Corporate governance and Ethics Harvard Case Solution & Analysis

INTRODUCTION

Justin Tyme has founded a medium-sized property listing company named Cambridge Tymes. He is now a major shareholder in the company as he owns a stake of 28 percent in the company but he is not the member of board of directors in the company. According to the case it appears that there is a serious agency conflict among Tyme and the board of directors of the company. As this company is close to Tyme, he desired that the board must consult him on major company decisions including business strategy and dividend policy.

Two of the directors, agree with Tyme demands but other do not. Tyme had threatened to sue the board of directors and had also demanded resignation from the director that had sold his own company’s land to Cambridge Tymes for excessive price.

PROBLEM AND ITS BACKGROUND

The problem discussed in the case relates to corporate governance.  Corporate governance is basically the system for the management and the control of the corporations. The concept of corporate governance is relatively new. It is being researched and studied from the last two decades only, although the dilemmas discussed under this very concept were present in the business arena from centuries.

Under corporate governance, board of directors is a body that is entirely responsible for the business decisions of the company (Casson, 2013). The board composition and structure is an issue that is of greater concern to the organizations. Corporate governance confirms how boards delegate authority of managing the business. The board delegates the authority by assigning specific limits of authorities to CEO, Executives and committees. Then these people assign tasks and objectives to the management and employees.

Companies have an obligation to communicate effectively with stockholders. The practices of communication with the stockholders help them to comprehend the business, its financial condition, risk profile and operating performance.

Companies communicate with stockholders and other stakeholders by proxy statements, annual reports and stockholder meetings, and through many other mediums. All of these communications medium must provide information that is consistent and clear.

There are various aspects of corporate governance, the most important of which is the “agency conflict”. Agency conflict arise when the owners of the company i.e. shareholders interfere in the matters that are to be decided by the management of the company and particularly the board of directors. Managers mostly select less risky investments with reduced financial leverage because as a result of this they can decrease the threat of bankruptcy, and evade losses on their own ownership and investment in the company.

Corporate governance also deals with the accountability of the individuals through a mechanism which reduces the principal-agent problem in the organization (khan, 2011).

The presence of audit committee in the corporate governance system of the organization can also help in reducing the agency conflict. It is also an element of the good corporate governance practice to have a functioning audit committee.

To control agency conflicts certain special costs are incurred. These costs are known as agency costs. Ross, Westerfield and Jaffe (2005) describe these costs as additional costs that are incurred because of the existence of conflict conditions between stakeholders. These are incurred by the owners of a company in case where ownership and control are separated.

MEASURES FOR DEALING WITH THE BOARD’S RELATIONSHIP WITH TYME

The measures for dealing with the board’s relationship with Tyme are given as under. The pros and cons of each measure are also discussed;

Incentives for Agents:

The first measure that the Chairman can take is to link the agents’ outcomes with the incentives they can earn. This means that the BOD should be offered incentives such as performance related stock options in the company to control their decisions in the favor of the Cambridge Tymes. The major cause of the conflict between Tyme and the BOD is due to information asymmetries. The BOD makes decisions that determine the impact to the interest of the principle i.e. owners. The CEO and the director’s compensation must be linked with the increase in the value of Cambridge Tymes over the years. If the directors and the CEO’s returns would be linked to the Cambridge Tymes’ performance; they will be more vigilant in their decisions regarding the company. Jensen and Murphy (1990) suggested that an average CEO’s wealth increases by $3.25 when $1000 in the company’s value. They also find that CEO pay-performance sensitivity coefficient is lower in companies with an increased variability in returns. Mehran (1995) suggests that directors are motivated by the form of compensation rather than the level of compensation....................................

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