can be potentially counterproductive

17. of the management is to monitor and
control
Agency Theory Stewardship Theory
Management act as agents Management act as stewadrs
Governance approach is materialistic Governance approach is sociological and psychological
Behaviour pattern is-
•Individualistic
•Opportunistic
•Self-serving
Behaviour pattern is-
•Collectivistic
•Pro-organizational
•trustworthy
Manager are motivated by their own objectives Manager are motivated by the principle’s objectives
Interests of the managers and principles differ Interest of the managers and principals coverage
The role of the management is to monitor and control The role of the management is to facilitate and empower
Owners attitude is to avoid risks Owners attitude is to take risks
Principal-Manager relationship is based on control Principal-Manager relationship is based on trust
Behavioural differences

18. Agency Theory Stewardship Theory
Motivation revolves around
•Lower order needs
•Extrinsic needs
Motivation revolves around
•Higher order need
•Intrinsic needs
Social comparison is between compatriots Social comparison is between principals
There is a little attachment to the company There is great attachment to the company
Power rests with the institution Power rests with the personnel
Psychological mechanisms

19. Agency Theory Stewardship Theory
Management philosophy is control oriented Management philosophy is investment oriented
To deal with increasing uncertainty and risk, the theory
advocates exercise of
•Greater controls
•More observations
To deal with increasing uncertainty and risk, the theory
advocates exercise of
•Training and empowering people
•Making jobs more challenging and motivating
Risk oriented is done through a system of control Risk oriented is done through trust
Time frame is short term Time frame is long term
The objectives is cost control The objectives is improving performance
Cultural differences revolve around
•Individualism
•Large power distance
Cultural differences revolve around
•Collectivism
•Small power distance
Situational mechanisms

20. The Fall of Enron
Company's officers
Board of directors
Chairman Lay
CEO Jeffrey Skilling
CFO Andy Fastow
Selling their Enron stock at higher prices due
to false accounting reports that made the
stock seem more valuable than it truly was.
After the scandal was uncovered, thousands of
stockholders lost millions of dollars as Enron
share values plummeted.
The collapse of energy giant Enron in 2001

21. CEO Bernard Ebbers
$400 million Loans
Interest rate of 2.15%
Not disclose in Annual report
Company's Accounting scandal hit the
news

22. Driving down its share price
From 1998 to 2001
Boeing had < 130,000 shareholders
Most of those shareholders were Boeing
employees
Purchased company stock through retirement
plans
At the same time
Boeing planning
Buying back much of its
stock

23. Goldman Sachs and the Real Estate Bubble

24. Stakeholder Theory
The stakeholder theory is grounded in many normative
theoretical perspective:
• Ethics of care
• Ethics of fiduciary relationships
• Social contract theory
• Theory of property right
• Theory of stakeholders as investors
• Communitarian ethics
• Critical theory

25. Dr. Dhiman chowdhury, professor of Accounting &
Information Systems, University of Dhaka, defined
Corporate Governance :-
 Corporate Governance is probably a control mechanism used
for efficient utilization of corporate resources.
 It can be defined as an organizational control device, which is a
hybrid of internal and external control mechanisms with view to
achieving efficient utilization of Corporate Resources.

26. Centre for Policy Dialogue (CPD)
Institute of Chartered Accountants (ICAB)
and the Institute of Bank Management (BIBM)

27. Back Up Slides

28. The Fall of Enron
• The collapse of energy giant Enron in 2001 showed how
catastrophic the agency problem can be. The company's
officers and board of directors, including Chairman Kenneth
Lay, CEO Jeffrey Skilling and CFO Andy Fastow, were selling
their Enron stock at higher prices due to false accounting
reports that made the stock seem more valuable than it
truly was. After the scandal was uncovered, thousands of
stockholders lost millions of dollars as Enron share values
plummeted.

29. The Boeing Buyback
• Aerospace leader Boeing offers an instructive example of how the
agency problem occurs in capital markets.
• From 1998 to 2001, Boeing had more than 130,000 shareholders.
Most of those shareholders were Boeing employees who
purchased company stock through their 401(k) retirement plans.
• At the same time, Boeing was planning on buying back much of its
stock, driving down its share price. The actions of the executives in
charge of caring for the company damaged the value of its
employees' retirement accounts.

30. Executive Compensation and WorldCom
• When an executive uses company assets to underwrite personal
loans, the agency problem occurs as the company takes on debts
to provide its executives with higher incomes. In 2001, WorldCom
CEO Bernard Ebbers took out over $400 million in loans from the
company at the favorable interest rate of 2.15 percent. WorldCom
did not report the amount on its executive compensation tables in
its annual report. Details of the loans did not come out until the
company's accounting scandal hit the news late that year.

31. Goldman Sachs and the Real Estate Bubble
• Another agency problem occurs when financial analysts invest
against the best interests of their clients. Investment giant
Goldman Sachs and other stock brokerage houses developed
mortgage-backed securities, known as collateralized debt
obligations, then sold them "short," betting that the mortgages
would undergo foreclosures. When the housing bubble hit in 2008,
the values of the CDO's dropped and the short-sellers made
millions of dollars. Meanwhile, millions of investors and
homeowners lost nearly everything in the collapse.

32. Criticism of stakeholder theory

33. • Who are the stakeholder?

34. Cont.…..
• Superfluous
• Corruption and chaos

35. The Anglo-American model

36. Features of Anglo-American model
• Division of ownership
• Directors and management
• Run of corporation
• Attitude of investor
• Rules of the corporation

37. German model

38. Features of German model
• Two tiered board
• Share in the company