Corporate Objectives & Governance | Part 6 – Principles of Corporate Finance (14th)

This unit explores the intricate relationship between corporate management, shareholders, and the broader societal landscape, focusing on the mechanics of corporate governance and the evolution of business objectives. It begins by examining the fundamental agency problem, where the separation of ownership and control leads to inherent conflicts of interest between managers and shareholders. These conflicts manifest as agency costs, including value-destructive behaviors such as reduced managerial effort, the pursuit of private perks, overinvestment for personal prestige, and detrimental short-termism that prioritizes immediate earnings over durable growth. To mitigate these risks, the sources describe a robust system of monitoring conducted by boards of directors, external auditors, lenders, and active shareholders who utilize tools like proxy fights, engagement, and the threat of exit to ensure value maximization. The discussion extends into executive compensation, illustrating how stock-based incentives and long-term incentive plans are designed to align leadership goals with owner interests, while acknowledging the controversies surrounding rising pay levels and the risk of short-term price manipulation.
Beyond internal mechanisms, the unit compares global governance regimes, contrasting the market-based systems of the United States and United Kingdom with the bank-centric models found in Germany and Japan, and detailing unique structures like the Japanese keiretsu, European codetermination, and the challenges of family-controlled pyramids. Transitioning into the purpose of the firm, the unit evaluates the tension between traditional shareholder primacy and the emerging model of stakeholder capitalism. While the classic Friedman doctrine argues that profit maximization is the most efficient way for businesses to serve society through tax revenue and legal compliance, the concept of enlightened shareholder value suggests that investing in employees, customers, and the environment is actually a prerequisite for long-term financial success. The sources introduce "responsible business" as a modern framework where companies seek to create social value as their primary mission, guided by the principles of multiplication, comparative advantage, and materiality to ensure their societal contributions are both impactful and strategically sound. Finally, the unit addresses the practical implementation of these philosophies through legal structures like benefit corporations and B Corp certification, alongside the growing importance of harmonized environmental, social, and governance (ESG) reporting standards to provide transparency and accountability in an increasingly complex global economy.

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