2.2.8 Synopsis section 2.2

Section 2.2 starts by describing the reasons for establishing a firm. A firm can be seen as a system of relationships that comes into existence for reasons such as certainty, efficiency and synergy among team members in the firm. For these reasons the VOC - the first public limited liability company - was established in 1602. Nowadays, firms are still established for the same reasons and in

general have five core legal characteristics (legal personality, limited liability, transferable shares, delegated management under a board structure and investor ownership). Within the VOC a separation of ownership (the shareholders) and control (the Lords Seventeen) existed to keep the company manageable, just as in modern companies. However, this separation of ownership and control results in information asymmetry and in a divergence of interests between the shareholders (principals) and management (agents): the agency problems. To minimise these agency problems, agency costs are inevitable (monitoring costs, bonding costs, the residual loss and costs due to self-control problems). These costs are incurred due to the implementation of possible remedies for the agency problems, such as alignment, disclosure, commitment, separation of functions and monitoring. Implementing one of these five remedies in companies is not sufficient: combinations depending on company characteristics are necessary to minimise agency problems. Although all five remedies are of importance, over time the attention given to the remedies changed. In many western countries nowadays the remedies alignment, commitment and separation of functions are quite sufficiently laid down in regulation or in agreements. Nevertheless, disclosures about and monitoring of the level to which those rules are applied should receive most of the attention nowadays, to ensure continued compliance with the rules and agreements. The comply or explain principle can be regarded as a variation of the disclosure remedy. In avoiding information asymmetry transparency is aimed for as regards code compliance towards the stakeholders. From the perspective of the company (more specifically the board members) there is also the commitment remedy. The company is subject to the rules of the code, i.e. self-regulation, and is committed to disclose the related information in its corporate governance statement.

As stated above, over time the five remedies have been embedded in rules, regulations, legislation and contracts. Or more in general: they have been translated into legal strategies and have become corporate law. Strategies such as agent constraints, decision rights and agent incentives were laid down in (international) regulations or legislation to solve and prevent agency problems as much as possible. These developments even increased after the corporate scandals (see chapter 1): legislation and codes blossomed and the corporate governance discussion gained importance, as explained in more detail below. In this discussion the national corporate governance codes and thus the comply or explain principle can be regarded as a regulatory strategy to constrain the agents ex post through standards (see table 2.2.7 above). Standards leave the precise determination of compliance with these standards to after the facts (ex post). The company (more specifically the board members) drafts the corporate governance statement after the financial year in which code compliance did or did not take place.1

For the sake of history and explanation the section above commenced with the agency theory, although from both an economical and legal perspective. Other theories of relevance in the still ongoing corporate governance debate are addressed further below.