Question

Explain the evolution of corporate governance. What problems developed? What are the current trends?

Discuss the pros and cons of the shareholder-privacy and director-primacy models of corporate governance. Which does your group prefer and why?

Answer 1

1. Explain the evolution of corporate governance. What problems developed? What are the current trends?  

Over the years, corporate governance has evolved by growing. It has also shown how the complexity of business has changed over the years. The way a company is managed is by shareholders who appoint a board of directors to supervise the management of the business through a voting system. This is in place so that companies do not have issues such as insider trading or falsifying records. Even though there is a board that is appointed to oversee the executive team, there are still issues, such as executives getting overpaid. There are also issues in which some individuals on the board of directors mix up with management – this is an issue since these two bodies are to be separate as to avoid any conflict. As far as what the current trends are; shareholder activism brings to light social affairs to which management needs to shed light to. Based on this week’s EIP, it is also apparent that companies are required to maintain a certain level of transparency with their operations so that investors understand their business practices and logic. This also ensures there are no schemes, backdating, or fraudulent business practices.

Discuss the pros and cons of the shareholder-primacy and director-primacy models of corporate governance. Which do you prefer and why?

According to the textbook, corporate governance is the method by which the firm is being governed, directed, administered, or controlled and to the goals for which it is being governed. The Anglo-American model utilizes the shareholder-primacy model, the model that puts shareholders at primary importance. There are four major groups within the shareholder-primacy model; shareholders, board of directors, management, and employees. The charter gives the corporation the right to exist in the states eyes as well as lays out the general guidelines for the corporation.

One major attribute of the shareholder-primacy model is much of the world participates in this model of corporate governance as it provides a similar system that is easily transferrable throughout different cultures. This model utilizes the flexibility needed to do business in a global economy.

Agency problems are one of the major downfalls of the shareholder-primacy model. Separation of ownership over control is a newer concept as historically owners of a business were very involved in the decision making process of their firms. Now, with the dispersion of ownership within the shareholder, management plays a larger role in the decision making process. This weakens the role of ownership and opens the company to the issues of Agency problems, which consists of management acting in a manner that is self-serving as opposed to the greater good of the company.

The director-primacy model is an alternative model of corporate governance that challenges the balance of power between the shareholders and board members. In this method, the team production model incorporates the needs and demands of all levels within the firm to make decisions that are mutually beneficial to stakeholders as well as shareholders.

A major attribute of the director-primacy model gives a company the ability to promote its corporate social responsibility and sustainability goals, both of which are extremely important characteristics of the modern business model. This model enables a company to focus on value creation as well as the stakeholder. Conversely, the director-primary model does not sit well with older companies that are stuck in their ways. Some firms have cut jobs and research expenditures in protest of this new ideology.

In my opinion, the director-primary model serves the purpose of the evolving business environment we see today. The focus on the team approach as well as value creation in the best interest of all parties encompasses the strategic goals of the future. As business continues to move towards corporate social responsibility and sustainability for generations, the director-primary model reflects a modern approach that will enable business constant growth within corporate governance.