Agency Theory and Corporate Governance - Essay Example

? Introduction Agency theory is entirely an academic term and it defines the relation and conflicts between a principal and an agent. With the help of corporate governance any corporation and company can be managed and governed. Agency theory is a part of corporate governance as corporate governance is not complete without the committee members, shareholders and board of directors of a company. This interaction between the shareholders, committee members and the board of directors are help in order to improve the performance of the company. In 1997, Malaysian corporate governance mechanism was strengthened and reformed and resulted in the establishment of the Malaysian Code on Corporate Governance (MCCG) in 2000. The impact of this study was unsatisfactory and the failures of almost 176 Malaysian companies persisted from 2004 to 2006 (Journal of American Academy of Business, Cambridge, 125). Corporate Governance also affects the cash flow or cash holdings in companies. Businesses which possess a complex nature should consider the needs and financial requirements of the firms. There are several firms who totally rely upon CEO duality. Studies revealed, that the corporations, who are under the category of independent leadership consistently performed better than the companies dependant upon CEO duality. According to the perspective prediction increment in proxy access and reduction is executive pay results in fair value (Journal of Business Research, 757). The contribution Agency Theory in a Multinational company is vast and definitely value-maximizing. It covers the aspects such as international joint ventures, internationalization, new forms of global business groups and headquarters-subsidiary relationships. Many researches suggested that apart from the prevailing concept of Agency Theory in almost all the corporations we also need to focus and investigate regarding different key corporate governance mechanism. This will help in improving the company strategies and its outcome. The areas that needs to be investigates are the work of board of directors, the nature and the role of governing owner, the role of the market for corporate control, remuneration of the company executives and also the division of the CEOs and board of directors. (The Journal of Management Studies, 471) The corporate world both has honest and fraud people in it. It has been proved that the concept of corporate governance can help people who does the right thing but unaware about the right way ahead. The revised code is definitely proved to be a steady step to raise the corporate governance standards and is also the best proposed code till date. The code that was issued in 2005 had potent changes on the remuneration of disclosure of individual and independent directors. This was issued by the Council of corporate disclosure and governance but was rejected by the Ministry of Finance. There were few recommendations and it affected many companies. The proposal was: 50% of the board consisted board members where the CEO and the chairman is the same person; the chairman and the CEO are family relatives; the chairman is not an independent director or owner of the corporation and last but not least, both the chairman and the CEO should be a part of the company (The Business Times by Mak Yuen Teen). Critique and analysis: Insolvency is a very important aspect of Law or any company and there are many case laws on this particular aspect. Usually, a managed investment or a trust is described as insolvent but under the Corporation Act 2001 (CTH), a person cannot be called insolvent in such cases. The analysis of the viable purposes of this act needs to be performed by the trustee of the company or firm. The director or the owner as well as the creditors face problems when the trustee is insolvent as it leads to lack of guidance. In the Corporation Act 2001, it clearly states that a director of a firm needs to restrict any kind of insolvent trading or business deals by the company. A company is notified as an Insolvent company when it not only incurs substantial amount of debts but also fails to pay off (Australian Business Law Review, 95). The concept of Insolvency is not restricted to business firms but it can also be applied in case of tenants. In this financial crunch, Corporation Act 2001 provides a great help to the landlords against the insolvent commercial tenants. The corporate tenant needs to pay the rent for using the administration. Usually, a letter is also sent to the corporate tenant if they owe the rent including the last date of making the payment. In certain cases, landlords are permitted to forfeit the lease, on the basis of insolvency of the corporate tenants. In such cases, a notice should be sent to the tenants, under the section 146, which is also known as the Law of property act 1925. In addition, either the approval of court or the administrator is required, before the lease is cancelled. If the court does not approve the 146 notice then the landlord cannot forfeit the lease. If the landlord is aware of the insolvency of the tenant and still communicates with the administrator without sending a Notice 146; it may lead to waiver of the forfeit (Australian Business Law Review, page 150). When recession struck the economic base, it made everything extremely unstable and most of the corporate firms were becoming insolvent. The Government of Australia tried to implement certain laws. The Australian government made certain changes in their first meeting on November 18th 2008. It was decided in that particular meeting that the administrator will remain at the same place but a new committee of creditors were formed. The next meeting which was scheduled on June 2nd 2010 and in that meeting all the creditors decided to wrap up the company. A new committee was also introduced which was known as the “committee of inspection”. Nine member were there in the panel of the committee such as; the employees of the firm, cross-section and unsecured creditors, shareholders and also banks (American Bankruptcy Institute Journal, Richard J Corbi). On the 19th of January 2010, Australian Federal corporate insolvency reform package was announced by the Australian minister of financial services. The revision of the corporation act 2001(cth) was included. The main themes were firstly, to improve the parameters of insolvency, secondly, the conclusion of the creditors’ needs to be enhanced and mainly, the administration procedures needs to be impeccable. The sons of Gwalia decision plays are very important role here. This company faced the challenge of insolvency and prior to that, it used to purchase shares. But due to the fact that the company was unaware of enough market disclosures, it faced insolvency. It collected enough debt but was failing to return it. It was an Australian Gold mining company which incurred a substantial amount of debt to the Australian stock market before it went insolvent. The opponent was Luke Margaretic, who also happened to be a shareholder. Mr. Marharetic alleged the Sons of Gwalia and also claimed for certain damages. He also submitted important proofs of the debts that were incurred by the alleged company. It was said in that proof that the Sons of the Gwalia violated certain rules and some discrepancies were also noticed in the behaviors of the suspected Gold mining firm. The company also violated the disclosure of the laws. All the proofs of Mr. Margaretic were rejected by the administrator of the sons of the Gwalia. The alleged gold mining company’s application are cancelled at the first instance and Margaretic’s cross claim was granted followed by the proof of the debts as well as the vote as he was an unsecured creditor. This proves that the vote of an unsecured creditor plays a very important role in the category of insolvency. Then the administrator appealed to the high court and the application was again dismissed by the high court due to the breach in disclosure of the law; which was proved by Margaretic. This again proves that any person experience loss due to the unreliable conduct of the company possess ample amount of gravity. In such cases, dismiss of the application of the suspected company is always encountered. The claim of any losses of both the unsecured creditors as well as the shareholders is equal due to the deceptive conduct of the alleged company. After the decision of Sons of Gwalia, the Australian Federal government proposed a review by CAMAC. The decision as the proposed legislation by the Federal government should minimize the complexities as well as the expenditures related to insolvency in Australia. The unsecured debts will be arrested and can expect greater investments in all the Australian firms. All the shareholders, legal commentators, noteholders praised the proposed legislation but on the other hand these legislations were criticized by all the bondholder rights advocates and the legal funders (American Bankruptcy Institute Journal, Naomi Moore and Jeffery Black). Conclusion: Summing up, Agency theory can be categorized under financial economics which points out the conflicts; especially between the shareholders and the CEO. This particular theory helps the economists study the market and on the other hand it again helps the investors by giving them better understanding about the market. The concept of corporate governance again helps in managing a company or firm by the board of directors as well as the concerned committees. This is done so the company’s stakeholder can reap the benefit along with the company. Needless to say, this kind of governance definitely plays absolutely a crucial role in any corporate firms. It again helps in balancing socio-economic and individual goals. Corporate governance in any company becomes successful theory because it involves interaction between various company participants. These kinds of discussions help in understanding each others problems. It also helps in elevating the company performances and restricting extra expenditures. Besides, individual performances and thoughts are placed in front of the owners or the board of the directors. The distinctions between the owners and the managers are clearly made in corporate governance. A manager’s task or job needs to be well defined as they are responsible for all the decision that is made in any firm. Corporate governance assures transparency between the employees, shareholders, CEOs therefore it helps in enhancing economic development of any company. With the help of the concept of corporate governance each employee understands its viable rights in the company. Steady corporate governance in any company increase the confidence of the investors hence the capital of the company can raise competently. A company should also take step against the wastages, misconduct, security breaches, corruptions and all these problems are solved with the help of impeccable corporate governance. It can potently responsible for propagating opportunities and profits in the company. Companies implement corporate governance laws are much more successful that the companies who maintains CEO duality. The concept of corporate governance is intertwined with insolvency. If a company possesses the rules or laws of corporate governance it will not face the challenge of insolvency. A firm will not incur a huge amount of debt if it follows corporate governance rules. The clear discussions between the CEOs, managers, directors, employees and even shareholders will restrict unnecessary debts. The sons of Gwalia were one of the reputed firms but it lacked the laws of corporate governance. This company was alleged for discrepancy and deceptive conducts and breaches in laws. The rules of corporate governance will never encourage any violation of the company laws and misleading the investors. The decision of the sons of Gwalia turned out to be a great help for the shareholders and unsecured creditors. In this aspect, the unsecured creditor, ( Mr, Margaretic) was given importance and equality. Reference: 1. http://proquest.umi.com/pqdweb?index=4&did=2015165581&SrchMode=1&sid=1&Fmt=4&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1308320264&clientId=68428 Read More