Corporate governance is an aggregate of processes, norms, canons, policies, guidelines, laws, and institutions directing the method by which a corporation is regulated, managed, or controlled. Corporate governance also includes the relationships among several stakeholders and the ends for which the corporation is affected. It is a subject with many aspects. A significant motif of corporate governance is to guarantee the accountability of particular persons in an organization using methods that restrict or abolish the principal-agent problem. A relevant but distinctly associated point of debate is the consequence of the corporate governance system on the economic output, along with resolute stress on the welfare of shareholders. There are other important facts too, such as stakeholders’ conception and the corporate governance models throughout the world.
There has been an upsurge of interest in the corporate governance norms after the onset of the new century. This has been because there were collapses of many U.S. companies like Enron and Worldcom. In response to all this, the federal government came up with the Sarbanes-Oxley Act. This was meant to enhance public trust in matters of corporate governance. Objectivity, integrity, and transparency are key to any system of corporate governance whether it is national or international. The business safety attitudinal pattern is also a must for such a system. Good corporate governance rests upon external marketplace dedication and legislation. Furthermore, a healthy board culture that secures norms and processes is also vital. Numerous benefits can flow from good corporate governance. O’Donovan a reputed business author notices, “The perceived quality of a company’s corporate governance can influence its share price as well as the cost of raising capital. Quality is determined by the financial markets, legislation and other external market forces plus the international organisational environment; how policies and processes are implemented and how people are led. External forces are, to a large extent, outside the circle of control of any board. The internal environment is quite a different matter, and offers companies the opportunity to differentiate from competitors through their board culture. To date, too much of corporate governance debate has centred on legislative policy, to deter fraudulent activities and transparency policy which misleads executives to treat the symptoms and not the cause” (Corporate Governance, 2003, A Board Culture of Corporate Governance).
Corporate Governance is an institution of structuring, running, and managing a company with the purpose of attaining strategic ends to pacify shareholders, creditors, and other persons associated with the process who have their stake in the system. The duties of corporate governance include compliance with legal and regulatory stipulations, environmental and local population requirements. Dedication to values, ethical business pursuits, and the distinction between private and corporate funds is at the same time very important.
In the 19th century, the rights of corporate boards were increased and they were able to manage without the consensus of shareholders in return for statutory benefits. From that time onwards, because the wealth of the United States has been classified into different corporate entities and institutions, the rights of individual owners have been increasingly fleeced. The worries of shareholders versus management pay and stock losses periodically have attracted attention to corporate governance reforms. “Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set and the means of attaining those objectives and monitoring performance” (Enclyogov, 2008, What Is Corporate Governance).
Since the decade of 70s, corporate governance has been the issue of many parleys in America and around the globe. Offensive and wide-ranging reforms have focused on the requirements of the shareowners to execute their rights of corporate ownership and to enhance the worth of their shares and in turn their wealth. From that time onwards, the obligations of the corporate directors have increased by big margins which used to be just their loyalty to the corporation and the shareholders. In the last decade, the issues of corporate governance in America got the media limelight because of the dismissals of many chief executive officers by the authority of no other than their boards. Shareholder activism came to the fore when it was learned that corporate norms would not be allowed to be ruined despite the harmonious relations between the CEO and the board directors. This was exercised using frequent use of unrestrained stock options that too with back datedness. “Frustrations with the performance of publicly traded corporations abound. Even before the Enron debacle and the other widely publicized scandals in 2002, there was a steadily increasing volume of criticism and complaints regarding the governance of many companies. Awareness of and new stories about dissatisfaction have only intensified over time as the complaints have continued to take many forms and address ever broader issues. There is the perceived injustice of the CEOs having made huge fortunes while company shreholders have lost significant portions of their investmnets and many employees have lsot their jobs” (John L. Colley, Jacqueline L. Doyle, Wallace Stettinius, George Logan, 2003, 10).
At the end of the last decade, the East Asian financial crisis facilitated the flight of capital after the assets were done to death. The dearth of corporate governance mechanisms in these countries magnified the loopholes of the institutions in their economies. In 2000, there was a wave of collapses in the United States of very big companies that led to their bankruptcies. They included Enron, Worldcom, and others like Adelpdia communications. This grabbed much attention of the shareholders and governmental focus on corporate governance. Since then many reforms have been introduced and the warmth of the shareholders has seen the downside. The healthy consequence of good corporate governance is no doubt the strengthening of the economy. Better corporate governance is a way forward for socio-economic development. After the ruination of East Asian economies, it was admonished by no less than World Bank that corporate governance would have to stand on solid foundations if any transformation is required.
The golden principles of good corporate governance pertain to integrity, trust transparency, openness, output, ouns, accountability, mutual respect, and dedication to the organization. “Sound principles of corporate governance are key to obtaining and maintaining the trust of investors. They are also vital to creating an environment of respect where all investors, employees, customers and partners participate”. ( Claessens, Stijn, Djankov, Simeon & Lang, Larry H.P. (2000), The Separation of Ownership and Control in East Asian Corporations). The most significant thing is how directors and managers coin a model of governance to run the affairs of the body that are commensurate with the norms of the corporate contributors and then judge this model from time to time. Especially, senior executives should manage with a great deal of above-enumerated values. Conflict of interest and disclosure in the financial reports are very important in this regard.
The principles of corporate governance on which there is growing consensus are the rights and equitable treatment of the shareholders. Organizations should look at the rights of the shareholders with great reverence and assist them in the early execution of those rights. They should facilitate the information that is comprehensible and easy to get with and encourage shareholders to be present at the general meetings. Organizations should acclaim that they have some legal provisions to be complied with and the shareholders owe to them some legitimate rights. There are some obligations of the board in this regard that are very significant. It needs wide-ranging techniques and skills to tackle the different business issues and have the capability to review and oversee the management output. Its volume needs to be highly appropriate which would greatly help in discharging the functions.
There are some challenges of the combination of executive and non-executive directors. The important role of the chairperson and the CEO should not be converged and held by the same man. Next comes the turn of integrity and the ethical attitude. It is key to decision-making and public relations. Risk management and the prevention of lawsuits cannot be imagined without it. Organizations should have a code of conduct that governs their directors and executives. It should aim at the promotion of ethical and appropriate decision-making. It is also important to comprehend that some criteria are required to map the ethics and the integrity of the decision-making process, different companies have come up with compliance and ethics program to ensure that the same happens beyond any shadow of a doubt. “Corporate Governance looks at the institutional and policy framework for corporations – from their very beginnings, in entrepreneurship, through their governance structures, company law, privatization, to market exit and insolvency. The integrity of corporations, financial institutions and markets is particularly central to the health of our economies and their stability. The OECD steering group Steering co-ordinates and guides the Organization’s work on corporate governance” (Thomas Clarke, 2004, 17).
Disclosure and openness are the lifeblood of all organizations without which they cannot think of making any progress. Companies should make clear the obligations of the board and the management to facilitate shareholders with a level of accountability. They should also execute procedures to test independently and secure the truthfulness of the company’s financial reporting. Disclosure of all matters should be on time and balanced to dispel all notions of misgivings. All the investors should have unhindered and free access to the information which has bearings on their interests.
There are some issues that involve corporate governance canons. Overseeing the preparation of the organization, financial statements is a very basic thing. Internal controls and the neutrality of the auditors ensure transparency. There should be monitoring of compensation arrangements for the higher officials charged with carrying out the vital duties for the organization. The method by which the individuals become the board members are to be very well screened. The material resources facilitated for the directors with the purpose of execution of their duties are to be marked. Management of risk is very crucial for the trust of shareholders. Dividend policy leaves wide imprints for the running of an organization.
Corporate governance mechanisms and controls are intended for minimizing the performances that emerge from moral dangers and adverse selection. For instance, to oversee managers’ attitude and the auditor which is independent endorses the preciseness of information supplied by the management to the investor. “The roles and the responsibilities of the audit committee include: ensuring that there is a well defined, well written, and well-communicated code of ethical standards and guidelines for acceptable behavior, on which a climate of integrity is built and well established. Ensuring the adequacy of internal control policies, systems, and practices that promote the effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations. Selecting, evaluating and replacing the independent auditor subject to board and/or shareholder approval” (Crawford, C. J. (2007). Compliance & conviction: the evolution of enlightened corporate governance).
A normative control system should manage both the motivation and the capability. There are two types of internal corporate governance controls and external corporate governance controls. The internal corporate governance oversees monitor activities and takes rectifying measures to attain organizational ends. The board of directors has the legal right to hire and fire the high-ranking management. Regular board meetings are instrumental in marking the true nature of the problems and offer solutions in this regard. Nonexecutive directors are taken as more independent but their actual performance is a matter of question as they fail to come up to a satisfactory level in this regard. The performance of the board also depends on the accessibility to the information. Executive directors wield greater knowledge of the decision-making process and therefore gauge the top management on the foundations of the quality of the decisions that facilitate the financial performance. It can be easily opined that the executive directors have a way of seeing things beyond the scope of the financial touchstone. Output-based salary is intended to link some section of the salary to the individual performance. It may be cash or otherwise. Recent research has revealed the fact that noncash prizes give a tremendous boost to the morale of the employees. External corporate governance brings in its purview the external stakeholder’s exercise. There is an evaluation for the performance information. Media pressures, debt covenants, and government regulations are some of the illustrations in this regard.
There are some hindrances that are quite problematic in the affairs of corporate governance. Inaccuracy in the financial statements will engender problems in the performance of the corporate governance. This should be rectified by the functioning of the external auditing process. requirements for the information may serve as a potential barrier to good management. Shareholders should have unhindered access to the free information and the evaluations of the larger professional investors. For the purpose of impacting the directors, the shareholders must join with others to make an important voting group that can offer an actual threat of executing resolutions or allocating directors at a general meeting.
Financial reporting is a key to an essential element for the corporate governance systems to work efficiently. Accountants and auditors are the basic suppliers of information to capital market contributors. The directors of the organizations should be vested with the right to hope that the management makes ready the financial information in line with the legal and the ethical stipulations and depends on the efficiency of the auditors. Contemporary accounting practice permits a semblance of choice of method in evaluating the method of measurement, benchmark, recognition, and the basics of the accounting body. The execution of this option to rectify manifest performance brings additional information costs for the users. In this fringe, it may lead to the nondisclosure of the information.
One aspect of worry is whether the accounting firm performs as both the independent auditor and the management advisor to the company that is in the process of being audited. This may yield the conflict of interest which imposes on the truthfulness of the financial reports some amount of suspicion owing to the client leverage to make happy the management. The Enron collapse is an illustration of misleading financial statements. It did not reveal mammoth losses and propagated the false illusions that a third party would be liable to compensate the amount of any losses. However, the third party had considerable vested economic interests. The sweeping changes in the form of the new act in the United States do not permit the companies to facilitate both the auditing and the management advising services at the same time. Similar provisions have been undertaken in many other countries to counter the same situation. Better financial reporting is not enough for the performance of healthier corporate governance if the users do not process it and the knowledgeable user is not capable of executing the monitoring performance owing to the high expenditures.
Rules are considered to be easy than principles for their follow-up. They draw a fine line between what can be accomplished and what can not be. They also minimize the individual powers on behalf of the individual managers and the auditors. As seen from the pragmatic viewpoint, rules can be quite tedious than principles. They may not be fine-tuned to deal with fresh types of transactions not embraced by the code. Principles on the other hand are the shape of self-management. Enforcement can influence the general trust of a management system. They bar the foul actors and level the field play. It is not always good as it can deter risk-taking.
There are various corporate governance models around the world. Though the model of the U.S is not popular. The models of the other countries attempt to respond to the same challenges as experienced by the former. They include Japan, Germany, South Korea, and others. These models vary according to the typical capitalism in which they are steeped. The liberal models which are popular in Anglo-American regions incline to give priority to the interests of the shareholders. The coordinated model that is practiced in continental Europe and Japan also hails the interests of the worker’s customers and the local society. Both models have their pluses in different perspectives and they have been intended for different ambiance. The liberal model has always encouraged the new changes and the innovation to reform the performances and the cost competition. On the other hand, a coordinated model of corporate governance helps the incremental innovation and the quality race.
JohnL.Colley,JacquelineL.Doyle,WallaceStettinius,George Logan, 2003, Corporate Governance. Mc grw hill professional.
Corporate Governance International Journal,(2003) “A Board Culture of Corporate Governance, Vol 6 Issue 3.
Enclyogov, 2008, What Is Corporate Governance. VIAMINVEST. Web.
Claessens, Stijn, Djankov, Simeon & Lang, Larry H.P. (2000) The Separation of Ownership and Control in East Asian Corporations, Journal of Financial Economics, 58: 81-112.
Crawford, C. J. (2007). Compliance & conviction: the evolution of enlightened corporate governance. Santa Clara, Calif: XCEO.
Thomas Clarke, 2004, Theories Of Corporate Governance. Routledge.