Foundations and FrameworksEdit

Agency theory

Figure 1 – Hierarchy Through Agency Theory

Questions asked of whether a board is efficient, effective and performing well inevitably are responded to by ‘it depends’. The requirement for a firm, shareholders, a board, management, meetings, processes and anything else that serves within the corporate governance atmosphere is determined by context. Context is the specifics of the scenario in which the firm operates. Context, in this regard, means there is demand for a product or service, which a firm offers, and for them to do so, they have put in place a structure to aid in their performance of delivering that product or service. Context therefore means that as different parts of the atmosphere change, so too does the way in which the firm operates.

This leads to the framework for this assignment, agency theory. Principals or shareholders require a firm to be profitable and successful, however managers would prefer it to be run differently or, more simply, managers tend to not act in the best interest of the shareholders; sometimes they may act for the benefit of the company’s reputation or themselves and not profitability. Due to this separation of ownership and management, the shareholders put in place a person or group of people, often professionals from either within or outside the industry, to provide impartial and unbiased direction on strategy, policy and accountability. Agency theory therefore sets the foundation of why a board exists and how it is expected to act. Agency theory also sets the precedent for hierarchy and structure when discussing corporate governance, ethics and accountability.

Throughout the following discussion, I will use agency theory and the collapse of Babcock and Brown as the framework and context to explain the delicate connections the board has within the firm. I will use various examples of firms and diagrammatic links to illustrate agency theory, the purpose of the board, board structure and ethics and accountability issues faced by the board. I will then end the discussion with an evaluation of the importance of the board by comparing Babcock and Brown to a theoretical firm with no board of directors.

Babcock and BrownEdit

Founded in 1977, Babcock and Brown generated income from the USA, Europe and Australia as an adviser for structured finance deals such as leases, debts, hedges and securitisation. The company floated itself on the Australian Stock Exchange (ASX) in 2004, raising $550Mil in capital. The company’s peak performance was during 2005 to 2007 where the share price rose from its original float price of $5AUD to $34AUD as a result of their asset backing. Led by speculation in June 2008 of the company selling off assets to pay debt, and shortly after the collapse of Lehman Brothers in September 2008, the post-mortem shows the demise of Babcock and Brown officially began in November 2008. The company initially raised a ‘firewall’ to protect their assets from being sold off, followed by the founder, Jim Babcock, and CEO, Phil Green, resigning from their positions on the board and, finally, the banks called in the debts owed to them, a value in excess of $2B AUD. By March of 2009 the board had been forced to make the decision to sell of the firm’s assets to pay off debts, leaving the company with a value of less than $50M AUD and a share price of $0.14AUD




Summary of Wiki (previous)

Corporate Governance (next)

The Purpose of the Board

Board Structure & Size

Accountability & Ethics

Concluding Statement

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