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Corporate Governance Maximise Shareholders Essay

‘’An agency relationship arises when one or more principals (e. g. an owner) engage another person as their agent (or steward) to perform a service on their behalf. ’’ (Institute of Chartered Accountant in England and Wales) This is demonstrated in the diagram (see Appendix 6); Directors (agent) of ITV are employed by the shareholders (principal) and therefore are working for the benefit of the shareholders. Applying good CG to ITV will improve the agency relationship as it shows that the agents are fulfilling their roles given by the principals.

‘’The Committee continues to recognise the importance of executive Directors becoming shareholders so as to align their interests with other shareholders. ’’ (AR – Page 68) This is a good method in order to maintain an excellent agency relationship as the agent will have their self-incentive tied to the company’s wellbeing as much as the principals’. Stakeholder Theory Stakeholder theory is about the relationship between the company and their stakeholders (see Appendix 7).

It ‘’pushes managers to be clear about how they want to do business, specifically what kinds of relationships they want and need to create with their stakeholders to deliver on their purpose. ’’ (Freeman, R. E. , Wicks, A.

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C. , & Parmar, B. (2004) In the Donaldson and Preston Article “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications” (1995), they suggested that the stakeholder theory have three approaches. Firstly descriptive approach, this is how the company deals with their stakeholders and protects their interests.

Secondly instrumental approach, this is the consequences that may be faced by the company due to taking stakeholders’ interests into consideration in management of the company, as it may interrupt various CG objectives. Thirdly normative approach, this is the moral and guidelines linked to the company’s activities and management. The most effective approach to put Stakeholder Theory into practice is Corporate Social Responsibility (CSR) theory. CSR uses political, environmental, social, technological, economical and legal approach in order to identify all their external and internal stakeholders’ interests.

ITV complies with CSR approach as they paid ? 69 million in taxation (see Appendix 8) and also provided an external auditors report; these are legal requirements. As ITV is a television network, they rely highly on the latest technology for the best quality of service and most efficient. Due to this matter ITV invest accordingly on equipments for the company. This approach may be costly in the short-term but cost-effective in the long-term. Relation The relation between the company’s performance and CG can be both positive and negative depending on the timescale.

The cost of CG may have a negative impact on the company’s financial performance, hence, the shareholders’ wealth for the short-term. However, implementing these costs at the earlier stage of the business cycle and maintaining the required after costs can lead to the company improving their financial performance; this will lead to a positive impact on the shareholders’ wealth. For ITV, CG seems to have made negative impact on the shareholders’ wealth as after tax, ? 79 million was less attributable to the shareholders’ wealth.

However, after calculating the Return on Investment percentage, it shows an increase of 23% (see Ratios) on the share value. This shows that regardless of the CG costs, the shareholders’ overall wealth has grown. Conclusion In conclusion, CG can have a positive or negative effect on the shareholders’ wealth. In relation to ITV, the Return on Investment percentage showed a positive effect. Also, the increase of 1. 5p on earning per share clearly shows that CG does maximise the company’s shareholders’ wealth.

In order to get to this conclusion, agency theory and stakeholder theory were applied to ITV to demonstrate how it would work within the company. Also, the relation between CG and shareholders’ wealth were established through statistical evidence. Recommendation ITV should calculate the accurate amount of tax for the current year rather than calculate it in the next tax year as ‘adjustments for prior periods’ (see Appendix 8). This creates a positive impact on the company’s tax payment as it is added back to the current year’s tax; however, this ?

19 million from 2010 tax could have been attributable to the shareholders. Ratios Liquidity ratio = Current Assets/Current Liabilities 1482/754 = 1. 97:1 Return on investment = Gain from investment – Cost of investment/Cost of investment*100 7. 9-6. 4/6. 4*100 = 23. 44% References ITV PLC Annual Report (2011). Retrieved December 13, 2012, from http://www. itvplc. com/sites/itvplc/files/ITV%202011%20Annual%20Report%20and%20Accounts. pdf FRC – Financial Reporting Council (2012). The UK Corporate Governance Code, Page – 4, Retrieved December 11, 2012, from https://www.

frc. org. uk/getattachment/a7f0aa3a-57dd-4341-b3e8-ffa99899e154/UK-Corporate-Governance-Code-September-2012. aspx ITV PLC, About ITV: What we do, Retrieved December 13, 2012, from http://www. itvplc. com/about/what-we-do Institute of Chartered Accountant in England and Wales (2005). Agency Theory and the role of audit, Principal-agent relationships: What is an agency relationship? , Page – 6, Retrieved December 16, 2012, from https://www. icaew. com/~/media/Files/Technical/Audit-and-assurance/audit-quality/audit-quality-forum/agency-theory-and-the-role-of-audit.

pdf Freeman, R. E. , Wicks, A.

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C. , & Parmar, B. (2004). Stakeholder Theory and “The Corporate Objective Revisited. ” Organization Science, Page – 364. Retrieved December 17, 2012, from http://www. thunderbird. edu/wwwfiles/publications/magazine/fall2004/faculty-papers/2Corp-Obj-Freeman-Reply. pdf Donaldson, T. & Preston, L. E. , (1995). The Stakeholder Theory of the Corporation: Concepts, Evidence and Implications, The Academy of Management Review, Retrieved December 20, 2012, from http://www. jstor. org/discover/10. 2307/258887? uid=3738032&uid=2129&uid=2&uid=70&uid=4&sid=21101532532571 Appendices Appendix 1 – Annual Report 2011– Page 57 ITV’s Corporate Governance Structure Appendix 2 – Annual Report 2011– Page 41 Deficit Funding Contribution Appendix 3 – Annual Report 2011– Page 73 and 95 The Annual Fees & The Audit Fees paid to KPMG Appendix 4 – Annual Report 2011– Page 86 Consolidated Statement of Financial Position Appendix 5 – Annual Report 2011 – Page 68 Balance of Remuneration Appendix 6

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