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125 732 Theory Summary Essay

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125. 732 Theories and empirical conclusions for the following: 1. Corporate Governance
The definition of CG: Corporate governance is a major issue for all private and public companies and their stakeholders. With increasing corporate and economic globalization, corporate governance has international relevance in developing countries as well as for the global economic powers. Corporate governance is about balance. It is about balancing the interests of shareholders with those of other stakeholders in an organization - suppliers, customers, investors, employees and the community at large. It is about balancing short-term needs with the long-term sustainability of an organization. It is about protecting investors by balancing business enterprise with accountability. Components of CG and their functions: The corporate governance framework of an organization is the system of risk management, law, regulation and practice within which it operates. Public policy makers and stock exchanges around the world see the benefits of corporate governance and are setting deadlines for adherence to their own preferred corporate governance frameworks. Key components of corporate governance frameworks: 1. Independence and Separation of Duties

One of the main concerns of successful corporate governance is the implementation of policies and procedures designed to eliminate bias and conflicts of interest. In an organization that is directed by such individuals as the founder or owners and friends and family members who are engaged in the day-to-day management of the business, biases and conflicts of interest may hinder the ability of the board of directors to make independent decisions. In these cases, it is important that the board include independent directors who are capable of making decisions that keep the best interests of the company in mind rather than making decisions that benefit them individually. The roles of strategic planner and operator must also maintain a separation of duties so the planner can focus on long-term planning while the operator maintains control of day-to-day business activities. 2. Reliability of Systems and Procedures

It is important for a corporation’s systems and procedures to be both reliable and easily manageable. A lack of reliable systems and procedures can have a negative effect on the bottom line, which affects stakeholders at every level. The organization must also be able to remain in operation in a variety of contingencies, such as the illness or other unavailability of the business owner. Efficient corporate governance also includes an exit strategy for the owners of the company so the organization may continue to run smoothly in the event the owners decide to sell. Extensive documentation of all systems and procedures must be in place for the smooth transition from one owner to another or from party to party. 3. Key Performance Indicators

The use of key performance indicators (KPIs) involves the determination and measurement of the key factors that drive the business. KPIs may include a variety of indicators, such as financial measurements and operational goals. It is important to identify the appropriate KPIs to measure and manage to maintain optimal performance. KPIs are an integral part of the corporate governance of an organization in that they may be used to measure and analyze the performance of the company at every level. 4. Transparency

Transparency in all aspects of corporate governance provides greater protections for investors. For example, transparency in compensation of both employees and directors, sales incentives and other human resource practices reduces the opportunity for mismanagement and unethical practices, which may damage the organization. Effective corporate governance also helps attracts and retain high-quality employees. Agency theory (costs): Agency theory suggests that the firm can be viewed as a nexus of contracts (loosely defined) between resource holders. An agency relationship arises whenever one or more individuals, called principals, hire one or more other individuals, called agents, to perform some service and then delegate decision-making authority to the agents. The primary agency relationships in business are those (1) between stockholders and managers and (2) between debtholders and stockholders. These relationships are not necessarily harmonious; indeed, agency theory is concerned with so-called agency conflicts, or conflicts of interest between agents and principals. This has implications for, among other things, corporate governance and business ethics. When agency occurs it also tends to give rise to agency costs, which are expenses incurred in order to sustain an effective agency relationship (e.g., offering management performance bonuses to encourage managers to act in the shareholders' interests). Accordingly, agency theory has emerged as a dominant model in the financial economics literature, and is widely discusse...

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