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Agency theory predicts that the Chief Executive Officer (CEO) and the chairman positions should be held by different individuals in order to protect shareholder’s interest. Though there are mixed evidences on CEO duality and firm performance, most research have found that there is negative relationship between CEO duality and firm performance. Although, in the last decades of the twentieth century, agency theory became the dominant force in the theoretical understanding of corporate governance, it does not however cover all aspects of corporate governance. This paper aims to explore whether it is better to combine various theories in order to describe effective and good corporate governance or theorizing corporate governance based on one theory only. This will cover corporate governance theories which include agency theory, stakeholder theory, stewardship theory, and institutional theory.
Currently, the most
important issue with respect to financial institutions is how to motivate staff
without providing perverse incentives. For instance, with the implementation of
a proper incentive system, staff will be motivated via their self-interest to
create financial innovations to better price and hedge risk. However, this
system must also be designed with checks and balances in mind because it is
also very easy to institute a system in which perverse incentives drive individual
behavior. In an effort to modernize the Chinese financial system, it is
important to understand both the underlying mechanism by which people respond
to incentives to better design compensation schemes that maximize innovation.
Utilizing game theory, it is possible to analyze the interplay between these
two drivers of human action. From this analysis it becomes possible to design
better ways of compensating staff to curb undesirable behavior by those in the
financial industry while still promoting innovation within the field.