**Corporate Governance**

**Corporate Governance**

#### Alla Mostepaniuk Additional information is available at the end of the chapter

Alla Mostepaniuk

Additional information is available at the end of the chapter

http://dx.doi.org/10.5772/intechopen.69704

#### **Abstract**

The following chapter identifies the meaning and main features of corporate governance, underlines the importance of an entity, which regulates and balances the interests of shareholders, stakeholders, and managers in order to realize a corporation's long-run goals. Currently, all models of corporate governance can be divided by their characteristics into three types: Anglo-American, German, and Japanese; each of these models has some unique elements that are required by a particular country. The process of forming and development of corporate governance in transitional economies are described as well. As the accuracy of corporate government influences the wiliness of investors to sink their capital, it is crucial to understand the methods of corporate governance efficiency evaluation by international rating agencies. Moreover, the example of Enron Corporation's failure shows the exceptional role of corporate governance in protecting and ensuring the rights of shareholders and stakeholders, solving the conflict between managers seeking higher bonuses and investors' goals on stable future return and potential growth.

DOI: 10.5772/intechopen.69704

#### **Chapter objectives**


#### **Methodology**

Historical and descriptive methods, including critical review of existing scientific literature, were used to meet the objectives of the chapter; in addition, case study on Enron's corporate governance was introduced. Based on learning the current situation of corporate governance development within advanced and transitional countries, their potential failures and constraints, the crucial contemporary issues were identified and suggested the ways to minimize or eliminate them.

**Keywords:** corporations, managers, shareholders, stakeholders, corporate governance, conflict of interests, the agency theory, Enron

#### **1. Introduction**

Corporations are the key players in the global economic environment; corporations are the main source of a county's economic growth, and the most attractive business deal to invest in. To maintain and increase the profitability of corporations and to enlarge the investments flows, it is crucial to ensure the total understanding of the owners', investors', and managers' interests and to find a way to balance them. All this is about corporate governance and the ways in which investors assure themselves of getting a return on the finance [1]. Corporate governance framework identifies how investors control the manager's actions, how the responsibilities are divided between owners and managers. Adequate system of corporate governance allows the suppliers of finance to relay on managers, to realize that the manager has reliable internal and external sources of information based on which he is able to make rational decisions for their mutual interests.

In general, corporate governance is a complex process that involves organizational, legal, economic, motivational, and social tools, the combination of which provides the unique working environment that allows to minimize costs by reducing the gap between managers' and owners' interests [1]. The well-organized corporate governance is not limited by managers' and owners' goals; it has to include the interests of investors, suppliers, consumers, workers, representatives of a local community, and government officers, as the financial success of a corporation depends on the satisfaction all of its chains.

However, dealing with numerous involved participations leads to a potential conflict of interest; consequently, the key objective of corporate governance is to minimize or eliminate the mentioned conflict.

#### **2. The nature of conflicts of interest**

According to the agency theory (see **Figure 1**), an agency relationship can be described as hiring a person (the agent, a manager) to perform and to make decisions on behalf of the principal(s) (owners and shareholders) [2]. The reason why the owner is not operating the business by himself is his wiliness to hire a professional, which will act in the most efficient

**Figure 1.** The agency theory.

**Methodology**

4 Corporate Governance and Strategic Decision Making

**1. Introduction**

interests.

mentioned conflict.

the ways to minimize or eliminate them.

conflict of interests, the agency theory, Enron

corporation depends on the satisfaction all of its chains.

**2. The nature of conflicts of interest**

Historical and descriptive methods, including critical review of existing scientific literature, were used to meet the objectives of the chapter; in addition, case study on Enron's corporate governance was introduced. Based on learning the current situation of corporate governance development within advanced and transitional countries, their potential failures and constraints, the crucial contemporary issues were identified and suggested

**Keywords:** corporations, managers, shareholders, stakeholders, corporate governance,

Corporations are the key players in the global economic environment; corporations are the main source of a county's economic growth, and the most attractive business deal to invest in. To maintain and increase the profitability of corporations and to enlarge the investments flows, it is crucial to ensure the total understanding of the owners', investors', and managers' interests and to find a way to balance them. All this is about corporate governance and the ways in which investors assure themselves of getting a return on the finance [1]. Corporate governance framework identifies how investors control the manager's actions, how the responsibilities are divided between owners and managers. Adequate system of corporate governance allows the suppliers of finance to relay on managers, to realize that the manager has reliable internal and external sources of information based on which he is able to make rational decisions for their mutual

In general, corporate governance is a complex process that involves organizational, legal, economic, motivational, and social tools, the combination of which provides the unique working environment that allows to minimize costs by reducing the gap between managers' and owners' interests [1]. The well-organized corporate governance is not limited by managers' and owners' goals; it has to include the interests of investors, suppliers, consumers, workers, representatives of a local community, and government officers, as the financial success of a

However, dealing with numerous involved participations leads to a potential conflict of interest; consequently, the key objective of corporate governance is to minimize or eliminate the

According to the agency theory (see **Figure 1**), an agency relationship can be described as hiring a person (the agent, a manager) to perform and to make decisions on behalf of the principal(s) (owners and shareholders) [2]. The reason why the owner is not operating the business by himself is his wiliness to hire a professional, which will act in the most efficient way to improve the owner's welfare. In practice, this kind of delegation of managing tasks is rational as a manager has more sources of information. Moreover, as the owner and the manager have different information (asymmetric information), the actions made by the manager cannot be fully supported by the owner. If both participants (the owner and the manager) are aiming mostly at their self-interest, there is a possibility that the agent will not act in the best interest of the principal (according to his information).

The principal can limit the willingness of the agent to follow his goals by implementing the appropriate incentives for the agent and monitoring to prevent abnormal activities. Monitoring can be fulfilled in a form of budget constraints, compensation policies, operation rules, etc., and leads to an increase in costs. The bonding costs guarantee that the agent will not make decisions that can harm the principal; otherwise, he will compensate the loss. According to the theory, it is impossible to balance the self-interests of the principal and the agent costless; in each case, positive agency costs will occur, including monitoring, bonding, and residual loss, the last can be described as the difference between the agent's decisions and those decisions that would maximize the principal's benefits [2].

### **2.1. Discussion**

As the agency relationships model is suitable for corporations, it demonstrates the essential need of corporate governance to cope with conflicts of interests. The conflict of interests, as a rule, arises as the goals of shareholders and managers contrast, generally, shareholders seek the stable and ensured return and long-term potential growth, while the aim of managers is to increase the financial performance in the short-time period in order to earn bonuses, which normally depend on the financial results rather than overall stability and reliability. The misuse of the bonus system can lead to either financial or reputational losses, even to "hidden" bankruptcy.
