CORPORATE GOVERNANCE

Impact of Corporate Governance Disclosure on Principal-Agent Problem within the UK Oil Sector

Table of Contents

Abstract3

Introduction to research problem4

Aims and Objectives6

Literature review and rational6

Corporate governance6

Types of Corporate Governance7

The Control Mechanisms7

Types of the Control Mechanisms8

Corporate Governance and the Principal Agent Problem9

Corporate Governance and Voluntary Disclosure9

Agency Problem in Oil Sector10

Rationale for the Study11

Methodology12

Resource Requirement13

Ethical consideration13

Conclusion14

References15

Bibliography15

Abstract

The UK has been privileged with one of the most enlarged, advanced and developed capital markets in the world. Most of the firms in the capital market are Principal agent based instead of single ownership so that there is a less chance of liability risk in decision making. Pragmatic research studies have been performed to observe the effect of various factors on the capital market, especially on the principal agent firm. Corporate Governance is among one of these factors. This study is intended to derive the impact of disclosure of corporate governance on the principal agent problems. The research will also address the issue of agency cost associated with the disclosure of corporate governance. The growth of the firm in terms of financial and economical conditions, dividend growth of firms in respect of paying dividend to the shareholders, managerial ownership within a firm and ratio of Non-executive directors to executive directors would be considered to identify Principal Agent problem. The firms belonging to the oil sector of UK will be analysed as UK retains the status of largest producer of oil and petroleum among European Union countries. Therefore it is hoped that the study will provide a significant background for the analysis of an important sector of United Kingdom.

Impact of Corporate Governance Disclosure on Principal-Agent Problem within the UK Oil Sector

Introduction to research problem

Corporate governance accounts mechanisms that grant all shareholders of the company to participate fairly in decision-making and to assure them that the management acts in the common interests. The transparency of the company's financial situation and ownership structure, consolidation or integration of all relevant shareholders into decision-making processes and a fair distribution of profits among all shareholders are basic factors of corporate governance. (Heinrich et. al, 2005, pp. 5)

To risk liability from the decision making power, property rights are not delimited in one person's hand, rather than there is a separation between the ownership and control. (Fama, E. F. and Jensen, M. C. 1983, pp. 301- 302) However, this detachment of power in ownership and control provides managers a discretional power to attain their own which become the root cause for contravenes of interest among shareholders and management. (Jensen, M. C. and Meckling, W. H. 1976. pp. 306- 310) This situation is termed as the Principal agent problem. Principal agent problem comes up when the principal has less information as compared to the agent. When the agents want to chase and accomplish their own goals instead of the organizational goals, even at the price of getting less earnings for principals. The visible reason behind the Principal agent problem is the asymmetric type of information.

Corporate governance has conventionally been linked with the “principal-agent” or “agency” ...