Essay On The Concept Of Corporate Governance

Corporate governance in itself has no single definition but common principles which it should follow. For example in 1994 the most agreed term for corporate governance was “the process of supervision and control intended to ensure that the company’s management acts in accordance with the interest of shareholders” (Parkinson, 1994)1. Corporate governance code is not a direct set of rules but a self-regulated framework which businesses choose to follow. This code has continued to change in the past 20 years in accordance with what is happening in the business world. For example the Enron scandal caused reform in corporate governance with the Higgs Report which corrected the issues which were necessary. Although it does not quickly fix problems, it gives a better framework to

As details of the Enron scandal surfaced public outrage grew, calling for action, accountability and consequences. Corporate governance began receiving renewed interest. Corporate governance is a multi-faceted subject that sets forth the rules and responsibilities of the relationship between the corporation and its stakeholders (Cross & Miller, 2012). This includes the company’s officers and management team, the board of directors, and the organizations shareholders.

Corporate governance introduces structure where accountability and control of corporations are put in place. It is concerned with how corporate entities are governed as distinct from the way the company is managed. There is both self and legal regulation in the guideline of corporate

The US follows the “Anglo-American” Corporate Governance System which is governed through federal securities laws and regulations enforced by SEC, NYSE and NASDAQ. The effectiveness of this system has been heavily criticized due to its massive failure in preventing Enron, WorldCom, and Tyco corporate misconduct. Details of these scandals evidenced that the optimal amount of independence and oversight was not adequately practiced over the boards of U.S. companies. Thus, in 2002, SEC enacted the Sarbanes-Oxley Act (SOX) intended to protect investor’s interests by imposing penalties for violating the provisions of SOX. The act mandated changes in corporate governance principles related to executive compensation, shareholders oversight, board independence and accountability (Sec.gov, n.d.). This reformation has strengthen the corporate internal controls, however its implementation is deemed to be inefficient in terms of costs. According to KING III report the “total cost to the American economy to comply with SOX is more than the total write-off of Enron, WorldCom and Tyco combined” (KING III, 2009).

Corporate governance is an increasingly important topic in this age of globalisation, it is a global occurrence which in turn makes the subject complex, with issues of ownership, cultural, legal and other structural differences being involved. From this broad scope, it is discernible that the functions of the board are inseparable from the topic of corporate governance and in turn what effect these have and will potentially have on the share price in the future.

Ten years ago, corporate governance was still in the concept stage. There wasn’t a lot of information about corporate governance. After some big corporate failure that hit the economy, it has become obvious that corporate governance matters. After the collapse of Enron,Wordcom,..a new regulation was born (Sarbanes Oxley).The law was implement to increase transparency and to promote integrity and accuracy inside the companies.

The debate regarding corporate governance can be traces to the early 1930’s with the most notable publication being ‘The Modern Corporation and Private Property’ by AdolfBerle and Gardiner Means. In their publication, Berle and Means noted that despites presence of wide dispersion of ownership of firms’ and the subsequent separation of control and ownership there did not exist any check to control the executive autonomy awarded to corporate managers. Their ideas now known as the agency theory are concerned about the possibility of agents employed as professional executive to act on the behalf of business owners, serving their own interests and not those of the principals. This theory asserts that in order to deal with this problem,shareholders must incur ‘agency costs’. ‘Agency costs’ are designed to provide incentives to the professional executives so that they can align their interest to those of the shareholders (Robert. 2014).

Corporate governance is concerned with ways in which all parties interested in the well-being of the firm (the stakeholders) attempt to ensure that managers and other insiders take measures or adopt mechanisms that safeguard the interests of the stakeholders. Such measures are necessitated by the separation of ownership from management, an increasingly vital feature of the modern firm. A typical firm is characterized by numerous owners having no management function, and managers with no equity interest in the firm. Shareholders, or owners of equity, are generally large in number, and an average shareholder controls a minute proportion of the

Issues regarding corporate governance of companies are growing in importance. Corporate governance involves ‘the system of rules, practices and processes by which a company is directed and controlled’ (Investopedia, 2014). A company should treat all its stakeholders with respect and integrity. A controversial branch of governance is the extent to which executives gain compensation. This may or may not reflect their performance or be within the best interests of their shareholders; who are the owners of the company. Since the formation of the limited company, whereby management is separated from ownership an agency problem has emerged, as executives and other directors’ aims may not be in line with shareholders’ interests. Different

“Corporate governance, according to the Organisation for Economic Cooperation and Development (OECD), is ‘the system by which businesses are directed and controlled.’” (cited in Britton & Waterston, 2010, p.235) Corporate governance of a company maintains the welfare of the stakeholders in an organisation. Stakeholders are people who are directly affected by the company’s actions and consequences, such as the directors, managers, employees, auditors, and shareholders. Executive compensation is an important part of the corporate governance. It is a financial return for the executives’ services to the company, which is devised to ensure that the directors are “kept in line” in terms of their actions and performance in the business’s

1. This article focuses on the Gompers, Ishii, and Metrick (GIM, 2003) study which found that strong shareholder rights lead to higher stock price returns and thus value. This is a great indicator that good governance has a direct effect on the performance of the firm. The article finds the correlation of corporate governance and the positive impact it has on the firm, management, and shareholders. However the article provides a subjective view, is good governance the correct metric of evaluation. The primary finding of the article is a comprehensive and economic analysis defending the relation between corporate governance and performance. This article examines the inter-relationships among corporate governance,

The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. In the context of public service or private sector organization, Good Corporate Governance is therefore about ensuring all stakeholders’ adherence to organizational policies, procedures and systems.

Corporate Governance delivers the guidelines as to how the organisation can be directed and controlled (Cadbury, 1992) . The corporate governance role is not concerned with the day to day business of the company, their main duties associated with giving overall direction to the company that can fulfil organisational goals and objectives (Tricker, 1984). Interestingly Walker Review (2009) defined, the role of corporate governance is also to protect and develop the interest of stakeholders by setting up a strategic direction (Walker, 2009)

A function of corporate governance, information technology (IT) governance ensures the alignment of IT with business goals and value delivery through the use of investments. This means that there must be a clear understanding of what the business strategy is, in order to align the IT strategy with the business strategy. IT governance provides clarity between the business strategy and the IT initiatives, drawing the links between business objectives and project objectives. However, it is not enough to create the links, so it additionally provides clarity through the preparation of a business case for each initiative, in order to show how the project will improve the organizations business capabilities. From their it attains agreement on priorities as a group looking at the entire enterprise, by making a determination as to what initiatives to continue with and which of these they should finish first. Ultimately they must understand the resources necessary to accomplish the initiatives. Through good governance the organization establishes priorities on both human and financial resources.

The importance of Corporate Governance has been strongly highlighted by many organizations and foreign nations. According to Zulkafli (2004), Corporate Governance is the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realizing long term shareholder value, whilst taking account the interests of other stakeholders . This, in simpler terms meaning managing the company’s money in such a way, where they face less risk and maximize the utilization of the resources. Due to this reason, corporate governance is becoming a must in many nations and their economic policy. However, over the years, many such corporate governance failures have been a root cause in the company’s demise. The top level managements’ misleading actions have been detrimental to their organization. International scandals such as Enron, Worldcomm, and Tyco International, have created a stir in the economy and harmed their company. Many top level staffs were fired, accused and even tried in court, with a majority of them facing prison sentences even till now.