- Global Frameworks: Organisation for Economic Co-operation and Development (OECD) Principles of Corporate Governance, UK Corporate Governance Code.
1. The Principal-Agent Conflict
Corporate governance establishes the system of rules, practices, and processes by which a firm is directed and controlled. Its core academic foundation rests on Agency Theory (Jensen & Meckling), which addresses the fundamental conflict of interest that arises when ownership and control of a corporation are separated:
[Shareholders (Principals)] ──► Delegate Control / Capital ──► [Managers (Agents)]
│
[Monitoring Costs / Audits] ◄─── Financial Disclosures ───────────────┘
- The Conflict: Shareholders (Principals) own the firm and seek to maximize long-term equity value. Managers (Agents) run daily operations and may be driven by self-interest, seeking to maximize personal compensation, power, or job security at the expense of shareholders.
- Agency Costs: The sum of monitoring expenditures incurred by the principal (e.g., external audit fees), bonding expenditures incurred by the agent, and residual structural losses resulting from divergent choices.
2. Shareholder Primacy vs. Stakeholder Theory
- Shareholder Primacy Model (US/UK traditional baseline): Assumes the primary duty of the board of directors is to maximize shareholder wealth within the boundaries of the law.
- Stakeholder Theory Model (Continental Europe baseline): Argues that a corporation owes a duty to a broader collective, including employees, suppliers, customers, creditors, local communities, and environmental entities. The board must balance these competing interests to ensure the firm’s long-term sustainability.
3. Institutional Stewardship Codes
Global institutional investors (e.g., BlackRock, Vanguard, European pension funds) follow formalized stewardship codes. These codes require institutional managers to actively monitor investee companies, exercise proxy voting rights, and publicly disclose voting policies to hold corporate boards accountable.
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