Essay On The Concept Of Corporate Governance

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 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

The importance of governance has emerged only after the numerous corporate scandals witnessed globally during the past years. The aftermath of these failures have driven most OECD nations towards continuous reformation of their corporate governance practices. (OECD, 2003)

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.

Unfortunately, the (Sarbanes Oxley )law couldn’t prevent another economic crisis because some years later after the law ,and in 2007 the world experienced the biggest economic crisis since the great depression of 1930.So My research study focused on the role of corporate governance to avoid similar crisis in the future.

Under the stakeholder model of corporate governance, firms owned and controlled by small number of major shareholders. This model of corporate governance often called as the relationship based method due to the close relationship maintained between companies and their major shareholders. This close relationship, little separation of ownership and control minimises the agency problem. However, as a result of the minimum separation of ownership and control, firms would experience misuse of power by dominant shareholders. For an instance, little transparency over company’s operations and potential misuse of funds would be unavoidable. Concentration of ownership and control in a small group of dominating shareholders could result in weak investor protection for minority shareholders. [Solommon,2007]

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).

In the last decades years, the corporate governance is one of a substance that concern of an increasing of hight profiles corporate disgraces and lack of successful.The definition of Corporate governance can be as the process and structure that use for directing and hanging correctly business and could relate to affair of organization with earliest objective of ensuring its protection, dependability and improve its shareholder value.This mechanism characterizes the partition of power and achievement of accountability, transparency, fairness and honesty between board of directors, management and shareholders and in the same measure of safeguarding the interests of depositors and other stakeholders. Jones and Pollitt (2002) illustrated that corporate governance is the way the company’s board of directors is organised and functions.

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

Governance in the Oxford dictionary is defined as “control or influence”, while corporate is defined as “shared by all members of the group”. Therefore corporate governance refers to the structures and processes for the direction and control of members of a group. It is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require

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.

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.