Problems of corporate governance

1
Problems of corporate governance

• Bounded rationality
• Transaction costs
• Shirking
• Agency costs
• Opportunism
• Risk

2
The shirking problem
Assume worker gets 50 for moving an office 5 do
it faster for 100
20 20 20 20 20
Work
Pay _at_20
20 20 20 20 20
3
Work 0 25 25 25 25
Pay 20 20 20 20 20 Profit(loss)20 (5)
(5) (5) (5) Exchange rate 1 util
1 Then what happens?
4
Work0 0 0 0 0 Pay0 0 0 0 0
5
The entrepreneur
Pay entrepreneur 90 of the 50 gained by joint
effort 11 11 11 11 11 45
6
Making and selling a product (e.g., cell phone)
Design/patents
Electronics (chips)
casing
transport
transport
Assembly
transport
Marketing/sales
Warehouse
transport
Customer
7
A solution the big corporation
Board (policy and monitoring)
Top executives
Middle managers
Divisions Manufacturing, freight, sales
Assets factories, trucks, stores
employees
Shareholders
8
Agency costs
Pay (cop) 90 of the extra 50 11
11 11 11 11 45 OR
Four workers earn 80 for firm and one worker
earns 20 for cop 11 11 11 11 36 20 11
9

• NATURE OF THE FIRM GOVERNANCE AND MARKETS
• LIMITED LIABILITY.
• STATE COMPETITION.
• CORPORATE GOVERNANCE.
• THE CORPORATION AND SOCIETY.
• MANAGERIAL INCENTIVES AND FIDUCIARY DUTIES.
• SECURITIES DISCLOSURE REGULATION.
• SECURITIES FRAUD LIABILITY.
• INSIDER TRADING.
• TAKEOVERS.
• TAKEOVER DEFENSES.
• VENTURE CAPITAL AND STARTUPS.
• COMPARATIVE CORPORATE LAW AND INTERNATIONAL
  COMPETITION.
• IMPLICATIONS OF ENRON AND SARBANES-OXLEY.
• CLOSELY HELD AND UNINCORPORATED FIRMS
• THE MEDIA AND CORPORATE GOVERNANCE