Course : MGMT6464005 - Corporate

Governance
Effective Period: September 2024

Corporate Governance &

Capital Market
Thank you
 Acknowledgement

These slides have been adapted from:

Larcker, D., & Tayan, B. (2016). Corporate

Governance Matters: A Closer Look at
Organizational Choices and Their Consequences.
2nd Edition. Pearson FT Press.

Chapter 2
After This Session
• Learning Outcome
After studying this chapter, the students should be able to :
• LO 1 : Define Corporate Governance
• LO 2 : Basic Concept Corporate Governance
• LO 3: Review the major Corporate Governance science
disciplines t
 Capital Market Efficiency

• Capital markets are efficient, these prices are expected to be correct based on the
information available to both parties in a transaction.
Capital Market Efficiency
 Legal Tradition
• If the legal system is corrupt, unpredictable, or ineffective, alternative
disciplining mechanisms are necessary in the governance process. For
example, if contracts are not enforced through traditional legal channels,
they could be “enforced” by the threat of not engaging in future business
with the other party. Firms could place directors on the boards of
companies that are important suppliers or customers to monitor
management and to ensure that contracts are honored. These mechanisms
would enable the firms to bypass the legal system and to ensure that
shareholder and stakeholder interests are protected.
 Accounting Standards
• To improve the integrity of financial reporting, regulators have devised
standards that are based on the expert opinions of economists, academics,
auditors, and practitioners. In some countries, such as the United States
and Japan, accounting systems are rules-based.
• That is, they prescribe detailed rules for how accounting standards should
be applied to various business activities. In other countries, such as many
European nations, accounting systems are principles-based.
 Enforcement of Regulations

• Legal and regulatory mechanisms alone cannot protect the interests of

minority shareholders. Government officials must be willing to enforce the
rules in a fair and consistent manner. Regulatory enforcement mitigates
agency problems by dissuading executives from engaging in behaviors
such as insider trading, misleading disclosure, self-dealing, and fraud
because they acknowledge a real risk of punishment.
 Enforcement of Regulations

• If regulatory enforcement is weak or inconsistent, shareholders cannot

expect to have their interests protected by official channels. Therefore, they
have to take a more direct role in governance oversight, either through
greater rights afforded through the bylaws and charters or through direct
representation on the board. Without these tools, they will demand higher
returns on capital to compensate for the greater risk of investing their
money.
 Societal and Cultural Values

• Shareholder-centric view, which holds that the primary responsibility

of the corporation is to maximize shareholder wealth. Actions such as
improving labor conditions, reducing environmental impact, and
treating suppliers fairly are seen as desirable only to the extent that
they are consistent with improving the long-term financial
performance of the firm.
 Societal and Cultural Values

• Other countries tend toward a stakeholder-centric view, which holds

that obligations toward constituents such as employees, suppliers,
customers, and local communities should be held in equal importance
to shareholder returns.
Individual National Governance Structures

• To get a better sense of how economic, legal, and cultural realities

contribute to the governance systems in specific markets, we will
consider and compare the United States, the United Kingdom,
Germany, Japan, South Korea, China, India, Brazil, and Russia.
 References

Larcker, D., & Tayan, B. (2016). Corporate Governance

Matters: A Closer Look at Organizational Choices
and Their Consequences. 2nd Edition. Pearson FT
Press.