Board Of Directors Constraint Mechanism Of The Managers

Incidents that corporate management detriments the ownership's interests have been unveiled one after another in both China and western countries in recent years, thus bringing another move in studying the corporate governance, especially the incentive and constraint approaches targeted at top executives.The article, with reference to the Principal-Agent theory, points out that top executives, being part of the Agent, have different interest orientation from the Principal. The executives tend to maximize their own interests and may detriment the Principal's interests in the process. Therefore, approaches shall be in place to keep the Agent and Principal aligned in interests. As part of the mainstream study, two approaches are available, i.e. incentive mechanisms, which encourage the executives towards the Principal's objectives, and constraint mechanisms, which restrict the executives from going aberrant from the Principal's interests. The article asserts the constraint approach is more efficient, though the incentive approach is also helpful.The article, on the basis of Board Centralism concept, analyzes the position and function of executives in the corporate governance structure and points out that the executive's control over the corporate is sourced from the Board and naturally, it's reasonable for the Board to exercise constraints on the executives. The article further points out that the Board is the most economical resource for executive constraints. Therefore, it's practical for the Board to establish constraint mechanisms and apply them onto the executives.A lot of constraint mechanisms are available for use by the Board. The article gives a description of details and functions of a number of constraint mechanisms and makes a case study on the HK-based CLP group to demonstrate the application and effect of certain constraint mechanisms. As corporations differ widely in many aspects, no single constraint pattern can serve all corporations, particularly in China, where enterprises differ not only in ownership system, but also in organization pattern. Even at a particular corporation, a single constraint mechanism could not cover all risk exposures. As a solution to this problem, the article puts forth a model of Weighted Portfolio of Constrain Mechanisms (the WPCM), which includes six constraint mechanisms. For each given corporation, a reasonable and efficient weighted portfolio of constraint mechanisms can be developed with this WPCM model on the basis of situation analysis. This constitutes the core view point and kernel of the article. Such weighted portfolio will maximize the constraint efficiency by reducing the constraint costs.