July 3rd 2012
Mark Largan| Current Issues in Finance| MSc in Finance and Management
Corporate governance
Despite increased regulation and disclosure, serious doubts remain about how effective corporate governance rules are in achieving their basic objectives of ensuring that directors manage– and are seen to manage– their companies in accordance with the shareholders’ interests. Huge efforts have been made to ensure that directors’ remuneration is aligned to the long-term health of the company rather than to the attainment of shortterm goals. But academic and other studies continue to show that the link between long-term corporate performance and directors’ pay is still far from perfect.
July 3rd 2012
Mark Largan| Current Issues in Finance| MSc in Finance and Management
Corporate governance
No solution has yet been found to the basic problem that it is impossible to measure how far the performance of a com
pany and its share price is due to the efforts of its directors and how far to external forces beyond their control. Some companies do try to judge directors’ performance using measures relative to those of a group of peer companies, while others include accounting measures as well as market measures, such as return on equity or earnings per share.
July 3rd 2012
Mark Largan| Current Issues in Finance| MSc in Finance and Management
Corporate governance
Also, as the repeated corporate scandals that have emerged in the 21st century (e.g., Enron, WorldCom and Parmalat) have vividly demonstrated, to resolve the conflict of financial interest between shareholders and directors by linking the latter’s remuneration to shareholder returns might solve one problem only by creating another much larger one. Through their responsibility for the accounts of the company, the directors also have control over arguably the biggest single influence on the company’s share price– its reported performance.
July 3rd 2012
Mark Largan| Current Issues in Finance| MSc in Finance and Management
Regulation
What should regulators do now? Regulators have concentrated on the structural causes of the financial crisis but as we have looked at the financial crisis it is apparent that the causes are much more complex.
July 3rd 2012
Mark Largan| Current Issues in Finance| MSc in Finance and Management
Regulation
A key question is whether the financial crisis was triggered by macro level/economic factors or was due to human/social factors, often at the level of individual firms.
July 3rd 2012
Mark Largan| Current Issues in Finance| MSc in Finance and Management
Regulation
Weaknesses in risk management may be either technical, due to poorly designed risk management processes, or operational in that they relate to a failure in implementing otherwise sound procedures. Both technical and operational weaknesses were features of the financial crisis. In particular, the research found the defects listed in the next slide.
July 3rd 2012
Mark Largan| Current Issues in Finance| MSc in Finance and Management
Regulation
July 3rd 2012
Mark Largan| Current Issues in Finance| MSc in Finance and Management
Regulation
Structural reforms such as the enforced separation of retail and investment banking activities, or the breaking up of large institutions, have been at the centre of the debate around fixing the financial crisis. Measure to control excessive bonuses and remuneration packages that reward excessive risk taking are to be curtailed.
July 3rd 2012
Mark Largan| Current Issues in Finance| MSc in Finance and Management