Corporate Governance and Agency Theory: A Financial Analysis

This report delves into the critical aspects of corporate governance and agency theory, emphasizing their importance in effective organizational management. It begins with an introduction to agency theory and its relationship with corporate governance, highlighting the significance of maintaining healthy relationships between agents and principals. The report then examines the main agency problems arising from a corporate governance perspective, focusing on conflicts of interest between management and shareholders and the implications of different risk assessments and incentives. The analysis extends to a case study of BREO's corporate governance practices, including an overview of its board's responsibilities and the roles of various committees, before concluding with the implications for financial regulation. The report also discusses the relationship between Sky UK and its corporate governance report, emphasizing the company's focus on aligning the interests of investors and stakeholders. The report also provides a thorough analysis of the role of corporate governance in mitigating agency problems and ensuring that stakeholders' interests are protected, making it a valuable resource for students studying finance and corporate governance.

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CORPORATE GOVERNANCE AND FINANCIAL REGULATION(AAF019-2)
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BREO
Executive Summary
In the present era, the practice of corporate governance is important governance as it helps in
running the organization in a effective manner. The present report sheds light on the
principles of corporate governance followed by BREO and highlights the agency theory. The
report s structured in a manner that evaluates the problem from the perspective of corporate
governance. The report initiates with the introduction followed by the evaluation and the
critical evaluation of the major agency problems. Further, the management to the problems is
briefly discussed in the report.
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Contents
Introduction...........................................................................................................................................3
Relationships between agency theory and corporate governance........................................................4
Main agency problems from corporate governance perspective..........................................................5
BREO corporate governance..................................................................................................................7
Agency problem....................................................................................................................................8
Conclusion...........................................................................................................................................10
References...........................................................................................................................................11
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Introduction
Agency theory is an important concept when it comes to the relationship between the agents
and the principals. It requires that the agents to maintain a healthy relationship with the
principals. The report stresses the concept of agency theory together with the concept of
corporate governance. Just like the agency theory the corporate governance role helps in
establishing a strong link with the company and the stakeholders. Corporate governance can
be used in agency theory to apply the incentives in an effective manner so that the incentives
should not be unduly high and should only be such that can motivate the agents to work
efficiently (Goergen, 2012). The report reflects the concept that corporate governance helps
in achievement of the goals in an effective manner and considers that the interest is not
harmed. Further, the report sheds light on the corporate governance from the organization
name BREO. From the corporate governance report, the agency problem is adequately
highlighted and responses to such problem are projected in the report.
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Relationships between agency theory and corporate governance
Agency theory helps in projecting the link that the agents and principals share in a business.
In an agency relationship, there are two parties- agent and principal. The agent is assumed to
make decisions based on the principle as authorized by the latter. As the decisions are taken
on behalf of the principal, hence the agent is needed to act in the benefit of the principal
without having any space for self-interest (Goergen, 2012). Where the interests of the agents
differ from the principal, there may arise conflicts between both the parties. This results in
miscommunication between the agent and the principal thereby leading to various problems
in the company (Geoffrey, Joleen & Daviid, 2016). There may be cases where the
disagreements may become so intense that it may lead to inefficiencies and financial losses in
the company. The reason behind disagreements in agent-principal can be different risk
perspectives, different business goals, a difference of working approach, etc. An example of
an agent-principal relationship is the relationship between shareholders & managers were on
behalf of the shareholders, top managers are elected to act for the advantage of the
shareholders of the company (Bertilsson, 2017).
The agency problems happen when a difference in the interest between agent and principal or
the agents has their self-interests in the company. For minimizing such agency problems, the
companies take the path of corporate governance by formulating such corporate policies
through which both the principal and agent feel associated with the company and keep away
their self-interests (Bhattacharya & Sen, 2010).
Corporate Governance is a system under which the relationship between the various
stakeholders of the company is defined to help a company in its operations in an effective
manner. The main aims of corporate governance are to safeguard the rights of the
shareholders, encourage maximum disclosures and transparency, and help the board to
function properly & to create an enforcement framework for legal and regulatory matters.
Effective corporate governance strives at providing incentives to the board and the
management team and also encouraging its shareholders to participate in company matters so
that both follow the mutual objectives of the company (Hansmann & Pargendler, 2013).
Some of the key issues dealt by a company’s corporate governance are –
• To check whether the company is being managed in the interest of the shareholders
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• To see whether the decisions being made are based on ethics
• To ensure that the various risks to the company are being properly recognized and
managed
• To ensure that the board and management take the accountability of their actions towards
the shareholders.
From the above explanation of CG, it can be seen that the corporate governance also aims at
maintaining the good relationship between various stakeholders which may include the
agents and principals and ensuring that everyone works towards the common interests of the
company. With the help of CG, the company can change the rules for operations of the agent
so that the principal’s interests can be restored. Also, the principal should be well informed of
the workings of the agent and the approach he is using for his assigned work so that he can
make sure that the agent is working as per the principal’s interests (Clarke, 2010). This can be
made sure by providing incentives to the agents so that they work in unity with the principals.
Corporate governance can be used in agency theory to apply these incentives aptly so that the
incentives should not be unduly high and should only be such that can motivate the agents to
work efficiently. Such incentives should be removed which are likely to promote the wrong
behavior and such rules should be introduced which discourage moral hazards. Corporate
governance proves helpful where the problems in the agent-principal relation are assessed
timely and properly.
Main agency problems from corporate governance perspective
The agency problem is the interest conflict between the agent and the principal when the
agent is supposed to act on behalf of the principal’s best interests. When we talk of corporate
finance, such conflict usually refers to the conflict of interest between the company’s
management and the shareholders of the company (Hoffelder, 2012). On behalf of the
shareholders, the management is expected to act in their best interest thereby maximizing the
shareholder's wealth. The conflicts arise when the managers instead of acting in the best
interest of shareholders, start working in their interest to maximize their wealth (Donius,
2010).
Good corporate governance is one that helps the company to achieve its goals efficiently and
also take into account that the stakeholders’ interests are not harmed. Also if any
stakeholder’s interest is harmed, the same should be compensated. The agents are hired by
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principals to act on their behalf due to various reasons like a limitation of time, the good skill
set of an agent, employment position, etc (Eccles & Youmans, 2015). There can be a varied
reason for conflict of interests in agent-principal relation which leads to agency problems
from the viewpoint of corporate governance. Few of them are mentioned below:
• Different risk assessing ability and the willingness to undertake such risks- this is one of
the major reasons for agency problems. Mainly the agent-principal relationship is shared by
managers and shareholders of the company. The main motive of shareholders is the
maximization of their wealth which means good earnings per share and dividends on their
investments (Douma & Hein, 2013). They do not want to undertake any risks. But the
managers work towards the betterment of the company as a whole taking into consideration
far-sighted risks and are interested in the overall growth of the company. This different risk
undertaking creates agency problems.
• Low incentives to agents also discourage the agents to act towards their interests rather
than in the best interests of the principal. Non availability of discretion to agents while
working also discourages the agents to act towards their interests instead in the best interests
of the principal as they feel that the principal does not trust their acts (Elder, Beasley &
Arens, 2010).
• Another reason can be when the agents have their interests in the company and they start
working for maximizing their wealth. The agents start working for short term benefits to
getting hikes in their incentives. Such an act leads to agency problems as the managers are
not concerned with maximizing the wealth of the shareholders anymore and work towards
their wealth increments (Julia & Elizabeth, 2010).
Other than shareholders, the management is also expected to act as an agent for other
stakeholders as well where there are different expectations of different stakeholders. So the
agency problem can be with other stakeholders also. For example-
• The management is expected to prepare fair books of accounts and pay regular taxes. This
satisfies the government as a stakeholder. Further, the management is expected to pay off the
creditors and other borrowers in time. This satisfied the creditors and financial borrowers as
stakeholders.
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• The competitors expect that the company does a fair competition and does not adapt to
any cut-throat competition methods. In this also the management is playing the role of agent
for the company as a whole (Khalid, 2011).
BREO corporate governance
Sky UK is a United Kingdom-based company which provides British Telecommunication
services in United Kingdom (UK). The services include television & broadband services,
fixed telephone line, and mobile services to the retail consumers and the businesses in the
UK.
The Corporate Governance report of the company provides an overview of the workings,
roles, and responsibilities of the board towards the company and the stakeholders of the
company at large. It elaborates how the company has worked towards achieving its goals
along with maintaining good corporate governance. The Corporate Governance Report of the
company is summarized under the following points:
• The report starts with the Chairman’s overview through which the Chairman introduces
the report on behalf of the board. As per the overview, the board is responsible for aligning
the interest of the investors and all the stakeholders together. The board composition has
undergone some changes and few of the members were changed. Further, the overview states
that the investors and the analysts had a meet with the Executive Directors for discussions on
certain important topics (Sky report, 2018).
• The responsibilities of the Board have been mentioned in the report which states that the
Board is entrusted with the duty of direction, management, as well as performance. Also, the
board is responsible for providing leadership for effective controls so that the risks can be
managed in a timely and effective manner (Sky report, 2018). The report elaborates the roles
and responsibilities of all the members of the Board separately also.
• The report also presents the Board agenda which includes the short term as well as long
term business plans. The board delegates the responsibilities to the Board Committees which
comprises of Audit Committee, Remuneration Committee, Bigger Picture Committee, and
Corporate Governance & Nominations Committee.
• All the details related to the board have been mentioned in the report such as Board
Composition and independence, their required time commitments, their meetings with the
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executives and training, directors’ reappointment details, the expectations from directors to
avoid conflict of interests, etc. An external Board Evaluation was also done for which the
details have been mentioned in the report (Sky report, 2018).The corporate governance
matters and matters of remuneration are also discussed
• Next is the report of the Audit Committee which is included in the CG Report. This report
includes Audit Committee Agenda, few of the points of which are- review of interim and
financial statements and its recommendation to the board, dividend policy review and
proposed dividends of the company and its board recommendations, review of non-audit
services and fees every quarter, etc. Further, the Audit Committee Report details the
significant accounting issues that were reviewed by the Audit Committee while considering
the Annual Financial Statements.
• Similarly, the Corporate Governance and Nominations Committee has also issued its
report in the Corporate Governance Report for explaining in detail the activities undertaken
by the Committee for the company about Corporate Governance and otherwise.
• Similarly, the Bigger Picture Committee has also issued its report in the Corporate
Governance Report for explaining in detail the activities undertaken by the Committee for the
company about Corporate Governance and otherwise (Sky report, 2018).
Agency problem
The Board of directors is the real stewards of the company. The investor's interest caretaking
is their real tasks. The principals of corporate governance advocate that the company should
be transparent, decisive and Law-abiding. The following are the steps taken by the company
in complying principals of CG to safeguard the stakeholders interest.
1. The Board has chosen to reduce its number from 14 to 12 keeping a good mix of talent
and experience. It also decided to get an independent review of its working from a third-party
group. The group thought that the board & its members are working good and in alliance with
stakeholders objectives.
2. The Annual report is drafted very carefully disclosing every small detail which may be
material for any decision making of the stakeholders. The company holds a regular dialogue
with the shareholders to get their view and understand their problems.
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But all is not that good as it is presented to the stakeholders, as there have been instances
where principals of corporate governance have not been followed. The independent of the
two directors James Murdoch, Chase Carey, and John Nallen is not independent as per the
code of conduct, yet they were given a clean report by the outside agency. This creates a little
bit of suspicion on the report given by the independent review group. Hence it is advised that
Board mix and its working capabilities and their output towards company objective must be
reviewed.
The appointment and removal of directors is a sensitive and important matter which must be
addressed properly. The top-level management is responsible for decision making and any
conflict among them may prove to be very fatal. As per the Board, the conflicts among
directors are properly authorized and operating efficiently. The Board monitors the conflicts
properly but the stakeholders would like to hear the conflicts and their solutions. The
shareholders best interest lies in the adoption of best industry practices and complying with
applicable laws & regulations,
The Board has made various committees Like Audit, Revenue, Corporate Governance &
Nominations Committee which comprises of current directors. The current Board members
themselves get a chance to become part of any committee by getting nominated in board
meetings. To ensure more transparency, the stakeholders should advise the Board to induct
some Independent directors and review the minutes of meetings and meeting agendas. For
Example: in the case of the Nomination Committee, The names nominated by them can be
verified and people with similar experience and talent may be directly induced through the
process of Voting or the majority.
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Findings
The major findings from the report are that the shareholder's engagement is a very crucial
aspect for the company and there are regular conversations and meetings held with the
shareholders so that the objectives of the shareholders and the group can be aligned. Further,
the Board acts as a custodian of the business and has a responsibility towards several
stakeholders along with pursuing the statutory duties of the company for achieving its
objectives for the overall benefit of the company
Recommendation
Going by the overall matter it can be said that the corporate governance of the company plays
a pivotal part in shaping the destiny of the organization. Hence, considering the entire report,
it is therefore recommended that the appointment and removal of director is a matter that is
associated with the well being of the company hence must be addressed in a proper manner.
Further, the company must have various committees that will address the major issues and
ensure all the major activities are properly coordinated.
Conclusion
From the discussion, it is clear that the board of directors should operate in a fashion that
provides the best services and serves the stakeholders. The stakeholders should hire an
independent agency to verify the claims made by the Board in the Meetings and the Annual
report. An Investor meet should be regularly conducted to showcase the financial progress of
the company. The auditor’s report and their opinion is where the stakeholders can rely on and
get an independent opinion on both Financial & Non Financial matters. All these measures
shall secure the interest of shareholders and principals of corporate governance. Hence, it is
imperative for the organization to ensure that corporate governance should ensure that
interest of the stakeholders is safeguarded and no problem exists.
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References
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Responsibility_CSR_The_Role_of_CSR_Communication [Accessed 1 June 2019]
Clarke, T. (2010) International Corporate Governance. London and New York, Routledge,
Donius, B. (2010) Profit Maximization - Ethics = The ‘Goldman Standard, Available
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eth_b_553605.html [Accessed 1 June 2019]
Douma, S and Hein, S. (2013). Economic Approaches to Organizations. London
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Goergen, M. (2012) International Corporate Governance. Prentice Hall
Hansmann, H. & Pargendler, M. (2013) The Evolution of Shareholder Voting Rights:
Separation of Ownership and Consumption. Yale Law Journal, Vol. 123, 144–165
Hoffelder, K. (2012) New Audit Standard Encourages More Talking. Harvard Press.
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Julia, S.K & Elizabeth C. R. (2010) Conflict Between Doing Well And Doing Good? Capital
Budgeting Case Study – Coors. Journal of Business Case Studies, 6(6), 123-130. Retrieved
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