INTRODUCTION One of the most vital key ingredients for a company if its wants to survive is to have a clean good

corporate governance, where all the role and the rights of corporate elements are well presented and run as it should to guarantee that the company is able to maximize the return to the owners as it is the main purpose of a corporation. However though, not all of the companies out there in this world run their activities based on this idea, not to mention the obstacles found by them who intended to implement it. This corporate governance often put a company into a crisis where it seems that a company lost on their way to achieve their purpose as I mentioned above. Due to the purpose of doubling the owner s profit, managers as the executives of one company could sometimes do anything they could to achieve an acknowledgement of their good work and further higher bonuses and promotions as a concrete for of those acknowledgments. Meantime, many researchers, and practitioners are all trying to see this situation with a deeper perspective, trying to define what corporate governance really means, what are the elements included in this concept, and what would be the impact for one company if they implement this idea and what would it be if they re not. Many comes with definitions, and approaches, anomalies to study, and many other problem solving materials, found by years of research and real life cases and evidences. This paper made and aimed to compile some of those definitions, and perspectives, so that we can all see this idea of corporate governance in many point of views. This paper is also including one real example how a company would deal with this concept when by nature, it operates on places where culture values have making it hard to do in a most possibly the right way to do it.

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EXAMPLE: SOUTH EAST ASIA CORPORATE GOVERNANCE One of the good examples where we can actually see how a company in such a great need to implement an idea of good corporate governance and yet struggling with some nasty situation related to the fact that it is operated in a place where internal situations like the fact that it is a family corporations and external situations like socio-political aspect really affecting the stand ground of one company is the example of what was happening to south-east Asia and the nations of that region during and after the Asian financial crisis in 1997. In 1998, the Asian Development Bank (ADB), launched a study to assist countries that were most affected by the crisis and determine what factors resulted in the extent of damage suffered by this countries. The findings show that poor corporate governance was one of the major contributors to the building up vulnerabilities that finally led to the crisis in 1997 . One feature that considered responsible of this situation is the fact that in East Asia is controlled by large families. This featured are marked by the characteristic of a significant family control and interlocking shareholdings among affiliated firms. This clearly has a potential to create problems for the companies corporate governance, because the ownership structures give insiders excessive power to pursue their own interests. The ADB stated that this problem was one that could be solved by internal checks on the company structures; at this end many South-East Asian countries have enacted legislation regulating directors duties as well as guidelines to achieving good corporate governance. A study carried out by the World Bank in 2003 showed that family businesses made up the following proportions of total market capitalization in these South East Asian countries. In certain countries where effective legislation is in place, the dominance of family business structures may be used to promote principles of good corporate governance. Family businesses have the valuable characteristic of having an incentive to keep in place long-term strategies that aim to transfer the company to the next generation in better condition than it was when received from the preceding generation . This differs significantly from the short-term goals of most companies aiming to maximize profitability in the current period. By taking initiatives directed at the long-term improvement in performance, it is submitted that family businesses
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Corporate governance is not a new issue to discuss. and the theories tagged along the definitions. the management and control of companies is increasingly separated from the ownership. which consist of requiring 3 . which basically means corporate governance that is done in the right way. The family business structure gives rise to various interesting discussions with regards to corporate governance. Managers may seek to maximize their own-self interest at the expense of shareholders. And along the way. While the owners seek to gain information (by evaluation). commentators often talk as if the invisible hand has yet to guide the governance to an equilibrium point. It is happened where the CEOs of public companies have responsibility to act as agents for the owners. shareholders and managers and of controlling and minority shareholders. It is in line with the Agency Theory that pointing out the importance on separating day to day corporate management from the owners to the managers. The purpose of the separation system is to create efficiency and effectiveness by hiring professional agents in managing the company.have encouraging prospects of practicing good corporate governance. Furthermore this separation may lead to a lack of transparency in the use of funds in the company and in the proper balancing of the interests of. reforms . CORPORATE GOVERNANCE: DEFINITIONS In modern economies. with such a mindset. That is. This leads to various definitions stated by these researches. and how a company would implement this mechanism on how it operates. Much of the confusion concerning corporate governance likely occurs because discussions of governance issues typically assume implicitly governance is out of equilibrium. unlike other economic activity. they also develop a concept of good corporate governance . for instance. develop incentive systems to ensure agent actions in the owner's interests. including what are the roles of stakeholders. and these are reflected in many South East Asian legal frameworks. for years researches been trying to understand what corporate governance is. However there is a problem in this separation of corporate management and ownership as well.

that corporate governance consists of two elements: 1. rather ponderously. and the means of attaining those objectives and monitoring performance are determined. can seem a sensible course of action. its board. Corporate governance is known as the shareholder s model of governance. The OECD Principles of Corporate Governance states: "Corporate governance involves a set of relationships between a company s management." While the conventional definition of corporate governance and acknowledges the existence and importance of 'other stakeholders' they still focus on the traditional debate on the relationship between disconnected owners (shareholders) and often self-serving managers. Corporate governance also provides the structure through which the objectives of the company are set. The concept of corporate governance can be defined as a set of mechanisms for directing and controlling and enterprise for the company operational in accordance with the expectations of stakeholders. 4 . 2. its shareholders and other stakeholders. the concept of Corporate Governance is a concept that focuses on the harmonious relationship organs of the company (shareholders. This implies an adversarial relationship between management and investors. and is one of the reasons why it prescribed in some detail the way in which the board should conduct itself: consistency and transparency towards shareholders are its watchwords. board of commissioners and board of directors who manage the company. Narrowly. Indeed it has been said. incentives for manager and communications between management and investors. This was the basis for much of the rationale of the Cadbury Report. and an attitude of mutual suspicion. The concept of CG has a narrow or broad perspective.all firms to adopt what seems to be a good idea or has been shown historically to be a trait associated with the good-performing firms. The transactional relationship which involves dealing with disclosure and authority.). The long term relationship which has to deal with checks and balances.

Participants who contributed to the capital known as the owner (the principal). the owner will leave the company without an assurance that the capital that has been placed will not be channeled to investments or projects that are not profitable. Chandler and Bratton said that until the year 1970. 2. employees. whereas participants who contribute the expertise and labor is called the agent (management company). expertise and manpower in order to maximize profits in the long term. the concept of Corporate Governance faced with two main issues: 1.In the shareholder model of governance. The company is a nexus of contracts means that within the company there is a set of contractual reciprocity (quid pro quo contract) that facilitates the relationship between company owners. After making the placement of the capital owned. 2002). the company is a mechanism that provides the opportunity for several participants to contribute to the capital. 2002). The Problems of Incomplete Contracts After 1970 came a new economic theories of the firm. The direct effect of this idea can still be felt today. These theories put forward by Alchian and Demset'z (1972) and Jensen and Meckling (1976). causing the problems concerning the mechanism should be established to harmonize the different interests between them. The existence of two participants (the owner and agent). suppliers. and various other 5 . especially among practitioners and decision makers that specifically discuss the company's shareholders as owners and GCG as a problem which basically related to the separation of ownership and control of the company (Learmount. Agency Problems According to Monks and Minow (1995). Alchian and Demset'z and Jensen and Meckling introduced the idea that the company is a nexus of contracts (Learmount. the agency issues related to the legitimate use of power by the dichotomy between capital owners and agents became a central element that dominates the research in the company.

I would like to give you IFC s point of view on why corporate governance is important. and for the benefit of individual companies themselves. not just for us as outside investors. Tersa Barger. Director of IFC/World Bank Corporate Governance Department. for example the right to make decisions in the management of an investment deal with conditions that are different from what was planned. The cause of the absence of complete contracts are not to be expected every possibility that happen in the future due to cost constraints or to anticipate every possibility. 2004). but for the Government of Vietnam. the allocation of residual control for capital owners are often not effective because most of the capital owners often do not have the ability or do not have enough information to know what to do. clear lines of authority and good risk management. as well as the wealth of the Government. even if capital owners also receive control rights in order to decide something unexpected. Grossman and Hart (1986) describes this as residual control rights. as some of you no doubt are currently contemplating. as quoted of her speech below. professional management. for Vietnam's long-term economic success. Companies. will 6 . on her opening speech for 2004 Vietnam OECD/World Bank Asia International Roundtable Meeting on Corporate Governance. In fact. all of which promote business success and improved profitability. The absence of complete contracts has led to the emergence of numerous conditions that require control measures in the management of companies that are not explicitly stated in the contract. namely the right to make decisions in situations not described in the contract. who turn to outside sources of capital. As this is the first meeting. pointed why corporate governance is such an important thing to secure the investor's interests.participants associated with the company (Fan. Good corporate governance in a business enterprise promotes operational efficiency. and also to describe the appropriate actions in all situations possible. Maher and Andersson (2000) states that it is impossible to create a complete contract between the investors and agents who can detail the division of profits between capital owners and agents.

or associations (institutes) of directors and managers with the support of governments and international organizations. better products. institutional investors. leading to a more fair collection of tax revenues. and the development of a level playing field for fair competition. and therefore are more likely to work with companies that have made strides in this area. benefit from better corporate governance by increased transparency. Fair competition leads. ultimately. corporations. Corporate Governance concept like this is known as stakeholder model of governance. widely Corporate Governance concept is a concept that focuses on the responsibility a company to a number of stakeholders. As a rule. Furthermore. to faster economic growth as individuals and companies see that their investments will be protected. Corporate governance principles and codes have been developed in different countries and issued from stock exchanges. equate good corporate governance with operational success and lower investment risk. compliance with these governance recommendations is not mandated by law. However. allowing them to invest in increased productive capacity.need to demonstrate sound governance to investors and lenders. in addition to owners or shareholders. The interested parties include the creditors and social constituencies such as members of the community where the company is located. Such disclosure requirements exert a significant pressure on listed companies for compliance. Within the framework of his analysis. as well as local government and central government. For example. the environment. Investment in production leads to better technologies. Outside investors. increased employment and a growing economy better able to support an improving social infrastructure. like IFC. companies quoted on the London. stakeholder model of 7 . where not. they must disclose whether they follow the recommendations in those documents and. Toronto and Australian Stock Exchanges formally need not follow the recommendations of their respective codes. and the people they serve. Governments. although the codes linked to stock exchange listing requirements may have a coercive effect. So corporate governance and investment are part of a virtuous circle. they should provide explanations concerning divergent practices.

The United States. Tyco. (2) the management (led by the chief executive officer). there has been much criticism as well as cynicism by both citizens and the business press about the poor job that management and the BODs of large corporations are doing. WorldCom. Enron. There is a popular tendency to view shareholders as the owners of public corporations which affects some "definitions" of corporate governance. There is. Canada face more than 100 provincial and federal laws governing director liability." It has been suggested that the Indian approach is drawn from the Gandhian principle of trusteeship and the Directive Principles of the Indian Constitution. Such malfeasance has led to the erosion of the public s trust in the governance of corporations. depending on the state in which the corporate charter issued. It is about commitment to values. however. board members in Ontario. but this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions.governance emphasizes the company s presence as an intuition that should be socially responsible and as an institution that must be managed for public purposes (Maher and Anderson. and (3) the board of directors. the report of India's SEBI Committee on Corporate Governance defines corporate governance as the "acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. For example. Laws and standards defining the responsibilities of boards of directors vary from country to country. The boards of directors are the elected representatives of the shareholders. nevertheless. about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company. and ImClone Systems. We only have to look at the recent scandals at firms such as Arthur Andersen. a developing worldwide consensus 8 . 2000). STAKEHOLDERS AND THEIR ROLES The primary elements of Corporate Governance are: (1) the shareholders. For example. They are charged with ensuring that the interests and motives of management are aligned with those of owners. has no clear national standards or federal laws. specific requirements of director vary. Recently.

2. Germany. or supervising top management 4. Reviewing and approving use of resources 5. overall direction. Boards can range from being phantom boards with no real involvement to catalyst boards with a very high degree of involvement. agree or disagree with them. monitoring. Caring for shareholder interests How does a board of directors fulfill these many responsibilities? The role of board directors in strategic management is to carry out these basic tasks: 1. A boar should at least carry out this task. mission. Controlling. Hiring and firing the CEO and top management 3. decisions. Monitor: by acting through its committees. Finland. a board can keep abreast of developments inside and outside the corporation. and Venezuela) revealed strong agreement in following board of director responsibilities. the Netherlands. bringing to management s attention developments it might have overlooked. or vision 2. 9 . Evaluate and influence: a board can give examine management s proposals.concerning the major responsibilities of a board. Initiate and determine: a board can delineate a corporation s mission and specify strategic options to its management. 3. which shows the possible degree of involvement (from low to high) in strategic management process. Setting corporate strategy. Switzerland. Research suggests that active board involvement in strategic management is positively related to corporation s financial performance and its credit rating. give advice and offer suggestions. and actions. France. Interview with 200 directors from eight countries (Canada. Only the most active boards take on this task in addition to the previous ones. listed in order of importance: 1. and outline alternatives. More active boards perform this task in addition to monitoring. Another explanation of Board of Director s involvement can be seen on Board of Directors Continuum. the United Kingdom.

The boards of most publicly owned corporations are composed of both inside and outside directors. only slightly more than 32% of the boards help develop the strategy. The typical large U. there is a trend in United States to increase the number of outsiders on boards. the less active its board of directors. influencing. initiating. Another 1% admits playing no role in strategy. Generally. for example. and determining very seriously. More than two-thirds of the boards review only after it has first been developed by management.S.Highly involved boards tend to be very active. they provide advice when necessary and keep management alert. there is no need for an active bard to protect the interests of the owner-manager shareholders-the interests of the owners and managers are identical. In this case. Nevertheless. the smaller the corporation. corporations conducted by Korn/Ferry International. whereas in France 10 . evaluating. fortune 1000 corporation has an average of 11 directors. For example in a survey of directors of large U. inside directors (sometimes called management directors) are typically officers or executives employed by the corporation.S. the privately held corporation may be 100% owned by the founders-who also manage the company. companies.S. 2 of whom insiders. Even though outsiders amount for slightly over 80% of board members in these large U. corporations (approximately the same as in Canada). Their heavy involvement in the strategic management process places them in active participation or even catalyst position. They take their tasks of monitoring. as measured by return on equity. 54% of the respondents indicated that their boards participate in an annual retreat or special planning session to discuss company strategy. Boards in the UK typically have 5 inside and 5 outside directors. more than 60% indicated that they were deeply involved in the strategy-setting process. Although there is yet no clear evidence indicating that a high proportion of outsiders on a board results in improved financial performance. In the same survey. In an entrepreneurial venture. Outside directors (sometimes called non-management directors) may be executives of other firms but are not employees of the board s corporation. This and other studies suggest that most large corporation s have boards that operate at some point between nominal and active participation.S. they account for only 42% of boar membership in small U.

Excluding all insiders but the CEO reduces the opportunity for outside directors to see potential successors in action or to obtain alternate points of view of management decisions. Boards with a larger proportion of outside directors tend to favor growth through international expansion and innovative venturing activities than do boards with a smaller proportion of outsiders. outside members. Rather than use the firm for their own ends. In contrast those who prefer inside over outside directors contend that outside directors are less effective than are insiders because the outsiders are less likely to have the necessary interest. availability. involving getting things accomplished through and with others in order to meet the corporate objectives. in contrast. The SEC also required that all listed companies staff their audit. because of their long tenure with the corporation. Top management responsibilities. Stewardship theory proposes that. This is the main reason why the U. Outsiders tend to be more objective and critical of corporate activities. People who favor a high proportion of outsiders state that outside directors are less biased and more likely to evaluate management s performance objectively than are inside directors. insiders (senior executives) tend to identify with the corporation and its success. compensation. Securities and Exchange Commission (SEC) in 2003 required that a majority of directors on the board be independent outsiders.boars usually consist of 3 insiders and 8 outsiders. which states that problems arise in corporations because the agents (top management) are not willing to bear responsibility for their decisions unless they own a substantial amount of stock in corporation. This view is in agreement with agency theory.S. Japanese boards. especially those of CEO. or competency. and nominating/corporate governance committees entirely with independent. these executives are thus most interested in guaranteeing the continued life of the corporation. Top 11 . Outside directors may sometimes serve on so many boards that they spread their time and interest too thin to activelu fulfill their responsibilities. The theory suggests that a majority of a boar needs from outside of the firm so that top management is prevented from acting selfishly to detriment of shareholders. contain 2 outsiders and 12 insiders.

to boost financial performance. The view is widely held that executive compensation is not closely linked to performance measured by changes in the value of the firm. Successful CEOs are noted for having a clear strategic vision. They are often perceived to be dynamic and charismatic leaders-which is especially important for high firm performance and investor confidence in uncertain environment One view is that the conflict of interest between owners and managers would be substantially reduced if executive compensation plans more tightly related to performance. this relationship may be least partially explained by large value of the firm in relation to executive compensation.003. Specific top management task vary from firm to firm and are developed from an analysis of the mission. objectives.management s job is thus multidimensional and is oriented toward the welfare of the total organization. 12 . In addition. derived Jensen and Murphy results from some leading models of principal-agent theory. this is argued to demonstrate that executive pay is not linked to performance. using some reasonable parameter assumptions. or 0. a strong passion for their company. and key activities of the corporation. However. A diversity of skills can this very important. most successfully handle two primary responsibilities that are crucial to the effective strategic management of the corporation: (1) provide executive leadership and strategic vision and (2) manage the strategic palling process. with the support of the rest of the top management team. The CEO. Research indicates that top management teams with a diversity of functional and educational backgrounds and length of time with the company tend to be significantly related to improvements in corporate market share and profitability. highly diverse teams with some international experience tend to emphasize international growth strategies and strategic innovation especially in uncertain environment. A large impact on executive wealth position could have strong motivational influences. Tasks are typically among the members of the top management team.3%. Haubrich (1994). Jensen and Murphy (1990) found that executive pay changes by only $3 for a $1. an elasticity of 0. and an ability to communicate with others.000 change in the wealth of the firm.

This result suggested that the board and ownership variables were proxies for the effectiveness of the firm s governance structure controlling agency problems and not the determinants of the CEO s equilibrium wage. The board and ownership structures affected the extent to which CEOs obtained compensation in excess of level implied by the economic determinants. Core. and outside directors were older and served on more than three other boards. The sample consisted of 495 observations for 205 publicly traded U. showed that board of director characteristics and ownership structure were significantly related to the level of CEO compensation. With respect to ownership s variables. and Larcker used a second set of regressions between the compensation predicted by the board and ownership variables and the subsequent operating and market performance of the firm. Holthousen.Core. and Larcker (1999).S firms over the period 1982 to 1984. CEO compensation was lower the greater percentage of inside directors that sat in the board. there were more outside directors considered gray (the pay). The compensation data were collected by a major consulting firm using mail surveys. firms with weaker governance structures had greater agency problems. The cross-sectional regression. 13 . CEO compensation was lower when the CEO s ownership was higher and when the large blockholders were present (either non-CEO internal board members or external blockholders who owned at least 5% of the equity). controlling for the economic factors. examined the association between firm s corporate governance structure and level of CEO compensation and the future performance of the firm. Firms with greater agency problems did not perform as well. They found a significant negative relationship. Holthousen. With regard to board of director variables. CEOs of firms with greater agency problems were able to obtain a higher compensation. CEO compensation was higher when side directors appointed by the CEO. Thus.

Base bonus and stock option plans on stock appreciation 3. A wider peer group c. Despite the primacy of generating shareholder value. Such actions would likely lead to negative outcomes such as alienated employees. customers) who must be explicitly taken into account in the strategic management process. increased governmental oversight and fines. ignoring issues related to conservation of natural environment to save money.These are some proposal to improve pay for performance policies have been made in recent years: 1. Stock appreciation benchmarks shoul consider: a.S. Each stakeholder group makes various claims on the company. Limit the base salaries of top executives 2. corporations owe something to their workers and the communities in which they operate and that they should sometimes sacrifice some profit for the sake of making things better for 14 . suppliers. Pay directors mainly in stock of the corporation with minimum specified holding periods to heighten their sensitivity to firm performance. and exerting excessive pressure on suppliers to lower prices can certainly harm the firm in the long run.g. Broader stock market indexes 4. A stakeholder can be determined as an individual or group inside or outside the organization s performance.S. and disloyal suppliers. general public by Harris Poll revealed that 95% of the respondents felt that U. Institute company loan programs that enable top executives to buy substantially impact the wealth position of the top executives 6. Clearly. Base stock options on a premium of 10% to 20% over the current market and do not prerace them if the shares of the firm fall below the original exercise prices 5. Close competitors b. in addition to shareholders. A survey of the U. For example decisions such as mass layoffs to increase profits. there are other stakeholders (e. managers who focus solely on the interest of the owners of business will often make poor decisions that lead to negative unanticipated outcomes.

as the shareholders are 5. These negative feelings receive some support from a study that revealed that the CEOs at the 50 U. For example.S firms overall (only 9% increase). Definitions are vary among these elements of stakeholders. In essence. Trade unions: some argue that this group is redundant with the employee group 6. Management: controversial. People were concerned that business executives seemed to be more interested in making profits and boosting their own pay than were in the safety and quality of the products made by their companies. Creditors: creditors rights are often protected under contract and backed by collateral so they are seldom treated as owners. 15 . Shareholders: some would say that shareholders are the first stakeholder 3. The local community: broader definitions of stakeholders widen the concept to include responsibility to future generations those who will one day be reliant upon the physical environment as a stakeholder group.S. Evan and Freeman argue that managers have an additional duty to maintain the health of the company by keeping stakeholder demands balanced. there are arguments saying that each one of the group of stakeholders holds the position of main stakeholders: 1. There are two opposing ways of looking at the role of stakeholder management in strategic management process.their workers and communities. Employees: there is widespread argument that they are the prime stakeholder 2. Customers: most stakeholder models include customers 7. but some believe that managers are stakeholders. In this view. which makes them stakeholders 4. the role of management is to look upon the various stakeholders as competing for the organization s resource. The first one can be termed zero sum . the gain of one individual or group is the loss of another individual or group. Suppliers: often considered stakeholder 8. companies that outsourced the greatest number of jobs received a greater increase in pay (up 46%) from 2002 and 2003 than did the CEOs of 365 U.

participants might have personal goals. 1982.Although there will always be some conflicting demands. the managers are agents of the owners. contracts are unable to envisage the many changes in conditions that develop over the passage of time. managers. and payoffs under various conditions. the operations of the firm are conducted and controlled by its managers without major stock ownership positions. Workers receive wages. In this framework. the literature has expressed concern about the separation of ownership and control (Berle and Means. That is. there is value in exploring how the organization can achieve mutual benefit through stakeholder symbiosis. Fama and Jensen. conflict of interest arises between the owners and managers. lenders) and defines their rights. The contractual nature of the firm implies multiple stakeholders. Alchian and Woodward. 1988. shareholders. which recognizes that stakeholders are dependent upon each other for their success and well-being. A basic issue is the role of market transactions (and their relative costs) versus organization processes as alternative models of governance (Williamson. customers. owners. but in practice they may control the firm in their own interests. Contractual Theory of the Firm The contractual theory of the nature of the firm has become widely held (Alchian. Also. 1983b). The shareholders hold residual claims on cash flows. Their interest must be harmonized to achieve efficiency and value maximation. Although contracts define the rights and responsibilities of each class of stakeholders in a firm. actual and implicit. In recent years. wage earners have been paid in part in the common stock of the firm in ESOPs or in return for wage concessions. managers acknowledge the interdependence among employees. It vies the firm as a network of contracts. In general. potential conflicts can occur. 1999). obligations. as well. Warrants and convertibles add equity options to debt contracts. and the community at large. Most participants contract for fixed payoffs. In theory. 1983a. 16 . Creditors receive interest payments and are promised the repayment of principal at the maturity of debt contracts. that specify the roles of the various participants or stakeholders (workers. Thus. suppliers. 1932).

in effect. In fact. such as acquisitions. top managers are. Agency Theory versus Stewardship Theory in Corporate Governance Managers of large. additional monitoring expenditures (agency costs) are required. and (3) change in organization systems to limit the ability of managers to engage in the undesirable practices. furniture. (2) various kinds of bonding assurances by the managers that such abuses will not be practiced. Agency theory. Agency theory is concerned with analyzing and resolving two problems that occur in relationships between principals (owner/shareholders) and their agents (top management): 1. The real owners (shareholders) elect boards of directors who hire managers as their agents to run the firm s day-to-day activities. most of today s top managers own only nominal amounts of stock in the corporation they manage. and rugs. The agency problem that arises when (a) the desires objectives of the owners and the agents conflict or (b) it is difficult or expensive for the owners to verify what the agent is 17 . modern publiclt held corporations are typically not the owners. management might emphasize strategies. To deal with agency problems. This functional ownership can lead managers to work less strenuously and to acquire more perquisites (luxurious offices.Jensen and Meckling (1976) developed a number of aspects of the divergence of interest between owners and management (their agent). They described how the agency problem results whenever manager owns less than the total common stock of the firm. Agency costs include (1) auditing systems to its limit this kind of management behavior. As suggested in the classic study by Berle and Means. hired hands who may very likely be more interested in their personal welfare than that of the shareholders. that increase the size of the firm (to become more powerful and to demand increased pay and benefits) or that diversify the firm into unrelated businesses (to reduce short-term risk and to allow them to put less effort into a core product line that may be facing difficulty) but that result in a reduction in dividends and/or stock price. For example. company cars) than if they had to bear all of the costs.

and when a high percentage of board members are inside (management) directors. Executives may not select risky strategies because they fear of losing their jobs if the strategy fails. stewardship theory argues that in many instances top management may care more about a company s long term success than do more short term oriented shareholders. research indicates a positive relationship between corporate performance and the amount of stock owned by the directors. The relationship between the board and the top management is thus one of the principal and steward.actually doing. agency theory suggests that top management have a significant degree of ownership in the firm and/or have a strong financial stake in its long-term performance. Because executives in a firm cannot easily leave their jobs when in difficulty. The risk-sharing problem that arises when the owners and the agents have different attitudes toward risk. not principal and agent (hired hand). According to agency theory. these executives are most interested in guaranteeing the continued life and success of the corporation. suggests that executives tend to be more motivated to act in the best interests of the corporation than in their own self-interests. To better align the interest of the agents with those of the owners and to increase the corporation s overall performance. the likelihood that these problems will occur increase when stock is widely held (that is. stewardship theory argues that senior executives overtime tend to view the corporation as an extension of them. Rather than use the firm for their own ends. they more interested in a merely satisfactory return and put heavy emphasis on the firm s continued survival. such as pay and security. when the board of directors is composed of people who know little of the company or who are personal friends of top management. 18 . in contrast. In support of this argument. when no one shareholder owns more than a small percentage of the total common stock). This. A diversified investor may care little about risk at the company level-preferring management to assume extraordinary risk so long as the return is adequate. Stewardship Theory. One example is when top management is more interested in raising its own salary than in increasing stock dividends 2. Whereas agency theory focuses on extrinsic rewards that serve on lower-level needs.

It does this by emphasizing and promoting the positive traits in corporate participants. and the important implications of this positive emphasis on the corporation and its performance and sustainability. Education is considered to have an important role to play in this systematic development. Virtue ethics is fundamentally concerned with the character or attributes of a person that allow that person to best perform their role [as director. In this respect. sustainable environment. first advocated by Aristotle in The Nicomachean Ethics. healthy relationships on a professional and personal level). There is a focus on character and how it can be enhanced. to recognize their personal strengths and virtues. Positive corporate governance recognizes the dominance of the corporation in modern society and places enormous faith in the corporation as a facilitator of positive outcomes in society (strong employment. Positive corporate governance represents a movement that views the behavior and motivations of corporate participants (particularly executives) in a positive light (and is thus a significant departure from the anti-management approach which presently maintains support in law faculties and management schools). rather than emphasizing the utility of rules. executive or otherwise]. 19 . how these traits can be materialized through the corporation (as well as how these traits can be brought to the corporation). it could be said that there are close parallels between positive corporate governance and virtue ethics . This provides positive corporate governance with a solid normative grounding.Positive Corporate Governance James McConville on German Law Journal is explaining a concept named as Positive Corporate Governance. which derived from a psychological term named positive psychology. a one way to see corporate governance in behavioral and motivational point of view. and to promote the tangible implications that this positive perspective has for corporate governance (in particular the regulation of internal governance arrangements and the performance of companies). and which has since been applied in contemporary management literature and thinking to infuse management with moral accountability and autonomy. a concept that was developed by Martin Seligman in 2000.

e. the task becomes directing this natural competitive instinct (with the help of education both in and outside of the corporation) to promote more 20 . The development of increased interest in corporate governance reflects higher expectations by the public and investment community that greater efforts be made by listed public companies to develop structures and procedures so as to ensure management is effective and acts in the interests of shareholders and adopts appropriate standards of corporate behavior. formal legal rules) designed to perform a reward or punishment function in an effort to control the behavior of managers. and the individuals within the corporation. In embracing positive corporate governance. but rather one s relative position. Under this approach. happiness comes not from money per se. Corporate governance best practice seeks to provide the mechanisms which align the interests of management with those of shareholders. what we have seen in recent years is a change in the dynamics of regulation in relation to corporate governance from adherence to internal norms to the emergence of external regulatory mechanisms (i. the corporation. cannot be trusted to regulate their own internal arrangements without some external oversight and imposition of external rules.Because of the concentration on human weaknesses inside the corporation rather than recognizing and fostering strengths. In their text. Lipton and Herzberg make it quite clear that regulation of corporate governance is based entirely on the presumption that directors and managers of modern public corporations need to be kept accountable. Positive corporate governance may just be the answer to the problematic decoupling of executive pay from company performance that we have recently witnessed. Positive corporate governance contends that for the overwhelming majority of corporate executives. Understanding Company Law (2003).. One of the areas of corporate governance where positive corporate governance has significant implications is executive compensation. This is because the negative agency problem is considered the underlying and ultimate justifying force for external regulation of corporate governance. Positive corporate governance has some significant implications for the regulation of corporate governance.

chairman of the SEC during much of 1990. This earlier failure to reform the accounting industry contributed to the breakout scandals in the United States. First of all. However. legal. reform efforts in Korea were partially successful. For example. governance reform is easier said than done. which were basically afraid of losing their private benefits of control. reform requires: (1) strengthening the independence of board of directors with more outsiders (2) enhancing the transparency and disclosure standard of financial statements. It is not easy to change historical legacies. Although some countries face more serious problems than others. Nevertheless. Among the other things. and they will resist any attempt to change the status quo. p. existing governance mechanisms have failed to effectively protect outside investors in many countries. and (3) energizing the regulatory and monitoring the function of stock exchange commission. many parties have vested interests in the current system. such as pay for performance to achieve the same objectives. partly because the weight and prestige of the government were behind them and partly because public opinion was generally in favor of reform. as we have seen from the experiences of many countries. the existing governance system is a product of historical evolution of the county s economic.productive endeavors . the Korean government led efforts to reform the country s chaebol system but met with stiff resistance from the founding families. 21 . In another example. and will do so with little regard for public interest. It is noted that former executives of WorldCom were indicated allegedly orchestrating the largest accounting fraud in history. Arthur Levitt. They will do everything possible to protect their franchise. June 17. in Levitt s word (The Wall Street Journal. Second. attempted the use of lobbyists and advertising. 2002.as opposed to relying on conventional methodologies. with the help of conniving auditors. Corporate Governance Reform There is a growing consensus that corporate governance reform should be a matter of global concern. C7): The ferocity of the accounting profession s opposition to our attempt to reform the industry in a few years ago is no secret . and political infrastructure. following the Asian financial crisis.

It did the following: established an oversight board to monitor the accounting industry. in July 2002 congress passed the Sarbanes-Oxley Act (commonly called SOX) SOX focused on eliminating the many disclosure and conflict of interest problems that had surfaced it. and attorneys. established corporate board structure and membership guidelines. and between corporate directors. in United States. Accounting regulation The creation of a public accounting oversight board charged with overseeing the auditing of public companies. auditors. mandated instant disclosure of stock sales by corporate executives. Internal control assessment Public companies and their auditors should assess the effectiveness of internal control of financial record keeping and fraud prevention 4. and increased securities regulation authority and budgets for auditors and investigators. The misdeeds derived from two types of issues: (1) false disclosures in financial reporting and other information releases. Audit committee The company should appoint independent financial experts to audit its audit committee 3. and (2) undisclosed conflicts of interest between corporations and their analysts. and restricting the consulting services that auditors can provide to clients 2. In response to these fraudulent disclosures and conflicts of interest. and shareholders. officers. 22 .Sarbanes-Oxley Act of 2002 Beginning in 2000. numerous corporate misdeeds were uncovered and disclosed by various regulatory bodies. strengthened accounting disclosure requirements and ethical guidelines for corporate officers. Executive responsibility Chief executive and finance officers must sign off on the company s quarterly and annual financial statements. these officers must return any bonuses. The major components of SOX are: 1. tightened audit regulations and controls. If fraud causes an overstatement of earnings. established guidelines with regard to analyst conflicts of interest. toughened penalties against executives who commit corporate fraud.

Oliver. (2010). Bond University McConvill. Restructuring. Thomas L. J... McGraw-Hill: New York Fremond. Vietnam Lim. (2006). Positive Corporate Governance and Its Implications for Executive Compensation. John E. Why Corporate Governance Matters for Vietnam. Lenice. German Law Journal Weston.html http://www. David F.David.iigc. New Jersey Wheelen. Mitchell. (2007).id Forum for Corporate Governance in Indonesia http://en. Journal of Financial Economics Dees. The Role of Stakeholder. Publisher unknown http://www. Lawrence J. (2007). New Jersey 23 A Survey of Australian and Soth East Asian ..org Indonesian Institute of Corporate Governance http://www.applied-corporate-governance. Pearson Inc. (2005).References: Core. B. Text and Cases... Pearson Education. Robert W. (2000). Optimal and Mandatory Transparacy: Implications for Corporate Governance Regulation. Mark L. Principles of Managerial Accounting. Larcker. Pearson-Addsion Wesley: Boston Hermalin. Chief Executive Officer Compensation. Hughes J. 2004.. Takeovers. and Firm Performance.Fred. Publisher unknown Gitman.. (2006).. Strategic Management and Business Policy.or. (2006).fcgi. Resnick. Faculty of Law. Eun.. Strategic Manajemen. James. McGraw-Hill: New York. (1999). T. Weisbach. Holthausen... (2004). Inc. Benjamin E. and Corporate Governance. Corporate Governance. G.com/definition-of-corporate-governance. Corporate Governance Systems. Michael S. Lumpkin...wikipedia. Gregory G. A. OECD/World Bank Asia Roundtable on Corporate Governance. International Financial Management..org/wiki/Corporate_governance International Corporate Governance Meeting. & Eisner.

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