This research is an explanatory research purpose of establishing the effect of corporate governance variables on shareholder value maximization. The study adopts a case study approach by comparing practices in the U.S. and Germany. For this form of research, a case study approach is ideal to answer the research questions and, in an attempt, to understand and compare the two phenomena. Through a deductive approach of existing theories and academic research, the study can draw a quantitative approach to establishing the influence of corporate governance in each country, including shareholder maximization. The study will be based on data collected from different scholarly articles as well as other credible sources (organization or company reports and credible news outlets). The data and reports collected will be sourced through Google Scholar (scholar.google.com). The main keywords used are ‘maximizing shareholder value’, ‘corporate governance’, ‘corporate governance in the U.S.’, ‘corporate governance in Germany’, ‘effects of maximizing shareholder value’ and many other combinations. The preliminary search has yielded more than 20 peer-reviewed articles about the study’s aim. There is vast material to be reviewed about the topic, and understanding the data collected will help in the comparison and detection of the relationship between maximizing shareholder value and corporate governance. (HireEssayWriter for a similar paper)
Corporate governance is the process and structures by which stakeholders institute measures to protect their interests, and corporate management protects the interest of its stakeholders (Dedman, 2002). Ideally, good corporate governance is founded on principles of responsibility, fairness, transparency, and accountability. According to Jensen and Meckling (1976), corporate governance enables an enterprise to separate ownership and control – a factor that causes a principal-agent conflict. This form of conflict has raised contention in many quarters, given the often-conflicting interests between shareholders and directors. Lanno (1999) describes corporate governance in two parts; corporate that is the enterprise and governance about the administration strategy adopted by the company. In the U.S., there has been concern over the lack of oversight on corporate governance, particularly after the events that transpired at Wells Fargo Bank (Grace et al., 2019). Today, company boards are responsible for much of corporate governance oversight in the U.S. as an attempt to propel their company’s prosperity and accountability. In Germany, on the other hand, changes to the Shareholder Rights Directive II (SRD II) altered the domestic laws that govern corporates and their responsibility to shareholders (Trif, 2020). The differences in approach to corporate governance between the two countries call for a redefinition of corporate governance and the answering of the question as to whom lies shareholder concerns, with the government or as part of corporate responsibility. However, despite the differences in ideology, the ultimate objectives of corporate governance remain to improve shareholders’ wealth while taking to account the concerns of the stakeholders. (OrderCustomerPaper from us)
As previously mentioned, these objectives raise the principal-agent conflict. According to Jensen and Meckling (1976), the agency theory proposes ways that this conflict can be reduced. Ideally, the owners of the company are the principals, while management is the agents. Jensen and Meckling explain that a company is “a set of informal and formal contracts under which one or more principal engage people as their agent to perform services on their behalf, the performance of which requires the delegation of some decision-making authority to the agent.” It is expected that principals’ conflict with their agents’ especially in corporate governance where the two vary in ideology. According to Jensen and Meckling (1976), managers make decisions that maximize their interests, many of which compete with those of the principals. Where such conflict exists, there arise provisions in corporate governance capable of addressing the issues. Possible strategies that guide corporate governance include product market competition, external control mechanisms, internal control mechanisms, and legal and regulatory mechanisms (Jesen, 1994). For this study, the author focuses on the internal control mechanisms as they are company and country-specific. Davidson et al. (2005) contend that the internal governance structures of a company consist of functions and processes established to influence and manage the actions of an enterprise’s management. For any enterprise to retain its value, it is required to enhance its corporate governance structures and minimize risks that result from over leverage, weak internal controls, and poor financial management.
3 Principles of Corporate Governance
Despite the continued advocacy for improving shareholder value, the doctrine is unrelated to the principles of microeconomics. Friedman (1970) argued that corporate management focused more on shareholders than social welfare, hence, in 1970; he took on companies for engaging in social responsibility rather than achieving such objectives through their core mandate. He stated that “There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” However, despite his arguments being noble, they ignore the correlation between poverty and unethical practices and the deploring social life following corporate greed and exploitation of resources by companies. Friedman (1970) and Jensen and Meckling (1976) pioneered the theories on shareholder maximization. Their position remains unequivocal that the primary goal of any company should be improving the shareholders” value. Among ways that companies can achieve this objective is by through financial incentives, stock options, and through offering shares. Equally, management can be incentivized through stocks, stock options and financially to ensure they work to improve the shareholder’s value and “to align their interests with those of the maximizing the stock price” (Gay and Denning, 2014; Smith, 2014).