Thoughts on Corporate Governance

                 There is a normative consensus which suggests the corporation to maximize the wealth of the shareholders’ value.  From the investment perspective, that is true for its purpose because investor wants to profit on the shares. Moreover, “shareholders control the firm and shareholders wealth maximization is the relevant goal of the corporation.” (Ross, Westerfield, & Jaffe, 2008, p.15).  However, that is, perhaps, flawed because corporate management is not imposed shareholder wealth maximization by the market forces. In addition, there also a theory states that the stakeholders of the firm deserved to be desirable and preferred decision-making model of the management in which corporation increases productivity, social welfare, and accountability (Jensen, 2010). It seems that corporation and shareholders hold power over other stakeholders.  Therefore, corporation should reconcile the differences between the shareholders, management, and other stakeholders of the firm by primarily focusing on value maximization then addressing the market failures which might harm other stakeholders.

                 To protect the shareholders to get a return on investment, make sure management does not steal the capital that supplied and invested, and ensure shareholder can control the management of the firm in poor practice and performance, corporate governance is essential.  Shleifer and Vishny (1997) define corporation governance is an economic and legal institution that provide these assurance.  Therefore, corporate governance is definable through a political process and is independent in the international market.  For example, in Italy, corporate governance in the 1990s was undeveloped  so the flow of external capital of the firm was significant retarded (Shleifer & Vishny, 1997) while in the U.S the role of the court is so extensively impacting the investment contracts.

                  The basic difference between the focus goal of the shareholder and the other stakeholders is their perspective.  Shareholder perspective focuses on profitability over responsibility while stakeholder emphasizes responsibility over profitability.  In most of the foreign countries, the objective of corporation is to maximize the welfare of the stakeholders, while in the U.S. it is commonly agreed that corporation runs to maximize the value of shareholders (Aggarwal, Erel, Stulz, & Williamson, 2006).

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Aggarwal, R., & Erel, I., & Stulz, R., & Williamson, R. (2006). Do U.S. firms have the best corporate governance? A cross-country examination of the relation between corporate governance and shareholder wealth. USB FBE Finance Seminar.   

Jensen, M. C., (2010) Value Maximization, Stakeholder Theory, and the Corporate Objective Function. Journal of Applied Corporate Finance, 22(1), 32-42.

Shleifer, A., & Vishny, R. (1997). A survey of corporate governance. Journal of Finance, 52(2), 737–783.

Ross, S. A., Westerfield, R. W., & Jaffe, J. (2008). Corporate finance (8th ed.). New York: McGraw-Hill Irwin.

About Phat Pham

I don't have money to share, but I do have a desire to transform our society, starting from the workplace and the local community I serve.
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