"Basic" theories (agency, legitimacy, institutional, Stewardship)

Question 1

What are the costs associated with the Agency-problem?

Answer 1

1. Monitoring cost
2. Bonding cost
3. Residual cost

Question 2

How do we avoid agency problems?

Answer 2

1. Construct contracts that encentivies “good” behavior
2. Screening and selection mechanisms (good repetation/ warranties)
3. Monitoring and reporting requirements
4. Institutional checks or rules

Question 3

What is the agent-problem?

Answer 3

Conflict of interest where one party (that is motivated by self-interest) is expected to act in another’s best interests.

Example: getting my car fixed, the car-fixer wants to earn money and I want my car fixed for the minimimum cost.

assymetric access to information

Question 4

What is some critique against the agency theory?

Answer 4

• Naïve, narrow theoretical view (reduced on a single abstraction)
• Focuses on purely quantitative metrics and does not take interpersonal behavior, group dynamics and political intrigue into account
• Philosophical and moral Negative assumption about nature of man: people are self-centered; directors cannot betrusted

Question 5

What are the key-takes of transaction cost economies?

Answer 5

• Big companies can overcome disadvantages of scale by good CG structures.
• Focus on cost of enforcement/check-and-balance mechanisms.
• Enforcements costs should equal reduction of the potential loss from non-compliance.
• Like AT also based on opportunism (self-interest seeking) and moral hazard of managers; managers operate under
  bounded rationality

Question 6

What is critique agaist transaction cost economies?

Answer 6

Complexity within organization is ignored

Question 7

Describe the key elements in Stewardship Theory

Answer 7

• shareholding members appoint directors, which act as stewards for their interests and can be trusted
• Conflicts of interests between stakeholders and company should be met by competitive pressures in free markets and
  backed by legislation and legal control

Question 8

Critisism agaist stewardship theory

Answer 8

• Shareholder do not nominate directors
• Complex corporations lack transparency and directors are not readily accountable to shareholders because of growing complexity within organizations
• Rooted in law therefore normative; Emphasizes what should be done (comes from law)
• Ignore important impact of institutional investors which play an essential role in corporate governance

Question 9

Describe the key aspects in resource dependency theory

Answer 9

• Strategic View: governing body of corporate entity is the linchpin (Dreh- und Angelpunkt) between company and resources needed to reach objectives. Directors connect business to its strategic environment through networks.
• Resources = links to relevant markets, access to capital, know-how, technology, relationships with business, political and
  societal networks and elites