Corporate Governance Concepts

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For any investor to gain any trust in a company there calls the need of an assurance that the company top be invested in is been run or will be run in a way that should not only be seen to be honest and diligently, but it should operate as so. Due to this factors that are paramount in any person investing, it becomes necessary for a company to practice good corporate governance. In majority of the countries world wide, corporate governance is entrusted fully on the following stakeholders;

  1. Chief executive officers
  2. Managers who are professionals

Before an investor ploughs his investment in any company so that they can invest returns to him, its important that he makes step-by-step due diligence on the mode of governance that is exercised by the entity collectively. This is always reflected directly on the market share prices of that company that are traded in the stock market. This is true because no investor will be willing to commit financial suicide by financing a firm in form of equity unless he is more than assured that he will get fair returns from the investments he makes in that company (T. Horngren, Gary L. and S.William O. S 163).

Corporate governance has been practiced ever since time in memorial but the topic of governance was brought in to lime light in the twentieth century. This was triggered by the fall of Wall Street crash of 1929. Many scholars started on investigating on roles of Modern Corporation in the society. Other scholars introduced the idea of why firms are founded and the way they continue to operate (Ronald coase) enique fame and Michael jeuseu introduced the concept of separation of ownership and control that is the agency theory. According to article by horch and maclever they deduced that many large corporations have dominant control over the business affairs yet they lack accountability or monitoring of by their board of directors.

As from onset of 1970 corporate governance has been subject of paramount concern globally. This has resulted to an extensive research to be done to reform corporate governance. This is mainly due to the factors that;

    1. Owners desire to exercise corporate ownership

The owners of any corporation are the shareholders; they need to constantly have control over the affairs of the corporation.

    1. Increase of value of their shares and therefore wealth’

The managers have to constantly improve the par value of an organization. Adding on the corporate image of the organisation does this

As a way of showing corporate value will not be destroyed a rare occurrence in united stated in the year nineteen ninety, corporate governance received a very wide publicity due to dismissal of chief executive officers of corporations that had bad corporate governance thus creating a precedent on how the involvement of shareholders in running of corporate affairs (Damodaran, A. 81).

In the year nineteen ninety seven big economies like south Korea experienced a series of property assets collapse and this lead to exit of foreign capitals investors. The lack of corporate governance contributed principally for the run by investors and consequently it led to weakness of the institutions in the economy.

The interest of shareholders and the government was also triggered in early 2000 due to massive bankruptcies of large corporations such as erons and WorldCom. These lead to the passage of saibaness –oxley Act of 2002. This lead to large recovery of the stock market from the inefficiencies it had suffered before the introduction of the Act.

The corporate governance can be defined as “The structure and processes for direction and control of a company.”

It’s also defined as;

“A field in economics that involves investigation of how to secure and motivate efficient management of corporations using incentive mechanisms like contracts, organizational designs and the legislation. It’s limited to improving financial performance, for example, how the corporate owners can secure and motivate that the corporate managers will deliver a competitive rate of return”,

Corporate governance touches on the issues that relate to the all the management by the board of directors the controlling of shareholders and all the other stakeholders with interest in the corporation. Good corporate governance is a major key to a sustainable economic development in the organization as it enhances performance and Broaden the chance of access to outside capital (Lajoux, Alexandra Reed and J. Fred Weston, 118). That is equity and debt.

The issues that led to corporate governance. There are many issues that led to corporate governance i.e. running of the companies in an accountable and transparent manner these issues are discussed below

The wall street crash of 1929

These happened for a period of one month continuously starting from October 24th 1929. The new yolk city was a metropolitans and the Wall Street was a leading financial center in the world. The period of 1920s was a time of culture, social and artistic dynamism in North America. The public believed the market could sustain huge level of prices of the securities traded in the market. The share prices of New York Stock Exchange [NYSE] collapsed on Thursday October 24 1929, otherwise called the black Thursday, when the share prices started falling and continued with the tread of falling for a period of the following one month at unprecedented rate. To eliminate the impact of earning meltdown especially in the main stock markets it became extremely important for certain rules to be established so as to counter any other collapse in the stock market that may be impending (Bavly, Dan and Roger B. Porter., 54). Good advice for government regulators and accountants.

Continuous collapse of big corporate

Due to many companies going under in the recent past and investors money been lost, the government was drawn to create some big interest that the corporate should follow a given set of rules that will help the investors make informed decision on investment decision (.

Protection of investor

There has been need of accuracy and reliability of disclosures. The investors were not initially protected from any misinformation that could have resulted from the management in making any misstatements in the financial statements and disclosures. This made it hard for the insight of operations of company decisions known precisely. Due to these factors that the corporate may hide some vital information from the public to window-dress them in investing in the company; it was of great need that the minimum disclosures be made in the financial statements and disclosures.

Corporation fraud

This appears when a corporation cancels some information so that it can appear successful more than its real status. Due to the high level of corporation frauds there was need to provide for disclosures that is. Firms should disclose accounting disclosures that. Any misrepresentation could be legally enforceable after the laws on corporate governance were enacted.

Investment fraud

These mainly occurred in the following ways

  1. Conflict of interest; the firm may give its client a non-lucrative investment opportunity due to ties he has to that organization. This results to financial loss.
  2. Continuing risk- advisor may advice the client to continue investing in a risky venture despite the knowledge of apparent risk in the venture
  3. Biased investment decision –the advisor may be biased against a particular firm or for a firm and can give such advice that is biased.

Need for fair tracking

To embrace fair trading among corporations, these was a need to have a systematic and uniform way of presenting the corporations information that would be deemed to have a fair trading ground for all corporations in a market. This was tailored to avoid any unfair advantage over the other firms who did present to the public misinterpreted financial statements or statements that had some distorted information (HKICPA)


ICGN is acronym to; international governance network that is situated in England and Wales. It was incepted for the main objective of advancing of education world wide for public benefit through study and development and promoting corporate governance standards and guidelines

The structures of ICGA are;

  1. Avail package liability and ownership quality and inspection the ICGN proposed external independent auditor that shall ensure integrity and quality of financial statement that will maintain efficiency of capital market the auditors are responsible for standardization of the corporate accounting and discipline in the fixed term hence increase investor confidence (Davis, R., 21, 76). The auditor brings the attributed of confidence and stability. The auditors responsibilities included;
  • Auditors liability
  • Ownership restrictions
  • Audit quality
  • Inspections
  1. Board of directors

The board works for all shareholders and should be accountable to whole shareholders body and should stand for election on a regular basis.

Corporation should disclose all its board members in each annual report and attach thereto documents such as

  1. Identities
  2. Core competences
  3. Professional and other competencies

This enable the investors weigh options of if they shall add value company or not.

The board should have independent individuals with key competitive

  1. Shareholders returns

Practices of corporate governance should focus on optimizing returns of shareholders over time (Lajoux, Alexandra Reed and J. Fred Weston 43)

  1. Accounts

The corporation should accurate adequate and timely information which should be disclosed to the investors in so as they can make informed decisions which would not be misguided by any misinterpretation.

The Organization for Economic Co-operation and Development (OECD), is an international organization that was formed by thirty countries, that accept the principles of representative democracy and a free market economy. It started as the Organization for European Economic Co-operation (OEEC), in order to reconstruct o Europe, after World War II, its membership was later extended to non-European states, in 1961 it was named as the Organization for Economic Co-operation and Development or OECD.

The organization provides a setting, which the governments compare their policy, seek answers to their problems, point out good practice and co-ordinate domestic and international policies they hold. The OECD is very broad, it covers economic, environmental and social issues (IASC Foundation 2).

Corporate governance in United States

These were introduced by Sarbanes Oxley act otherwise called Sox of 2002 aftermath of Enron. Sox is different from other bodies like OECD in that it’s mandatory to comply with the requirements.

The main frameworks of sox Act are contained in section 302, 404, and 409.

The provisions of section 302 are as below

  1. An insurer principle, executive officer or a person performing similar function should certify in each quarterly and annual report of a corporate organization filled by issuer that signifies that
  • He has reviewed the report
  • That to best of knowledge the report not have any misrepresentations
  • That material represented are fair representation of financial conditions
  1. The corporation or issuer filling the report should disclose controls and procedures this helps the financial officers certify the statements and ensure provision of accurate and complete information regarding securities holders.

Works Cited

Charles T. Horngren, Gary L. and S.William O. S. Introduction to Management Accounting. New York. Prentice Hall. (2002) p147-153

Damodaran, A. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. John Willey. (2002). Page 487-490

Davis, R. What You Need to Know before You Invest. Barron’s Educational Series. (2003). Page 107-108

HKICPA. Framework for the Preparation and Presentation of Financial Statements. 2007. (Online). Web.

IASC Foundation. Technical Summary, Framework for the Preparation and Presentation of Financial Statements. 2008. (Online). Web.

Lajoux, Alexandra Reed and J. Fred Weston The Art of M&A Financing and Refinancing: Sources and Instruments for Growth, McGraw-Hill, 1999.

Sternberg. (1997) “The Defects of Stakeholder Theory”, Corporate Governance, Vol 5 No.1.

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