Agency theory means that the agent who are the directors of the company is under contract to act on best interest of the principals who are the shareholders. Agency problem arises due to the fact that there is a breach of trust where the directors are acting on their own self interest instead of shareholders’. In regards to the problems, there is also an information of asymmetry, which would described as the agents would have more information than the principals.
Reportedly there are numerous corporate scandals throughout the years, for example Robert Maxwell (1991), Barings (1995), Enron (2001), Lehman Brothers (2006). As the matter of fact, various Governance Code of Ethics were implemented due to these scandals. Company should appoint independent non executive directors in order to manage the management because directors were tempted to ignore company’s interests and objectives.
The collapse of Enron in 2001, it is because it lacks transparency. The Board of Directors, Chairman Kenneth Lay, CEO Jeffery Skilling and CFO Andy Fastow, were falsifying accounting reports and selling Enron stocks at a higher price to attract new investments. The fraudulent activities and audit failure by Arthur Anderson send shocks to investors and they lost millions and confidence. The executives directors dominate non executive directors, so that NED lack independence and ineffective in monitoring the EDs , therefore transparency is essential good Corporate Governance. Conflict of interest also draws attention to CG, as loyalties are compromised for personal benefits leading to unethical activities by securing personal gain instead giving priority to company affairs. Sarbanes-Oxley (SOx) Act 200...
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... Ethics to ensure compliance. The bonding costs would be costs to provide incentives to directors such as bonuses, performance packages in order to motivate them to act on the best interest by means of taking the long view instead of short view. Other than that, subcommittees (Audit, Remuneration, Nomination, Risk Committees) can be used to control agency problems and costs such as preventing directors to reward themselves excessively. Shareholders also have the rights to remove directors or board members.
Independent non executive directors play very important role within the board as it would reduce unethical activities and balancing out conflicts. In the scope of agency conflict would be different in each company, however, statutory and non statutory body has introduced mechanisms to reduce the conflicts as it would also protect the shareholders.
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