Corporate Governance
Diane Denis → stakeholders and shareholders are not necessarily in in clonflict with each other, because companies also compete not just in financials but also on the market for the best product and workers → LT thinkingSo somewhere government involvement is needed to reduce the firm value maximization and to protect stakeholders from the negative effects of market frictions and negative externalities, however government ability its not one size fits all Problems with Stakeholder approachIt may discourage financing and make financing more expensiveIt is not clear what social obligations areThe success of management is immeasurable The fiduciary duty of the manager becomes difficult because in first instance the duty of the managers is in the interest of shareholders, and shareholder often have less protection than stakeholdersInstead → social obligations should be put into the law than managers making up their own mind. Since shareholders are residual claimants, shareholder value is taken care of in legal claims Pro stakeholder approachDue to maximization of firm value, workers can be exploited by negative externalities → especially thus when contracts are incomplete. Contracts can be thus not complete or implicit. Solutions → control rights to stakeholders, CSR, SRI, better and more law enforcements. Key not of Diane Denis → stakeholders and shareholders are not necessarily in conflict with each other, because they compete in financials it does not mean they compete in the market. Because Long term they want to have best workers and good products on the market.
Somewhere government involvement can reduce the firm value maximization and protect stakeholders from negative externalities and market frictions. However government has limitation on their one-size fits all. Why need corporate governance? → We need it so the market stays confident and thus financing does not become expensive. Because at higher financing costs Projects become not feasible → less growth Products become more expensive → higher price → less sales → less growth Become more dependent on internal sources And overall welfare lossesConflicts between different playersShareholders prefer more risk than bondholder, employers enjoy stable/keeping job and shareholder prefer larger firm return Auditors independent but are hired by the firm itselfAnalysts independent but need access to management information Conflicts between classes of players Large investors may tunnel out for own benefits form small investorsSmall investors would prefer more risk (due to diversification)Directors (inside, independent,family)Agency costs leads to reduction/more expensive financing → and this can lead to welfare losses1st agency problem → between management and shareholders2nd agency problem → between shareholders itself