Although the beginning of the banking crisis, where some banks needed a bailout by taxpayers, is seven years ago, the consequences are still observable in the global economy. Further, the crisis pointed out the grievances of actual regulations as well as succinctly regulated corporate governance.
While some economists argue that the banking crisis is evidence that the shareholder theory failed and a shift towards a more stakeholder oriented theory is indispensable, others note that the shareholder theory is still applicable by pointing out that the managers did not act in the intention of the shareholder theory by contravening basic principles of the theory. The bailout by taxpayers further extended the discussion that not only should the managers reconsider several aspects, but also the policy makers who initially had the obligation to prevent the scenario, where banks needed to be bailed out by stakeholders.
This essay will first provide an overview of stakeholder corporate governance as well as shareholder corporate governance theory and the associated critiques. Further this essay takes a glance into the practice by reporting the influences of corporate governance towards the financial crisis with a special focus on the UK. Finally, the essay will conclude possible changes towards corporate governance to prevent crises in the future.
Table of Contents
1. Introduction
2. Corporate Governance
3. Shareholder theory
3.1 Shareholder theory and its critiques
4. Stakeholder Theory
4.1 Stakeholder Theory and its critique
5. Corporate governance and the financial crisis
5.1 Possible avoidance - Instruments of corporate governance
Research Objectives & Key Themes
This essay explores the debate between shareholder-oriented and stakeholder-oriented corporate governance models, particularly in the context of the global financial crisis. It investigates whether the prevailing shareholder theory, which prioritizes profit maximization, contributed to corporate failures and assesses the efficacy of current regulatory practices in the UK.
- Theoretical analysis of shareholder versus stakeholder corporate governance.
- Critique of principal-agent conflicts and short-termism.
- Evaluation of corporate governance failures during the 2008 financial crisis.
- Comparative analysis of UK and German governance structures.
- Assessment of executive compensation and risk-mitigation strategies.
Excerpt from the Book
3. Shareholder theory and its critiques
Jensen and Meckling (1976) articulate however that the control mechanism of the shareholders towards the management only works if shareholders invest considerable time and money in order to control decisions of the management. Because shares are widely spread, meaning there are numerous shareholders with a small number of shares, the incentive to control the management on a daily basis is small. The costs incurred during the control process inhibits the shareholder further and leads to a free-rider problem, where every shareholder hopes that the other shareholder is controlling the management (Hart, 1995). Berle and Means (1932) found that a large number of firms is manager controlled and not, as the neoclassical theory assumes, owner controlled. While this is pointing out the limitations of the neoclassical theory, it strengthens the argument of Berle and Means (1932) that there is a separation of ownership and control. Ross and Crossan (2012) articulate that corporate governance is a result of the proven limitations of the neoclassical theory.
As a result of the principal-agent problem managers of large public companies do not aim for maximisation of profit after they reached an adequate level of profit. Accordingly, after shareholders earned a satisfying return, managers strive for goals that maximise their own utility and therefore pursue their own goals at the expense of shareholders (Crossan, 2007; Hart, 1995). Such conflicts could lead to empire building, where managers aggressively grow the firm by for example acquisitions or increasing number of employees, which however can have a negative impact towards profit (Hope and Thomas, 2008). Further, managers may take actions which has a positive impact on the stock market in the short run, however have a negative impact towards the value creation of an organisation in the long run, for example by underinvestment of research and development (R&D), which can be ascribed to the Myopic model (Mizik, 2010). Figure 1 illustrates the reaction of the stock market on missing long-term orientation of managers. Grant et al. (1996) argue, that such problems arise because of asymmetric information between managers and shareholders.
Summary of Chapters
1. Introduction: Outlines the persistence of post-financial crisis economic consequences and introduces the conflict between shareholder and stakeholder governance theories.
2. Corporate Governance: Examines the lack of a standardized definition of corporate governance and compares the shareholder-oriented UK/US approach with the stakeholder-oriented German model.
3. Shareholder theory: Explains the neoclassical foundations of profit maximization and the obligation of managers toward shareholders, while addressing inherent limitations in the principal-agent relationship.
4. Stakeholder Theory: Discusses the alternative approach that balances various stakeholder interests and examines the criticisms regarding the ambiguity of this model's objectives.
5. Corporate governance and the financial crisis: Analyzes the failure of governance mechanisms to prevent excessive risk-taking and reviews regulatory tools to ensure long-term stability.
Keywords
Corporate Governance, Shareholder Theory, Stakeholder Theory, Financial Crisis, Principal-Agent Problem, Profit Maximization, UK Banks, Executive Compensation, Risk Management, Neoclassical Theory, Myopic Model, Regulatory Framework, Economic Crisis, Corporate Social Responsibility, Accountability.
Frequently Asked Questions
What is the fundamental focus of this paper?
The paper examines the effectiveness of corporate governance systems in the UK, specifically debating whether a shareholder-centric model or a stakeholder-centric model is better equipped to prevent financial crises.
Which theoretical models are compared?
The analysis compares the Shareholder Theory, rooted in neoclassical economics and profit maximization, with the Stakeholder Theory, which advocates for balancing the interests of all parties impacted by corporate activities.
What is the primary research goal?
The primary goal is to determine if current corporate governance practices and regulations—which often prioritize shareholder returns—are responsible for the risk-taking behaviors that led to the 2008 financial crisis.
What scientific methodology is utilized?
The essay utilizes a literature-based theoretical analysis, reviewing key academic studies and reports (e.g., Cadbury, Jensen & Meckling, Friedman, Freeman) to synthesize arguments regarding governance failures.
What topics are covered in the main section?
The main sections cover the evolution of corporate governance definitions, the mechanics and critiques of shareholder/stakeholder theories, the role of management in the financial crisis, and recommendations for revised compensation and monitoring systems.
What are the core characteristics of this work?
Key characteristics include a critical perspective on short-termism, an emphasis on the "principal-agent problem," and a focus on how different board structures (unitary vs. two-tier) impact decision-making.
How does the UK's governance approach differ from the German system?
The UK follows a more flexible, recommendatory approach focused on shareholder value, while Germany employs a more rigid, stakeholder-oriented model that includes employee representation in board structures.
Why are performance-linked compensation systems considered problematic?
The paper discusses that while performance-based rewards are intended to align manager interests with shareholders, they can lead to short-term, high-risk "myopic" behaviors, exacerbating financial instability.
What conclusion does the author draw regarding future regulations?
The author concludes that shifting from the current recommendatory nature of corporate governance toward stricter, mandatory regulations is essential to mitigate future systemic risks.
What is the role of taxpayers in the context of this study?
Taxpayers are identified as unintended stakeholders who suffered due to bank bailouts; the author argues that managers must be made more accountable to these wider interests to avoid future crises.
- Arbeit zitieren
- Anonym (Autor:in), 2015, Shareholder corporate governance, Stakeholder corporate governance and the current situation in the UK, München, GRIN Verlag, https://www.hausarbeiten.de/document/364435
