Corporate Governance: Theory and Practice

Corporate governance is the management of organizational and legal registration of the business, optimization of organizational structures, and the construction of intra- and interfirm relations of the company by the objectives (Larcker & Tayan, 2015). The main function of corporate governance is to ensure the work of the company for the benefit of its owners (shareholders) providing corporate financial resources. The essence of corporate governance is the implementation of the company cycle to maximize the efficiency of the firm, which is the main criterion of the notion.

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Product Launching Issues

The purpose of the firm’s product launching is to maximize the property (wealth) of its shareholders, which comes down to maximizing the company’s share price. The managers, however, may have other objectives that compete with the wealth maximization of shareholders. The situation when the owner of the firm provides managers with decision-making authority may create potential agency conflicts (Mallin, 2013). The primary agency relationships for the company will be the relationship between the shareholder and managers, as well as between lenders and the shareholder. It should be noted that the agency conflict is not essential. If there is no ambiguity, meaning no freedom to choose solutions by the agent and the principal can evaluate the actions of the agent, the conflict will not arise. For poor performance, the agent will be dismissed. In the situation of uncertainty, if the agent is not against taking the risk, his or her performance will be paid for (Mallin, 2013). In this case, there will also be no conflict of interest. However, given the specificity of the product launch, the two factors may determine the agency conflicts, which are incomplete information and risk aversion (Simpson & Taylor, 2013).

One solution to the possible disputes may be the creation of contractual arrangements providing for the interests of all the participants in the agency relationship (Mallin, 2013). The following solutions to debates are also applicable, for instance, stimulating the interest in the stability of the company’s employees and their jobs; motivating them to get proper wages; and the perspective interaction with the employer on certain aspects (equal opportunities, protection of health at the workplace, financial security, privacy, and ensuring adequate standards of living).


The outside investors will be entitled to a part of the company’s revenues as well as to the company’s assets in case of bankruptcy. However, the stockholders executing supervision through the company’s managers will conduct the monitoring of the decisions that manipulate the efficiency and riskiness of the organization’s assets (Moore, 2013). In general, the investors give the money at interest rates, which, among other things, depending on the riskiness of both the available and expected assets; the current composition of the capital; and the anticipated prospective decisions influencing the firm’s capital structure (Moore, 2013). These prime agents define the riskiness of money streams of the firm and therefore, the durability of its debt. It should be noted that most of these actions are aimed at maximizing the total cost and boosting the price of the company’s shares. However, if managers prefer bondholders to shareholders, the problems may arise. Creditors may assign high rates of interest on loans and other constraints, and this prospect is fraught with damage to shareholders.

When seeking for financial managers, the main professional competencies to consider will include financial and management skills. For instance, the knowledge of financial planning methods and techniques of financial analysis is essential. It is also necessary that the manager is knowledgeable about the methods of assessment and cost management of the company and can generate financial strategy and accounting policies; he or she must be skilled at shaping the fiscal policy and optimizing taxation (Pacces, 2013). Regarding the management competencies, the employee should be able to implement effective communication, be able to build a team, and work with it; he or she should possess strategic thinking and know-how to monitor and optimize business processes.

To maintain the ethical standards in the firm, it is necessary to organize accountability about the shareholders and the public (evaluating the internal and external liability). Also, it is necessary to protect the legitimate rights and interests of shareholders and to ensure the equal treatment of all shareholders based on mutual trust and respect. It is crucial to ensure the transparency in corporate decision-making and in providing information to all the interested parties on the development strategy and current activities. Also, the audited financial statements will determine whether the statements are prepared, in all material respects, by the established principles of financial reporting (Simpson & Taylor, 2013).

It should be noted that the debt ratio is the opposite factor within the meaning of autonomy, but it also characterizes the ratio of debt to equity. In the absence of reasonable standards, this indicator is estimated to be dynamic. The decrease in the number indicates an increase in the risk reduction and lower financial stability, which also increases the interest expense and the company’s strengthened dependence on possible changes in the rates (Rasheed & Yoshikawa, 2012). The lender may structure the financing in such a way that it would be possible to recover the costs from the paying participants in the project if the project does not meet the minimum volume. Also, the lender may mitigate the costs by securing a predictable revenue stream that can be used to service the debt.

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The possible managerial threats related to the Board may be linked with the position of interest rate risk, interest rate risk with the portfolio, as well as the impact of interest rate changes on the economic situation of the company as a whole. Also, the dangers may be associated with the uneven distribution of risks among the direct participants in the business; with a lack of proper organization risks insurance; and failure to comply with the regulations in working with partners and the external conditions (Larcker & Tayan, 2015).

As mentioned above, corporate governance is the management of organizational and legal registration of businesses, optimization of organizational structures, and the construction of intra- and interfirm relations of the company by the objectives (Larcker & Tayan, 2015). There are five major areas of corporate governance that include the rights of shareholders, equal treatment of shareholders, their roles; the disclosure of information and transparency; and responsibilities of the Board (Bloomfield, 2013).

The effective performance of the Board can be defined by the definition of strategies, investment, and budget planning, the establishment of motivation and evaluation of management systems, as well as oversight of the company’s assets and the reliability and efficiency of risk management, internal control, internal audit, and systems of corporate governance. However, the unfair and unreasonable actions (inaction) of directors assumed, in particular, in cases where the directors acted in the presence of a conflict between personal interests and the interests of a legal person, shall be considered ineffective (Simpson & Taylor, 2013).

Also, the Board should be considered problematic when it decides to execute power without obtaining the information necessary for decision-making. One of the measures to affect such occurrences is the application of the legislation by the governing bodies such as the law on deposit insurance (Keay, 2012). However, the deposit insurance system enables depositors to pay less attention to monitoring the activities of banks, which reduces the level of corporate governance. Also, the owners get an increasing temptation to invest in riskier assets, which could provide them with greater profits. Nevertheless, the requirement of supervisory authorities to provide regularly detailed financial statements increases the transparency of the Board’s activities.

Block ownership involves the ability to block any decision in principle. In cases when the controlling interest is not consolidated in the hands of one person, the owner of the blocking package can carry out his or her solutions (Bloomfield, 2013). The possession of such a shareholding provides the possibility to block the decision of the general meeting, make changes and additions to the Charter. It enables the reorganization of the company or its liquidation, determining the number, the par value, and type of shares. Also, it grants the opportunity to define the rights given by the shares and the access to all the accounting documents and minutes of board meetings and so on. However, this package gives the holder the right to sue the company’s transactions and compensate for the damages by the sole executive body.


Bloomfield, S. (2013). Theory and practice of corporate governance. Cambridge, UK: Cambridge University Press.

Keay, A. (2012). The enlightened shareholder value principle and corporate governance. New York, NY: Routledge.

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Larcker, D., & Tayan, B. (2015). Corporate governance matters. Upper Saddle River, NJ: Pearson Education.

Mallin, C. (2013). Corporate governance. New York, NY: OUP Oxford.

Moore, M. (2013). Corporate governance in the shadow of the state. New York, NY: Bloomsbury Publishing.

Pacces, A. (2013). Rethinking corporate governance. New York, NY: Routledge.

Rasheed, A., & Yoshikawa, T. (2012). The convergence of corporate governance. New York, NY: Palgrave Macmillan.

Simpson, J., & Taylor, J. (2013). Corporate governance ethics and CSR. London, UK: Kogan Page Publishers.

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