Corporate Governance

Did my reading on this topic back in the holidays, so not sure if the stuff that I am typing below is 100% correct. So don't blame me if you decide to act smart and repeat to others and they correct you :P

But yeah corporate governance is about the "government" of companies, be they big or small. A major problem occurs when the owners of a firm are different from those who actually manage the firm, which typically is the situation in the vast majority of companies nowadays. The CEO who is the overall in charge of the running of the company typically does not own the company, at least not the whole of it. This means that the objectives of the manager might be in conflict with the objectives of the shareholders. Shareholders typically want the company to maximise its profits. However, managers' objectives might not be to maximise profits per se. Of course if the company is doing well, they might get some enjoyment from it too. But they may pursue other activities which do not maximise profits for the company. For example, they may want a big and posh office with plasma TVs, expensive art paintings, a big company car or even just pursuing an expansion strategy which is not profit maximising so that they can be the manager of a big business empire. This problem is known as the principal-agent problem. The shareholders are the principal and the managers are the agents.

One way to solve this problem is to offer an incentivised contract to the managers of the firm. This means that the renumeration of the managers can be set up in such a way so as to align it with the objectives of the shareholders. Thus, for example, a contract could be set up such that the more profits a company earns, the more the managers earn. Or the higher the share price of the company, the more the managers earn. The managers can also be offered shares in the company such that he owns part of it and thus benefits directly if the company is doing well. These measures would help (though not totally) to make the managers channel more effort into realising the objectives of the shareholders.

However, one problem is that the managers do not get all the benefits. For example, assume the managers only own 1% of the shares. If they channel their efforts into maximising value for shareholders, in the end they only get 1% of the benefits while the rest of the shareholders get the rest of the benefits. The managers might thus decide it is not worth their while to channel ALL their effort into running the business. They would put in suboptimal amounts of effort.

The second equally important problem (which is the main topic of my post) is that effort is not observed. The profits or share price is not 100% under the control of the managers, outside exogenous factors also matter in determining whether the company is doing well or not. For example, if the stock market is not doing well in general, the managers might already be doing very well in keeping the stock price unchanged. However, shareholders might only look at the constant share price and decide that the managers are not doing well and thus the pay they get might not be high enough to reflect the efforts they had put in.

The fact that effort is not observed is pervasive in every area of life. And sometimes it is absolutely heart breaking. For example, lecturers do not observe how hard you have studied for an exam. You might have worked on the subject for 2 weeks, but if you suffer a burn out and flop the paper, you get marks that showed you flopped, and not reflecting the amount of work you had put in. You might be very fat at 200kg but decided to exercise to reduce your weight. You might be able to reduce your weight by half to 100kg but others will still look at your 100kg and think you are a fat and lazy cunt. The problem is they do not see the amount of sweat that you had put in the gym. When you are baking a cake and had spent 2 days trying to figure it out, buy the ingredients, trialing a few times, if the final product that you have is burnt, the person who is eating the cake will still have a negative impression. They will look at the burnt cake and not the amount of effort put in. At least their impression of the effort you have put in is just a fraction of what you had actually put in because your end product is a flop.

In Singapore, this situation is perhaps especially jia lat because of our education system, though there had been efforts to start changing it. People only see the results and conclude you had not studied; nobody actually really rewards the losers who had also worked hard. In a way, this cannot be blamed, because effort is such an intangible thing. The most objective assesssment of all is the result slip. But it still doesn't change the fact that it feels sucky when your efforts do not translate into tangible results and thus others do not know about it. And you fail to get the reward you deserve.

So perhaps whatever you do, don't be scared to be thick skinned, trumpet what you are doing and make god damn sure even if it flops, you package it such that it passes off as the best that it can be.

As Tong Leng so aptly put it (or close enough..), there is no consolation prize in life.