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Introduction

Corporate governance has been defined as the manner or way following which a

corporation governs in the market (Davó et al., 2019). However, the narrow definition of

corporate governance entails the legal and regulatory approaches by which companies are

controlled for being focused on the internal and external corporate structures (DHU and HBP,

2019). It is also defined as a framework using which the board of directors of a corporation

ensures business accountability, fairness, transparency, and ethics (Murwaningsari, 2019).

Martynova and Renneboog (2011) suggested that effective framework of the corporate

governance is a focus of discussion among experts and critics recently in many countries,

such as Turkey, Canada, Russia, etc. However, a comparative and comprehensive analysis of

corporate governance regulatory systems enlightening the evolution of frameworks since

1990 is absent. This essay by drawing upon the analysis of Martynova and Renneboog (2011)

addresses the essay topic of determining the viable role of regulation in corporate

governance and thus presenting how agency conflicts emerge in the shareholder and insider

models with examples.

This essay involves a lucid structure of introduction, analysis, and discussion along

with presentation of examples and conclusion. Drawing upon the arguments presented by

Martynova and Renneboog (2011), the discussion section examines the role of regulation in

the corporate governance framework while referring to the evolution of framework observed

since 1990. Moreover, the essay investigates how agency conflicts emerge concerning

organizational shareholders while using specific organizational examples in this context.

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Discussion and Analysis

The central premise of the universal model outlined by 'principal-agent theory'

suggests that the objectives of the shareholders and managers are different and this assumes

that organizational components have differing levels of access to the company's information.

Even though the discussion has been made on the basis of the corporate governance and

consideration for many big organizations, corporate governance scandals and governance

failures have been observed practically through the examples of the universal model outlined

by principal-agent theory. This essentially signifies the role and importance of regulations in

corporate governance. Regulations are legal standards that inform an organization's ethical

and legal responsibilities towards the larger society and therefore, regulators are standard

settlers.

Martynova and Renneboog (2011) have discussed the convergence of corporate

governance regulations and its role by considering the different framework of the corporate

governance. The first role of regulations with respect to corporate governance is to reduce

down the issues of agency between corporate constituents such as shareholders and

managers. In organizations there is always a conflict scenario can be observed between the

shareholders and manager especially in companies having dispersed ownership structure. In

the interest of the company's own benefit, management must implement a legal and

regulatory structure that can manage the various types of agency problems.

As argued by Martynova and Renneboog (2011), corporate governance regulation

ensures that companies disclose their activities especially in relation to their financial

activities, earnings, etc. for which at present most big companies publicly publish annual

income statements in an attempt towards transparency in business. In the absence of such

disclosure requirement, companies and managers can conceal information, or attempt to

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falsely report the information in order to keep their competitor un-informed or wrongly

informed which might be justified from business perspectives but cannot be justified in front

of business ethics (Flammer et al., 2019).

Martynova and Renneboog (2011) have presented another reason for implementing

corporate governance regulation in a corporation. According to the authors, specific corporate

governance regulations force organizational commitment towards higher legal and regulatory

standards of quality and ethics. Asper the arguments presented by the authors there have been

instances where companies even after initially implementing a framework of corporate

governance have broken laws later. The presence of a regulator sets much higher standards

and ensures that such instances do not occur. The authors in their discussion have also

detailed the importance of such regulations in controlling corporate activities as well as the

economic and commercial growth of firms. Similar to these views, Ponomareva et al. (2019)

have also suggested that under the framework of corporate governance, a regulatory body

ensures stricter laws and regulations which enforces managers and shareholders to act under

the legal parameters.

Agency conflicts are the conflicts of interest present inside organizational components

especially shareholders and managers are a major issue inside corporations in relation to

corporate governance. Conflicts can arise in many ways and this has been explained by

Martynova and Renneboog (2011). As per their analysis, the firms with dispersed ownership

structure have a small number of shareholders who already have the communication issue

which will distract them to maintain the various activities of the firm in an effective manner

rendering them to transfer authorities to a third party or professional managers. However, the

difference between the ownership role and authority surely deduces a conflict zone where

various issues can be originated between the manager and shareholders. In most cases, it has

been observed that such managers instead of focusing on the objectives of maximizing the
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profit of shareholders focus more on ensuring personal benefit thus serving personal interests

over the firm’s interest. Corporate governance, in this case, aligns the managerial interests

with the firm’s interests by preventing the misuse of corporate assets.

Duh (2017) has suggested that in line with the central premise of principal-agent

theory owing to the aspect that managers and shareholders have different interests and

objectives, managers can take actions that serve their self-interest over the interest of the

shareholders. As a result of this shareholders become the people bearing the cost of such

actions which generally tend to be unethical from a business ethics perspective. Such costs

are generally referred to as agency costs. However, in contrast to the arguments presented by

Martynova and Renneboog (2011), Duh (2017) have also presented a situation where

controlling shareholders (insider) exploit minority shareholders (insider) and their rights as

well as rights of the creditors (outsiders) to serve their personal interests of maximizing self-

profitability. Drawing upon the analysis of other authors, Duh (2017) suggested that the

system of corporate governance needs to be viewed as a cluster of interrelated internal and

external forces providing a structure and process of maintaining relationships between the

organizational management and organizational stakeholders.

With respect to the way agency conflicts emerge in the shareholder and insider

models‌‌‍ Martynova and Renneboog (2011) have suggested that conflicts of interest observed

between managers (insider) and shareholder (insider) are less severe with respect to

corporations having concentrated ownership structure. However, as detailed by Duh (2017) in

such cases the presence of a controlling shareholder can also raise conflicts of interest as the

controlling shareholder tends to exploit the minority blocks. In such cases, models‌‌‍Martynova

and Renneboog (2011) have suggested the importance of the board of directors who will

control the shareholders can ensure delegation and concentration of control thus reducing the

instances of exploiting the rights of the minority shareholders.

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Moreover, defining the fiduciary duties of managers and directors can also prove to be

beneficial. The principles of corporate governance as discussed by the Harvard Law School

Forum suggest that introducing fundamental changes in the framework of shareholder

engagement can prove to be highly beneficial in various ways. Increasing the access of

shareholders to the decision-making system essentially inviting them in the boardroom

discussion can prove to be beneficial; however, it should be accompanied by an increase in

shareholder responsibilities. However, these responsibilities should not be limited to

disclosure but their engagement is necessary for the corporate decision-making process

assuming more accountability in the business functions of the corporations.

Moreover, in this aspect shareholders must acknowledge the board needs to weigh

short-term and long-term use of capital investments thus determining the way of allocating

resources that creates the most benefit for moth minor and major shareholders in an equal

manner (Corpgov.law.harvard, 2019). The arguments and counter-arguments presented by

various authors including the works of Martynova and Renneboog (2011) in relation to

agency conflicts and insider models in reference to shareholders and managers as well as the

importance of corporate governance regulations in mitigating these conflicts can be further

illustrated supported by practical examples. These are detailed in the following section of the

essay.

Examples to support discussions

It is generally recognized that corporate conflicts are sometimes correlated with the

dissociation of ownership from an authority in the organisations. In order to facilitate the

mitigation mechanism to these problems, corporate governance has evolved. It has enabled

companies to raise investments from the equity and debt markets. This corporate governance

undertakes an important role to determine from which source and under which terms this
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capital is provided. Shareholders are the primary stakeholders who provide the required

capital to the companies. Typically, agency conflicts arise between these shareholders and the

managers or the majority and minority shareholders of a company. Therefore, appropriate

corporate governance has become an important aspect around the world and in the EU. The

following section of this essay will refer to several available examples on this topic to support

the discussion.

Martynova and Renneboog (2011) have analyzed corporate governance and their

evolution in 30 EU countries and the US as well. According to the researchers, changes in the

corporate governance regime started since the 1990s and such changes can be seen until

2005. Researchers had developed three new indices for corporate governance in order to

mitigate the problems between shareholders and managers, minority and majority

shareholders, creditors and shareholders. These indices were dissected along several regulator

strategy dimensions as well. Based on their analysis, these new proposed indices captured a

wider purview of corporate regulation dynamics and reforms. Furthermore, an analysis paper

has established that the enhancements of corporate transparency is a superior legislative

strategy for all the analyzed countries. Such transparency resolved the shareholders' concern

about managers misusing company resources or assets and also protected minority

shareholders from forfeiture by the major shareholders.

Coca-Cola's corporate governance is a real-life example of fair corporate governance.

Their regulations related to corporate rules promotes long term shareholder interests as well

as management accountability; this enables them to develop public trust as a result.

Shareholders of Coca-Cola elects the board members of the company. Coca-Cola promotes

the selection of the board by shareholders because board members will be responsible for

decision making in the future (Coca-Cola, 2019). This selection process by the shareholders

mitigates any future conflict between shareholders and the board members. This functional
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governance is established upon the company's corporate governance regulations. It addresses

the board member's qualification, their missions and responsibilities, performance evaluation

framework and also updates the guidelines based on necessity.

Sky Ltd also has an effective corporate regulation. The aim of this regulations or

guidelines is to facilitate a constructive entrepreneurial management for long term success.

The memorandum proposes to consolidate corporate governance rules and procedures. These

rules and procedures ensure that corporate governance is set out and complies with company

obligations. These guidelines suggest that Sky's board should possess a balance of executive

and non-executive director, also some of these non-executive board members need to be

independent. Furthermore, all the board members are re-elected through annual shareholder

voting. Sky's corporate governance codes also require mandatory quarterly meetings of

shareholders and board members (Sky, 2019). This is to ensure the mitigation of any conflict

among them. Sky's corporate governance codes also address the requirements of various

committees such as audit and remuneration committee, executive committee and so on. Their

governance guidelines also allow and encourage the board of directors to hold company

shares. But holdings should be long term as short term dealings for profit purposes are not

allowed. Directors are also required to inform the company secretary about such dealings as

well. Overall, Sky has an effective corporate governance code that aims to address every

possibility of corporate misconduct or conflict between internal stakeholders.

An article by MacDuff (2019) thoroughly discusses corporate governance in the UK.

The UK Companies Act, 2006 is the key statute that regulates corporate governance in the

country. According to this Companies Act, 2006 board of directors is liable to some duties in

addition to the company governance guidelines. This act requires directors to function in

conformity with the company regulations, avoid any conflict of interest, declining any

benefits from company outsider and also promoting the success of the company. Though,
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these duties must be practiced in accordance with common laws. Furthermore, the UK

Corporate Governance Code also encourages directors to engage with shareholders in

business operations to ensure good governance. This is why board members are required to

provide an explanation of the business model of the company in their annual report and also

directors are required to be elected annually for their term.

Another industry-based example can be seen in Shell's corporate governance laws.

These regulative laws address the board member's mission, their qualifications and

responsibilities. Furthermore, also highlights the role of senior management as well. This, as

a result, aims to mitigate any corporate misconduct or conflict between the shareholders and

the directors (Shell, 2018). Shell's corporate governance also ensures that their board is

possessing both non-executive and executive directors. These guidelines also promote the

idea of diversity as well. Shareholders of Shell elects the members of the board on an annual

basis. This is to facilitate effective governance in the company in order to establish a well-

governed corporate environment in the company.

Overall, based on these examples it can be seen that globally leading companies have

effective governance guidelines in effect. This is to ensure the mitigation of any conflict or

misconduct among the internal stakeholders such as directors and shareholders.

Agency Conflicts

There are two widely used models of corporate governance which mitigates the agency

conflicts. They are Shareholder or Outside Model and Insider Model. Following section will

discuss these two models and will compare them as well.

Shareholder or Outside Model Insider Model

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 As per this model market regulation  As per this model stakeholders’

is the priority. control is the main priority.

 Owners of the company or business  Owners of the business tend to

tend to possess transitory interest in possess an enduring interest in the

the business. business.

 In this model, there is an absence of  In this model, the relationship

close relationship among between management and the

management and the shareholders shareholders are more stable and

(Steger, 2015). also closer because of this stability

(Dignam and Galanis, 2016).

 There is an existence of active  There is an existence of employees’

corporate control or takeovers can be formal rights, which also has the

seen in this model. capability to influence the major

managerial decisions of a firm or

company.

 According to this model shareholder  In this model every stakeholder

rights are prioritised over other receives equal priority.

stakeholders.

Conclusion

Corporate governance frameworks have greatly evolved over the decades for various

reasons but mainly because of the continued corporate scandals observed in reference to

prominent business holders. The framework of corporate governance provides a legal

framework ensuring that companies behave legally and ethically. The necessity of regulations

in corporate governance can be outlined in reference to agency conflicts that are present
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inside organizational components. In conclusion to the analysis and discussion it can be said,

that in most business organizations, different business structures and ownership structures

give rise to conflicts of interest between managers, owners, and shareholders. In most cases,

shareholders have less legal power rendering them ineffectual in regulating the way the

organization should function ethically. The presence of corporate governance regulations

ensures that shareholders have more power over the way corporations should function

ethically.

Various organizational examples have been drawn to enlighten the way the presence

of regulations makes an impact on corporate governance. Moreover, organizational examples

that are drawn for analysis detailed how corporate scandals and the nature of it changed and

significantly reduced after the introduction of regulations and regulators in the framework of

corporate governance thus also enlightening the importance of regulations in corporate

governance. The findings of the essay, therefore, recommend that business organizations in

order to be more attractive should establish a sound corporate governance framework with

strict regulations and a regulatory body thus ensuring proper mitigation of agency conflicts as

well as instances of corporate scandals.

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Reference List

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https://www.coca-colacompany.com/investors/corporate-governance [Accessed 27

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Ponomareva, Y., Nordqvist, M. and Umans, T., 2019. Family firm identities and firm

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