ECONOMIC THEMES Niš, godina XLVIII YU ISSN ECONOMIC THEMES Published by: Faculty of Economics Niš Editor: Dr Evica Petrović, Dean Editorial Board: Dr Dejan Spasić, Faculty of Economics

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ECONOMIC THEMES Niš, godina XLVIII YU ISSN ECONOMIC THEMES Published by: Faculty of Economics Niš Editor: Dr Evica Petrović, Dean Editorial Board: Dr Dejan Spasić, Faculty of Economics Niš Dr Blagoje Novićević, Faculty of Economics Niš Dr Sreten Ćuzović, Faculty of Economics Niš Dr Vera Đorđević, Faculty of Economics Niš Dr Srđan Marinković, Faculty of Economics Niš Dr Biljana Rakić, Faculty of Economics Niš Dr Bojan Krstić, Faculty of Economics Niš Dr Ljiljana Maksimović, Faculty of Economics Kragujevac Dr Dragana Pokrajčić, Faculty of Economics Belgrade Dr Robert Gora, University of Information Technology and Management, Rzeszow, Poland Dr Robert Vodopivec, University of Maribor, Slovenia Dr Angel Georgiev Angelov, Faculty of Management and Informatics, UNWE, Sofia, Bulgaria Dr Penka Goranova, Tsenov Academy of Economics - Svishtov, Bulgaria Dr Dino Martellato, Faculty of Economics, University Ca' Foscari Venezia, Italy Dr Ljubica Kostovska, Faculty of Economics Skopje, Macedonia Dr Tatiana Orekhova, Donetsk National University, Ukraine Dr Alexandru Trifu, University,,Petre Andrei of Iasi, Romania Dr Ümit Gökdeniz, Marmara University, Istanbul,Turkey Editor-in-chief: Dr Ljiljana Stanković Economic themes was partly financed by Ministry of Science and Technological Development of the Republic of Serbia Lector: Miroslava Đorđević Computer Support: Zvonko Ilić Ivana Ranđelović Address of the editor and staff: Niš, Trg kralja Aleksandra Ujedinitelja br. 11, phone: , WWW: YU ISSN SD 1990; UDC 33; ID FACULTY OF ECONOMICS NIŠ ECONOMIC THEMES YEAR XLVIII No. 1 Niš, 2010 ********************************* EKONOMSKI FAKULTET NIŠ EKONOMSKE TEME GODINA XLVIII BROJ 1 Niš, 2010. C O N T E N S 1. Biljana Predić, Maja Ivanović-Djukić METHODS OF SOLVING AGENCY PROBLEM Dragoslav Kitanović, Miloš Krstić THE IMPACT OF FOREIGN EXCHANGE RATE ON THE ECONOMIC GROWTH OF SERBIA Radenko Milojević, Marija Andjelković Pešić BUSINESS CULTURE AS ACCELERATOR OF BUSINESS EXCELLENCE MODEL IMPLEMENTATION Branko Rakita, Dušan Marković MANAGING SOCIO-POLITICAL RISK, MARKETING AND BUSINESS ACTIVITIES IN FOREIGN COUNTRIES Aleksandar Radivojević, Ivan Filipović, Vukašin Šušić SPACIAL AND FUNCTIONAL CHANGES IN THE MUNICIPALITY OF SOKOBANJA DURING THE SECOND HALF OF 20th CENTURY Isidora Ljumović, Srđan Marinković, Vesna Milanović-Golubović CORPORATE REBRАNDING FOLLOWING MERGERS AND ACQUISITIONS IN THE SERBIAN BANKING INDUSTRY Marija Džunić EFFECTS OF SOCIAL CAPITAL ON THE EFFICIENCY OF SOCIAL OUTCOMES Vladimir Dženopoljac CONTEMPORARY TARGET COMPANY VALUATION METHODS IN THE ACQUISITION PROCESS Milica Radović SERBIAN STOCK MARKET TREND ANALYSIS FROM 1ST MARCH, 2006 TO 31ST MARCH, Biljana Bogićević Milikić EMPLOYEE TURNOVER: CAUSES, CONSEQUENCES AND MANAGEMENT...131 UNIVERSITY OF NIŠ FACULTY OF ECONOMICS ECONOMIC THEMES Year XLVIII, N o 1, 2010, p Address: Trg kralja Aleksandra Ujedinitelja 11, Niš Phone: Fax: METHODS OF SOLVING AGENCY PROBLEM PhD Biljana Predić * PhD Maja Ivanović-Đukić * Abstract: Separating ownership from management in enterprises leads to the appearance of agency problem that is emphasized in large corporations with a great number of shareholders and where the power of top managers is excessive. Immoral behavior of managers towards shareholders can lead to a company s crash, loss of the life savings of shareholders and numerous economic and social consequences. In order to mitigate the negative impact of agency problem, a great number of measures are undertaken by enterprises. The aim of this paper is to explain measures that can be implemented in the enterprises of shareholder type for prohibiting immoral behavior of managers towards shareholders and thus, avoiding negative consequences of agency problem. Keywords: management, shareholder, agency problem, Corporate Governance Code, shareholder value Introduction In large enterprises, where managing is extremely complex, the owners choose qualified persons-managers, who will lead the business (manage the enterprise).that way, it comes to the division of the management function from the ownership function. The job of managers is to mange business so to secure the continual increase of invested assets for owners. Since managers have their own objectives (maximization of their earnings, maximization of managerial influence and power), it can come to opportunistic and disloyal behavior of managers towards owners. The situation, when managers work to the satisfaction of their own interests at the expense of the owner s interests, represents the so called agency problem. * University of Niš, Faculty of Economics, UDK ; Review paper Received: ; Accepted: Biljana Predić, Maja Ivanović-Đukić Agency problem is evident in large corporations, where a large number of diversified assemblies of shareholders (from institutional investors to individuals with minor deposits) that do not have insight into the work of agents (managers) are present. On the other side, top managers of large corporations possess too much power and have benefits from their behavior, but that behavior is at the expense of shareholders and other stakeholders of the corporation. These problems have recently emerged, as some large enterprises, like Enron, for example, have bankrupted because of the opportunistic behavior of managers. The bankruptcy of the company Enron is considered as one of the biggest scandals in the US because of the immoral behavior of its managers, whereby the founder and chief executive officer of the company have been sentenced to life imprisonment. The company Enron is not unfortunately a unique victim of the immoral behavior of managers and an example of obvious agency problem. There are many such examples in foreign and domestic practice. In order to eliminate or mitigate the negative impact of agency problem and incite mangers to work in the interest of owners, a large number of measures are undertaken: forming of the control bodies monitoring the work of managers application of the Corporate Governance Code, connection of the rewards of managers to the earnings of shareholders and the like. Control Bodies Monitoring the Work of Managers Because of the division of the ownership function and the management function and opposite interests of owners and managers, a need emerges for controlling the work of top managers. External bodies perform the control of the work of top managers (auditors that control financial statements) as well as internal bodies. In an individual enterprise, the owner performs the internal control of the work of top managers. If an enterprise has many owners, which is the case of large corporations, then the bodies that control the work of top managers are chosen at the general meeting. Control bodies that monitor the work of top managers are not the same in all enterprises. There are mainly two models of internal control considering the work of managers: first degree and second degree models [1, p. 194]. First degree model of the internal control of top managers presumes that a board of directors controls the work of top managers. The members of the board of directors are elected by the assembly of shareholders. It is comprised of top managers, and often a top manager is elected the head of 2 Methods оf Solving Agency Problem the management committee. Besides top managers, within the management committee there are managers of the enterprise and business people from other organizations (managers of other enterprises, faculty professors, consultants, etc.).this model of control is dominant in enterprises in the US, Great Britain, Italy, France [2, p. 23]. In enterprises which use such a model of the control of the work of top managers, freedom of top managers is relatively high, since top managers (as representatives of management committees) control their work themselves, thus in turn negative consequences of agency problem manifest themselves. The justification of such a model involves lower costs and bureaucracy, since there is no hierarchical level of control above the level of the top management. In order to increase the objectivity of the control concerning the work of top managers and to reduce the potential malversation of top managers, people that are not part of the enterprise are elected for the members of the management committee so that they could objectively estimate the strategic decisions and behavior of top managers. In the second degree models of the control of the work of top managers, there are two control bodies, the management and inspecting committee, whereby each can be dominant. When the second degree model with the domination of the inspecting committee is present, then the situation is as follows: the assembly of shareholders elects the inspecting committee composed of people from external environment, and the inspecting committee elects the members of the management committee, follows their work and defines the compensation. The management committee is composed mainly of the mangers of the enterprise and its head is a top manager. This model is dominant in enterprises in Germany, Austria, Denmark [1, p. 194]. In enterprises in which this model of the control of top managers is present, there are potentially less possibilities of top managers to behave irresponsible towards shareholders owing to the greater objectivity of the control of their work and behavior. But, a great shortcoming of this model is in the fact that a hierarchical level emerges in the structure of management so that there are higher costs (compensations to the members of the inspecting committee). In Serbian enterprises, a different variant of the second degree model is often present in which the assembly of shareholders elects members of the management and inspecting committee; whereby the inspecting committee controls the work of external controllers, while the management committee is responsible for the control of the work of top managers. The key obligations of the inspecting committee are to inform shareholders about: 3 Biljana Predić, Maja Ivanović-Đukić accounting practice, statements and practice of financial reporting of the enterprise, alignment of business with legal and other demands of regulatory bodies, the independence, competence and ability of the enterprise s auditor, all the contracts made between the enterprise and members of the management committee, proposing the amount of the compensation to the auditor [1, p.195]. While the obligations of the management committee (member of which is generally a top manager) are to: a) perform the control of the accuracy of financial statements and information, b) formulate and implement the strategy of an enterprise and monitor the work of the executive committee and the administration of enterprises., c) establish and approve business plans of an enterprise, d) assemble the meetings and establish the agenda, e) further, terminate and abolish the authorization, power of attorney and similar acts of legal representation, f) prepare the drafts of decisions from the general meeting and control their implementation, g) define the date of establishing the list of shareholders with the right of participation in the general meeting, h) issue shares, options for acquiring shares and other securities, i) establish nominal value of any share and other property with previously acquired opinion of the certified auditor, j) elect the executive committee, give approval of contracts between the members of the executive committee and enterprise, establish their compensation and decide on the termination of their mandates or employment, k) establish the amounts of dividends, date and procedure of the payment of dividends, l) decide on other issues within appropriate performance of activities and business of enterprise with the aim of protecting the best interests of the enterprise and its shareholders, etc [3]. In enterprises where the model of the control of the work of top managers is present, the same problem appears as in the first degree models. Top managers as heads of the management committee control their own work, such that the control is not objective, which gives freedom to top managers to behave irresponsible way to shareholders. This problem can be solved by excluding top mangers from the management committee, through which much greater objectivity of the control of the work of top managers is achieved, the ethicality of their behavior towards shareholders is incited and the impact of agency problem is mitigated [4, p ]. The creation of bodies controlling the work of top mangers in enterprises of corporate type complicates the management process, but to a certain extent constrains the power of top managers and mitigates the negative impact of agency problem. Besides the direct control of top 4 Methods оf Solving Agency Problem managers, the alleviation of the impact of agency problem can be affected by the formulation and application of the Corporate Governance Code. Corporate Governance Code The Corporate Governance Code represents the set of written rules whose application can ensure good corporate governance. Good corporate governance presumes that the establishment of good relations between company managers, its management committee, shareholders and other stakeholders can enable the sustainable development of enterprise with the realization of the objectives of key stakeholders. Consequently, by formulating and applying the set of rules, the top management is motivated towards the realization of those objectives that are in the interest of the company, shareholders and other stakeholders. At the same time, the application of the mentioned rules should enable efficient monitoring of the business activity of an enterprise to all stakeholders. Some questions that comprise the codex of the most of organizations are related to: transparency of the work of the inspecting and executive committee and a high degree of the ethicality of behavior, equal treatment of shareholders, taking into consideration the expectations of other shareholders. А good example of the Corporate Governance Code is that of the Organizations for Economic Cooperation and Development (OECD) from This Code has been conceived as a response to the request directed to the Council of the OECD at the ministry level to design, together with national governments and other relevant international organizations and the private sector, the set of standards and guidelines for corporate governance that will represent the basis for mutual management and reporting in the countries that are members of the OECD, but also in other countries in the region. The standards should be directed towards the problems of management that have stemmed from the division of ownership and control. Key principles defined by the Code are related to [5]: - securing the basis for the efficient framework of corporate governance, - the rights of shareholders and key functions of ownership, - equal treatment of shareholders, - the role of interested parties in corporate governance, - revealing of the data and transparency - the responsibility of the management committee. 5 6 Biljana Predić, Maja Ivanović-Đukić The first group of principles is related to the respect of legal and contractual obligations of an enterprise, since they represent the basis of efficient corporate governance. Besides respecting obligatory regulations that stem from the law or contract, it is desirable that the management of a company should formulate different standard guides (e.g. the codex of business ethics) that do not have the status of law or regulation, but are of elective character and can have a positive impact on the top management. The second group of principles is related to the protection and alleviation of the creation of shareholders rights. The application of these principles should enable shareholders: to secure methods of the registration of property, share transfer, timely and regular access to relevant information about company, to participate and vote at the general meeting, the choice and change of the members of the management committee, the share in company s profit, share in making decisions in amending statute and founding act or approval of additional shares, to be sufficiently informed about decisions related to thorough corporate changes etc. In one word, these principles should enable shareholders the realization of the objectives they have right to owing to the invested capital, and which cannot be realized directly because of the existence of a great number of co-owners. Besides, it is very important to secure the equal treatment of shareholders, which presumes that all shareholders can realize their rights, including those with small deposits. It is also necessary to secure full informing for shareholders that are detached from the enterprise, etc. Besides shareholders, a good corporate management should have respect of the rights of other interest groups established by the law or mutual agreements and should incite active cooperation between companies and interested parties in the creation of wealth, employment and sustainability of financially healthy enterprises. Where interested parties participate in the process of corporate management, it is necessary for them to get timely and regular access to relevant, necessary and reliable information. It should enable interested parties to give the management committee their opinion about illegal and unethical practice without any restrain, while their rights remain protected. Good corporate governance should secure timely and accurate announcement of material facts related to a company, including financial situation, property and company management. This presumes public revealing of: financial and business results of a company, company objectives, considerable share owning and the right of vote, compensation policy for the members of the management committee and key managers, information about the members of the management committee, including Methods оf Solving Agency Problem their qualification, the selection process of the members of the management committees of other companies. The framework of corporate governance should secure strategic managing of a company, efficient monitoring of the management by the management committee and responsibility of the management committee towards the company and shareholders. The members of the management committee should act on the basis of complete information, with good intentions, with attention to and concern of the best interests of the company and shareholders. In the cases where decisions of the management committee can influence in various ways different groups of shareholders, the management committee should treat all shareholders equally. This codex presumes that the management committee should apply high moral standards. In order to perform their obligations, the members of the management committee should have access to accurate, relevant and timely information. The Corporate Governance Code of the OECD is the example of good conceived regulations whose application should secure good corporate governance and a high degree of ethicality of the behaviour of top managers and members of the management committee in order that the impact of agency problem could be mitigated. In Serbia, the application of the Corporate Governance Code is not a practice. This is validated by specific economic circumstances (in Serbia, since the 1990s the state and socially owned enterprises have been dominant, so it has come to the creation of corporations and the development of corporate governance much later than in capitalistic countries). Companies that are trying to build the image of responsible Serbian citizens, such as the enterprise Metalac, from Gornji Milanovac, have been among first to apply the Corporate Go
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