Corporate Governance: Conflicts, Mechanisms, Risks, and Benefits

How corporate governance handles conflicts of interest: principal-agent relationships and agency costs, the ways managers, controlling shareholders and creditors can work against other stakeholders, the mechanisms that keep those conflicts in check (reporting, shareholder meetings and activism, takeovers, bond indentures, board committees, labour law, contracts and governance codes), and the operational, legal, reputational and financial risks of weak governance versus the benefits of strong governance.

1. 1. Principal-agent relationships and agency costsWhenever one party hires another to act on its behalf and the hired party knows more, their interests can drift apart, and the costs of that drift (monitoring plus lost value) are agency costs that investors price into their required returns.Video · 5 minFree12 min
2. 2. Managers versus shareholders: five ways interests divergePay is the main tool for aligning managers with shareholders, but managers can still under-work, take too much or too little risk, build empires, entrench themselves or help themselves to company resources.13 min
3. 3. Controlling versus minority shareholders, and shareholders versus creditorsShareholders are not one happy group: a controlling holder, often helped by dual-class shares, can override minority owners, and shareholders as a whole like leverage and payouts that creditors fear.13 min
4. 4. Reporting, shareholder meetings, activism and takeoversShareholders protect themselves through information (corporate reporting), voice (general meetings and proxy votes), pressure (activism and lawsuits) and the threat of a change in control, which anti-takeover defences can blunt.14 min
5. 5. Creditor protections and board committeesCreditors protect themselves through indentures, collateral and committees, while the board delegates detailed oversight to independent committees for audit, nominations and governance, and pay, without giving up its own responsibility.14 min
6. 6. Employees, customers, suppliers and governmentsBeyond investors and the board, governance also works through labour law, unions and share plans for employees, contracts and social media for customers and suppliers, and laws, regulators and comply-or-explain codes from governments.11 min
7. 7. Risks of weak governance and benefits of strong governanceWeak governance exposes a company to operational, legal, regulatory, reputational and financial damage, while strong governance improves operations and lowers the cost of debt and equity by making investors trust what they see.14 min