Chapter 3a: Conflicting stakeholder

interests
Stakeholders objectives
Stakeholder theory
Objectives of the organization
Maximization

of shareholders' wealth
Separation of ownership from control

Conflicts between managers and

Short-termism
shareholders
Increase share prices and hence managerial rewards in
the short-term
Sales

maximisation

Increase market share increase company

importance increase management status
Overpriced

acquisitions

Building empire
Resistance

to takeovers

Loss of status
Relationships

Pursuit of short-term cost reduction exhausting

relationships
2

Conflicts between stakeholders

Needs

of shareholders and debtholders

may conflict
Managers

tempted to take risky decisions

Pay too much dividends
Shareholders and managers may wish to
prolong the companys life as long as possible
Managers attempt to undermine the position
of debtholders by seeking further loan capital

Conflicts between headquarters and

divisions
Allocation

of capital to the various

subdivisions by headquarters

Main sources of conflicting

Ownership control
Agency theory
Keyword:

Selfish
Thus goal congruence must be reached by many contracts
such as corporate governance.

Transaction cost economics theory

Keyword:

Governance structure
Transaction cost limited liability diversification little
direct monitoring.

Steward theory
Keyword:

responsibility
Interests of them are not always conflicting, nothing is
needed to do.

Strategies for resolution

Firm induced strategies (goal congruence)
Separation of roles
Accounting standards
Corporate governance

Goal congruence

Goal congruence exists where each of the

units within a business is seeking to achieve
personal objectives which are also in the best
interests of the business as a whole
Profit-related pay or economic value-added
pay
Rewarding managers with shares
Executive share options plan (ESOPs)
Problem: may encourage management to
adopt creative accounting method
7

Corporate governance

the Cadbury Report defines corporate governance

as 'the system by which companies are directed
and controlled'.
Balance:
Separating

the role of chairman and CEO

Non-executive directors to the board
Remunerating, audit & nomination committee

Fairness: remuneration
Independence: audit
Internal control: Risk management
Problem: Its costly, and may effect efficiency and
initiative

Corporate governance in the UK

The Cadbury Report (1992): the control functions of boards

and the role of auditors
The Greenbury Report (1995): the setting and disclosure of
directors remuneration
The Hampel Report (1998): brought together the previous
recommendations and submitted a proposed code to the
Stock Exchange which listed companies should comply with.
The Combined Code (1998): provides a number of general
principles and more detailed best practice guidelines for
companies. These relate to the directors and the balance of
power on the board, directors remuneration, communication
with shareholders and financial reporting and audit.
UK Corporate Governance Code (2010)
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Comparison between UK and USA

models

US

The role of stock markets is even more important

than UK
Financial Accounting Standards are often stricter
than the equivalent UK accounting standard

CG system is controlled by legislation (SarbanesOxley Act) and regulation of SEC

CEO&CFO must give up bonuses if not obey it

While its self-regulation in UK

Emphasis on audit committee

Would never be listing without it while it less important in UK

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Comparison of traditional UK practice

with the practices of other countries

Germany: institutional differences

The role of stock markets is not so important
Reporting requirement is based in tax law
Banks often hold equity, representatives of these
banks sit on the supervisory board
Two-tier board

supervisory board responsible for general policy

executive board dealing with management issues

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Comparison of traditional UK practice with

the practices of other countries
Japan: cross shareholdings

In Japan the system works on consensus, with all

stakeholders expected to work together in the best
interests of the company.
The role of stock markets is not important
A very close relationship exists between the banks and
companies, banks commonly represented on the board
of directors.
Three different types of board of directors

Policy boards
Functional boards
Monocratic boards

Long-term business relationships with banks, suppliers

and customers, buying each others shares as a symbol
of the relationship.
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Comparison of traditional UK practice with

the practices of other countries

South Africa
King

Report
Advocating an integrated approach to
CG in the interest of a wide range of
stakeholders

13

Comparison of traditional UK practice with

the practices of other countries

OECD guidance
Interest

in CG arises from its concern for

global investment
OECD principles
The

rights of shareholders
The equitable treatment of shareholders
The role of stakeholders
Disclosure and transparency
The responsibilities of the boards
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