Boards 。一姜旻 温星星 ●
Boards •——姜旻 温星星
Brief Introductions Key Words: Board's Responsibilities Corporate Governance/Agency Problem Market Value (Share Price) Share price is often used as an index to reflect market value. According to relevant formulation,Firm's market value book value of assets- value of equity market value of equity. Share price can reflect the market value of equity herein. Hence,share price can be used as an index to reflect market value of the firm. Critical Questions as the mainstream: What should boards do How can boards do better--------From the perspective of board composition:Outside Directors Female Directors (Via empirical researches) ●
Brief Introductions Key Words: Board’s Responsibilities Corporate Governance/Agency Problem Market Value (Share Price) Share price is often used as an index to reElect market value. According to relevant formulation, Firm’s market value = book value of assets – value of equity + market value of equity. Share price can reElect the market value of equity herein. Hence, share price can be used as an index to reElect market value of the Eirm. Critical Questions as the mainstream: What should boards do How can boards do better --------From the perspective of board composition: Outside Directors & Female Directors (Via empirical researches)
What Should Boards Do OECD Principles of Corporate Governance What is this? Principle VI.The Responsibilities of the Board "The corporate governance framework should ensure the strategic guidance of the company,the effective monitoring of management by the board,and the board's accountability to the company and the shareholders. Two Separate Responsibilities Strategy-setting effective monitoring of management Additional Accountability Provision: Accountability to the company and the shareholders ●
What Should Boards Do OECD Principles of Corporate Governance Principle VI. The Responsibilities of the Board “The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders. ” Two Separate Responsibilities : Strategy-setting & effective monitoring of management Additional Accountability Provision: Accountability to the company and the shareholders What is this?
OECD Principles Although these principles do not have any binding force of law. However, (1)these principles do reflect a universal consensus .(2)these principles have a tremendous impact on legal reforms of corporate governance. Hence,these principles should be treated as a sort of universal declaration of board's responsibilities. ● ●
OECD Principles • Although these principles do not have any binding force of law. • However, • (1) these principles do reElect a universal consensus • (2) these principles have a tremendous impact on legal reforms of corporate governance . • Hence, these principles should be treated as a sort of universal declaration of board’s responsibilities
Agency Cost/Problem Agency problem:both in monitoring and strategy-setting larger as a corporate challenge Possibilities of Looting Shirking Solutions:Fiduciary Duty,Executive Compensation... Looting:extracting value from the company and the shareholders beyond previously agreed level Shrinking:failing to exert one's best try for the interest of the company ●
Agency Cost/Problem Agency problem: both in monitoring and strategy-setting larger as a corporate challenge Possibilities of Looting & Shirking Solutions：Fiduciary Duty, Executive Compensation... Looting: extracting value from the company and the shareholders beyond previously agreed level Shrinking: failing to exert one’s best try for the interest of the company
Agency Cost Caused by the Board's Dual Responsibilities Tension between the dual responsibilities Another Agency Cost Why it exists? It is caused by the tension between Strategy-setting the dual responsibilities of BOD,as & the two responsibilities mentioned monitoring before are incompatible. ● ●
Agency Cost Caused by the Board’s Dual Responsibilities Tension between the dual responsibilities Another Agency Cost Why it exists? It is caused by the tension between the dual responsibilities of BOD, as the two responsibilities mentioned before are incompatible. Strategy-setting & monitoring
Comparison of the Board's two Responsibilities Responsibility strategy-setting monitoring Role advisory role (sounding board for management non-advisory role sometimes Relationship friendly (supportive and unpleasant (request with mutually favorable accountability managers opinions) transparency from the management) Legal Rules duty of care (business duty of loyalty- judgment rule) conflict of interests ●
Comparison of the Board’s two Responsibilities Responsibility strategy-setting monitoring Role advisory role (sounding board for management) non-advisory role Relationship with managers friendly (supportive and mutually favorable opinions) sometimes unpleasant (request accountability & transparency from the management) Legal Rules duty of care (business judgment rule) duty of loyaltyconflict of interests
。Sounding board: 0 BOD contributes its opinions as to general policy and their judgment whenever a problem comes up.BOD can do no more than that. Unpleasant relationship between BOD and managers: 0 A closely-monitored CEO may prefer to keep his views to himself,avoid bringing up problems or difficulties in the boardroom.However,the monitoring responsibility of BOD requests accountability and transparency from the management,which is incompatible. ● ●
• Sounding board： • BOD contributes its opinions as to general policy and their judgment whenever a problem comes up. BOD can do no more than that. • Unpleasant relationship between BOD and managers: • A closely-monitored CEO may prefer to keep his views to himself, avoid bringing up problems or difEiculties in the boardroom. However, the monitoring responsibility of BOD requests accountability and transparency from the management, which is incompatible
How can board do better --better corporate governance From the perspective of composition of BOD How to reduce the agency cost caused by the tension between the Board's dual responsibilities Two perspectives: 1.outside directors 吸 2.female directors ●
How can board do beFer ? —— beFer corporate governance From the perspective of composition of BOD How to reduce the agency cost caused by the tension between the Board’s dual responsibilities ? Two perspectives: 1. outside directors 2. female directors
Research concerning outside directors Evidence: Korean firms with 50%outside directors have higher share price. Analysis: This evidence cannot be explained by endogenous firm choice. (2 trillion won-large firms/small firms) why? Because some mandatory regulations were only imposed upon large firms with assets above 2 trillion won,such as these firms shall have 50%outside directors. (Won:unit of account) Endogenous firm choice ●
Research concerning outside directors Evidence: Korean Eirms with 50% outside directors have higher share price. Analysis: This evidence cannot be explained by endogenous Eirm choice. (2 trillion won-large Eirms/small Eirms) why？ Because some mandatory regulations were only imposed upon large Eirms with assets above 2 trillion won, such as these Eirms shall have 50% outside directors. (Won: unit of account) ——Endogenous Eirm choice ?