Lecture 8 Flashcards
What is a Corporate Governance System (CGS)
- A certain set of mechanisms used in a country or context during a specific time period.
What is the definition of a gatekeeper?
- “Third parties who are able to disrupt misconducts by withholding their cooperation from wrongdoers” (Alzola, 2017)
What is the role of gatekeepers?
The role is to stand outside the corporate structure and evaluate the financial and legal conduct and the business prospects of corporations.
- Consumer/customer/stakeholder protection.
- Gatekeepers are reputational intermediaries:
- ”They are interposed between two parties in financial markets, between issuers and investors – with the goal to reduce transaction costs. Gatekeepers are there to help mitigate market failures.” (Alzola, 2017, p 707)
Why do we need gatekeepers?
- Provide accountability and legitimacy and ensure trust in the system.
- Reduce transaction costs
- Reduce information asymmetries
- Functioning capital markets are built on trust between different parties - trust is a prerequisite to secure investments in situations with risk.
- Gatekeepers verify and certify information and thereby indirectly “provide” trust
Why does an organization need legitimacy?
In order to:
* Acquire and hold resources
* Minimize risks and costs
* Ensure trust and maintain reputation
* Ensure long-term survival of organizations and systems
What does legitimacy depend on?
- Time period
- Society and culture
- Type of business, strategy and business model
i.e. it is dynamic
What is legitimacy?
- Something that is given to an organization or an individual by outsiders.
- Creating legitimacy is a process aiming towards gaining legitimacy.
- Legitimacy can be lost, and it takes time to rebuild it.
What are the gatekeeping functions in the two systems (common law/ market-oriented and civil law/ network-oriented)?
In all systems:
* Auditors
* Financial analysts
* Credit rating organizations
* Media
* Research
In Common law/Market-oriented systems (USA/UK) also specifically:
* Lawyers
In Civil law/Network-oriented systems also specifically:
* Banks
Whistleblowers
What are the duties of the gatekeeper (according to Alzola, 2017)
- Withhold cooperation from wrongdoers
- To blow the whistle
- A duty to resign, discharge or otherwise
- Punish wrongdoers
- To rescue a person in a dangerous situation
What is the role of auditors (as gatekeepers)?
- To give credibility and secure accuracy in the financial statement and with that build trust in the company and reduce information asymmetry so investors feel secure in investing.
- The idea is that the auditors as gatekeepers are more credible than the issuer of the statement since they as auditors have a reputation to protect and thus incentives not to deceive the investors.
- They are repeated players with a reputational capital to preserve (Alzola, 2017, p. 707).
Describe auditors (lack of) independence
- Conflicting and competing interests
- Client, auditing firm and professional bodies
Problem not in interest, but identity - A shift a way from the traditional identity, more focus on client and/or selling services.
Different loyalties and/or power relations, hence not independent.
Enhance professional identity a way to secure independence
Describe the role of media (as a gatekeeper)
- Monitoring and evaluating
- Reduce information asymmetry and legitimizing
- Point of departure in Agency theory and the need for independent boards
- Formal and social independence
- Formal independence has a signalling effect
- Formal independence ”protect CEO”
- Social independence often overlooked.
Why do gatekeepers sometimes fail to live up to their expectations?
- Incentives and loyalties
- Non-complicity
- Ability/competence
- Ethics/Morale/Opportunism
- Unclear where their loyalty lies (Client? Investor? Personal gains? Personal reputation and professional identity? Public interest? Investors interest? Consumers interest?)
- Remuneration and fee dependence (Fairchild et al., 2019)
- Knowledge and expertise dependence (Fairchild et al., 2019)
- Social and emotional/psychological dependence (Fairchild et al., 2019)
