lecture 5&6 Flashcards
Manager-shareholder agency costs
One of these costs is the cost of monitoring and structuring the relationship between the principal and agent
Corporate law addresses this problem by providing
Board structures
One tier board structure
Shareholders –>
Board of directors (executive and non-executive directors) –>
Managers
Two tier board structure
shareholders & employees –>
supervisory board –>
Managing board –>
Managers
Full structured regime (special structure in the netherlands)
used for all types as long as the following criteria met (for 3 consecutive years)
Capital and earnings amount to 16m EUR
Legal obligation to appoint a works council
At least 100 employees in the netherlands
The full structured regime is intended to provide more check and balance for shareholders on the powers of board
Weakened structured regime (special structure in the netherlands)
Apply to companies which at least half of the issued capital is held by a legal entity whose majority of employees work outside the netherlands
Types of directors (one tier board)
Executive directors
non-executive directors (if not clear sometimes called “grey” directors: representatives of major shareholders or employes, former executives, etc.
non-executive independent directors: no relationship with the company other than board membership
Types of directors
Two tier board
Independent supervisory board members
Trusteeship strategy (independent directors)
Originated in the United States
Seeks to remove conflicts of interest ex ante
Do not profit from opportunistic behavior
Not tied by financial incentives but motivated by ethical and reputational concerns
Requirements (scandal or economic crisis driven)
BUT a panacea to mitigate almost every problem of company law (including the second agency problem)
Criticism includes: arbitrary criteria, non conclusive evidence on effect of firm performance, Their role during the financial crisis has been criticized (lack of expertise)
what about their incentive structure
Co-determination in germany
in germany mitbestimmung
More than 2000 employees, half of supervisory board = employee representatives
+ chairman (usually shareholder representative)
500-2000 employees (one third supervisory board = employee representatives.
The board of directors: gender diversity (germany)
§96 (2) aktiengesetz
In case of listed companies which are subject to the Co-determination Act, (…) the supervisory board shall be composed of at least 30 percent of women and at least 30 percent of men. The minimum percentage shall be complied with by the supervisory board in its entirety
Board of directors gender diversity (france)
Art. 225-18-1 Code de commerce
The proportion of directors of each gender may not be less than 40% in stock exchange listed companies (…)
Arguments for 1 tier or 2 tier board
The one tier board structure results in a closer relation and better information flow between the supervisory and managerial directors
The two tier board structure encompasses a clearer, formal separation between the supervisory body and those being supervised
BUT: no conclusive empirical studies
Board structures (convergence)
One-tie boards make use of delegation to the management and monitoring the exercise of delegated powers become its main task
both board structures depend on management information
The use of independency requirements;
Tasks (and board committees, including also a nomination committee)
Should companies be required to split the roles of chairman and CEO in a one tier board?
Pro: agency theory arguments (board independence)
Stewardship theory advocates separating the roles of chairman and CEO to enhance accountability, transparency, and effective oversight on the board of directors
Con: stewardship theory arguments (effective management)
The contrary perspective might argue for combining the roles of chairman and CEO to promote unified leadership, streamlined decision-making, and clearer strategic direction within the organization.
no conclusive results
Board of directors committees
nominating committee
Compensation committee
Audit committee