Corporate Governance: A Review Essay

Pages: 20 (6769 words)  ·  Style: Chicago  ·  Bibliography Sources: 20  ·  File: .docx  ·  Level: College Senior  ·  Topic: Business

, 2003). Increased need of capital resources to be raised from open markets has also led the importance of corporate governance to increase in recent years. Another aspect of corporate governance culture that has increasingly come to be scrutinized is the value-based governance and bottom line governance. Firms in Europe and specifically in the U.S. market have emphasized that their companies should reengage in value-based corporate governance (Du Plessis, et al., 2010; p. 11)In modern corporations, corporate governance arises through the severance of ownership and management control in the organizations.

Principles of Corporate Governance

Researchers have also identified the essential principles on which the conduct of corporate governance rests. These are:







Social responsibility (Du Plessis, et al., 2010).

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Du Plessis, et al. (2010) have described that the concept of corporate governance has significantly got transformed during the last few years. After each significant economic phase, the scholars have aligned the concept with more current needs of structural changes in the corporation's management. Good governance has been described as the effective leadership by corporate managers and board of directors. Ethics, responsibility, and fairness are included as the intrinsic elements that corporate governors of corporations should have (King Committee, 2002; p. 12). Sustainability of business operations has also been mentioned as the fundamental responsibility of corporate governance whereby the executives and board members have to deliver sustainability of operations and profitability. Corporate citizenship is also a contemporary concept being inculcated in the corporate governance elements (King Committee, 2002).Du Plessis, et al. (2010) also mentioned that there is considerable transformation in the principles of corporate management since the last 10 years. In 2003, the authors observed, the principles were as follows:

Essay on Corporate Governance: A Review of Assignment

Strengthening management oversight

Value addition through board restructuring by including more outside members on boards

Promotion of ethics and responsible culture

Maintenance of integrity in financial reports

Corporate disclosures should be timely and honest

Rights of shareholders to be safeguarded and promoted

Risk recognition and management

Responsibility in performance management, remuneration fixation, and recognizing legitimate interests of relevant stakeholders (King Committee, 2002).

Some researchers have opposed the idea of government reform of the board structures and emphasized on incremental changes in the financial industry without being coerced into restructuring drives (Salmon, Lorsch, Donaldson & Pound, 2000). Walter Salmon is quoted as saying that governmental intervention is detrimental to the independence and performance of the firm. The committees that are formed by the board of directors also need to change the way they work and devise policies. For instance, the audit committee needs to identify the 'high exposure' areas within the financial expenses and prevent any large retracement from companies profit expectations. Salmon also advises that 'constructive dissatisfaction' should be started in the board meetings and before media or any other regulatory agency identifies the flaw in financial reporting, board members should be able to identify it beforehand (Salmon, et al., 2000). Walter Salmon also identified the two main responsibility areas of corporate governance personnel, these were overseeing the strategic direction of the company (the long-term policies, procedures, and practices) and performance of i) Selection ii) Evaluation and iii) compensation of top managers of the company. The structuring of compensation and benefits plans is also overseen by the board of directors. Thus, corporate governance is more about anticipation of future trends in management and implementing them in the respective corporation. Salmon mentioned that in 1980s, the responsibility of board members was limited to firefighting only, the notion of tackling emergency situations in the corporations.

III- Theoretical foundations of corporate governance

In order to comprehensively understand the concept of 'corporate governance', it is imperative to study the theoretical foundations on which governance in corporate settings has been established. The theories that have significantly influenced the conduct of governance are agency theory, managerial hegemony, stewardship theory, stockholder theory, stakeholder theory, convergent theories of corporate governance, and the 'post Enron' theories of corporate citizenship (Clarke, 2004). The review suggests that the differences in the definitions of corporate governance are due to different theoretical perspective adopted by the researchers or defining authorities. In this regard, the classic theory defining and explaining corporate governance is agency theory, which treats shareholders as merely one of many factors of production bound together in a complex web of implicit and explicit contracts (Bainbridge, 2008). This theory treats the directors and officers as the agent of owners i.e. shareholder who define the objectives of the company; therefore, corporate governance under this theoretical perspective aims to align the goals of both the parties i.e. shareholders and directors as closely as possible to minimize the agency cost (Fernando, 2009). Agency theory upheld the notion that corporation is a set of contracts amongst individual factors of production. The classical economic theories revolved around the notion that profit maximization is the aim of firm and that the firm achieves so by acting as a single entity. This was however challenged by agency theory presenters and it was supported that each factor of production tries to maximize its own utility and profits. Thus, the performance of firm is based on contractual agreements and management was separated from finance.

Agency theory

The agency theory laid down the principle that managers raise capital from financers whereas financers provide funds to managers for providing them with efficient returns. The agency theory therefore states that corporate governance mainly deals with management of residual rights allocation issue (Clarke, 2004). The formation leads to a situation where managers accumulate significant residual rights and power for allocation of funds. This power along with management structure of that power is the main emphasis of corporate governance. Agency theory describes the investors as the 'residual risk' takers and not the owners of the firm. The agency theory thus separated the ownership of capital from the ownership of firm (Clarke, 2004). The agency theory also supports the notion that shareholders are the main principals whose interests shall be safeguarded by the management. Management and risk bearing are categorized as separate functions and each requiring specialization.

Stewardship theory

Stewardship theory emphasizes that the authority structure should facilitate the role of executives in managing and planning for the corporation. The greater empowerment to the managers would be more profitable for the corporation (Mallin, 2007). Stewardship theory utilizes psychological studies to dispel the dominant view that company's directors are purely driven by their personal economic interests (Du Plessis, et al., 2010). This theory assumes that the executives have more expertise of running corporations than the owners i.e. shareholders have. Although the stewardship theory has sharp contrasts with the agency theory, it has more recently been considered as a complementary, rather than competing, for the development of an effective structure of board of directors (Van Ees, Gabrielsson, & Huse, 2009). Stewardship theory has largely questioned the assumptions of agency theories of corporate governance. The stewardship theory states that there is an inherited conflict of interest between the managers and the owners or the shareholders. Need for achievement, recognition, responsibility, and altruism (Clarke, 2004; p. 8) are also present in the human beings and these aspects of management should not be ignored while governing the corporation. A singularly focus on economic gains is rejected by the stewardship theorists. This perspective has significantly influenced the corporate governance in the firms as more number of managers view themselves as the stewards of the firm, thus fulfilling the objectives of firm rather than merely satisfying the principals.

Stakeholder theory

Another important theory about the corporate governance is stakeholder theory, which aims to balance the over-emphasis of shareholders. It aims to include all interest groups including employees, customers, suppliers, distributers, government and society at large to the corporate mix (Fernando, 2009). However, this theoretical perspective has been criticized for being too vague to define clearly the actual or more related stakeholders. In addition, there is dearth of empirical evidence in favor of its impact on the organizational performance. This theory has been considered as of little practical value because if the directors intend to facilitate various divergent interest groups, they would fail to address the basic requirements of the business (Smallman, 2004). Sociological theory in the corporate governance aims to promote equity and fairness in society through board composition, financial reporting, disclosure and auditing (Fernando, 2009).According to the stakeholder theory perspective, organizations have been described as the association and multilateral constructs of organizations and their stakeholders. In context of stakeholders, two broad publics have been identified, the internal and the external stakeholders. Shareholders are the main source of generating capital for the firm. The organization or corporation therefore is not to be viewed as an asset for the shareholders only but also for the suppliers, long-term employees and the society at large for which the organization generates employment. Despite increasing pressures to deliver higher returns over the investments of shareholders, corporate managers have found the stakeholder theory to best address the multilateral issues being faced by an organization during its life-time. The stakeholder theory therefore holds true that an… [END OF PREVIEW] . . . READ MORE

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