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Corporate Governance and Remuneration Systems

Term Paper (Advanced seminar) 2004 16 Pages

Business economics - Accounting and Taxes

Excerpt

Table of Contents

Table of Illustrations

1. Introduction

2. Corporate Governance

3. Principal-Agent-Problem

4. Remuneration Systems
4.1 Classification of Incentives
4.1.1 Intrinsic and Extrinsic Incentives
4.1.1.1 Intrinsic Incentives
4.1.1.2 Extrinsic Incentives
4.1.2 Material and Immaterial Incentives
4.1.2.1 Material Incentives
4.1.2.2 Immaterial Incentives
4.2 Design of Remuneration Systems
4.2.1 Bonusbank
4.2.2 Stock Option Plans

5. Conclusion

Bibliography

Table of Illustrations

Illustration 1: Four Control Forces Operating on the Corporation

Illustration 2: Agency-Relations in a Company

Illustration 3: Elements of Performance

Illustration 4: Connections in the Material Incentive System

1. Introduction

Business corporations have become the dominant organization of the modern economy. Corporate Governance refers to the processes and structure by which the business and affairs of the company are directed and managed. The primary objective of sound corporate governance is to contribute to improved corporate performance and accountability in creating long term shareholder value.

The main objective of this term paper is a brief overview of possibilities to give the board of directors reasons for improving the long term shareholder value. In order to achieve this goal the second chapter of this term paper deals with the concept of corporate governance itself. In taking a closer look at some basic approaches the main tasks and individual and team objectives should be brought out.

The third chapter deals with the so-called principal-agent-problem. The essence of the agency-problem is the separation of ownership und control or the conflict of interests among owners and managers.

Chapter four introduces remuneration systems which are qualified to solve the agency problem and satisfy both: owners and managers of a company.

Finally, chapter five concludes the paper.

2. Corporate governance

In general, corporate governance refers to the manner a corporation is directed, and laws and customs affecting that direction. It includes the laws governing the formation of firms, the bylaws established by the firm itself, and the structure of the firm. The corporate governance structure specifies the distribution of rights and responsibilities among the board of directors and shareholders. This system spells out the rules and procedures for making decisions on corporate affairs, it also provides the structure through which the company objectives are set. The fundamental concern of corporate governance is to ensure the conditions by which a firm’s directors and managers act in the interests of the firm and its shareholders.

But the term corporate governance is not used uniformly. Many authors have a narrow view of the concept. They only understand direction and supervision as corporate governance (Suter, 2000).

The point of view for Shleifer/Vishny’s definition is the sight of the investor: “Corporate Governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.” (Shleifer/Vishny, 1997, 737).

Broad attention received the position of Jensen. He states four forces which are qualified to affect decisions of the management in a way that the company will be proper guided.

illustration not visible in this excerpt

Illustration 1: Four Control Forces Operating on the Corporation

Source: Jensen, 1993, 850

This concept handles the following aspects:

- Finance: structure of the company’s financial requirements
- Governance: supervision of the company, placement of incentives through management compensation, size and structure of the advisory board
- Organisation: internal rules of the game consisting of performance test, performance review, remuneration system as well as delegation of deciding-rights within the company.

Jensen states that the main goal of corporate governance is reducing the agency-conflict, which not only reduces the welfare of the company but also the welfare of the whole society.

3. Principal-Agent-Problem

Agency problems can arise whenever one person is acting on behalf of another person. The principals are the investors who delegate controll to an agent. Due to different interests, the investors run the risk that the manager (agent) uses company funds to pursue personal goals. Furthermore sources for more subtle conflicts lie in the fact that the manager’s risk aversion and time horizon may differ from the investors (Pfeil, 2002).

illustration not visible in this excerpt

Illustration 2: Agency-Relations in a Company

Source: Kibed, 2001, 58

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Details

Pages
16
Year
2004
ISBN (eBook)
9783638296069
ISBN (Book)
9783656071709
File size
462 KB
Language
English
Catalog Number
v27601
Grade
82/100
Tags
Corporate Governance Remuneration Systems Business English

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Title: Corporate Governance and Remuneration Systems