Importance of Corporate Governance

Importance of Corporate arrangement1. INTRODUCTIONThis chapter provides a comment of collective brass section and examines importance of, and the principles underpinning corporate politics. It also reviews prior research examining corporate governance disclosures and in particular, those which rich person investigated corporate governance disclosure in ECMs.2. DEFINITIONS OF CORPORATE GOVERNANCEModern corporations have dispersed ownership structure (Jenkinson and Mayer, 1994). Due to this, these corporate entities argon characterised by contractual relationships among (shareholders) owners and managers (agents). Management is employ by owners (i.e. investors) to run the stock on their behalf (Sarpong, 1999). Within the agency theory framework, it is theorised that managers may seek to maximise their wealth to the detriment of shareholders and bondholders through the consumption of perquisites (Jensen and Meckling, 1976). Decisions of agents have the tendency of unfavourably transferring wealth from one principal to another i.e. from bondholders to shareholders (Watts and Zimmerman, 1978). John and Senbet, (1998 p. 372) define corporate governance as a means by which stakeholders of a corporation exercise control over corporate insiders and instruction such that their interest will be well protected. Similarly, it is proposed that corporate governance issues renegade in an organization whenever two conditions are present. First, there is an agency problem, or conflict of interest, involving members of the organization these might be owners, managers, workers or consumers. Second, transaction costs are such that this agency problem cannot be dealt with through a contract (Hart, 1995, p. 678)To avert the agency problem, there is the need to ensure that adequate and effective corporate governance structures are put in dedicate to prevent abuse of power by managers (Cadbury, 1992). Corporate disclosure through annual reports is one of the of the essenc e(p) instruments for the monitoring of managerial behaviour (Watts, 1977 Watts and Zimmerman, 1978). This requires frequent evaluation of managerial activities and performances particularly, through independent non-executive directors (Roberts et al 2005). Berle and Means (2003) view corporate governance as a relatively new concept in both the public and academic domains, although the central issues the concept seeks to address have been in existence for a long-life period. The most common definition of the concept has been provided by the Organization for Economic Cooperation and Development (OCED).It defines Corporate governance as a system by which business corporations are directed and controlled. Corporate governance structures specify the distri exactlyion 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 af fairs. By doing this, it also provides the structure through which the companys objectives are set and the means of attaining those objectives and monitoring performance (OECD, 1999 p. 11).The influential Cadbury report defines corporate governance fundamentals and somewhat simplistically as the systems by which companies are directed and controlled (Cadbury 1992). This will require putting in place appropriate mechanisms which will ensure that corporate resources are safeguarded. Johnson and Scholes (1998) excuseed that corporate governance is concerned with both the functioning of organizations and the distribution of powers between different stakeholders. They argue that corporate governance determines whom the organization is there to serve and how the purpose and priorities of the organization should be decided. Thus, among other things, corporate governance is concerned with structures and processes for decision making, ensures righteousness and controls managerial behaviour . It therefore, seeks to address issues facing board of directors, such as the interaction with top management and relationship with owners and others interested in the affairs of a company.The definitions outlined, directly or indirectly, share common elements. They all acknowledge the existence of conflict of interest between managers and shareholders as a result of the existence of separation of ownership and control in corporate activities. They further recognize the need to put in place effective corporate governance mechanisms to ensure that shareholders and investors interest are well protected.1. IMPORTANCE OF CORPORATE GOVERNANCEAs a result of globalization and the increase complexity of business there is a greater reliance on the mystical sector as the engine of growth in both unquestionable and developing countries. Organizations do not exist in a vacuum they rather interrelate with a number of interest groups, known as stakeholders (Freeman, 1984). These stakeholders entangle shareholders, governments, regulatory bodies, creditors and the general public (Pease and Macmillan, 1993). Stakeholders are impacted by the activities of companies. In this regard, and in the setting of this study, adequate and effective corporate governance disclosure becomes relevant to investors and other stakeholders from a number of standpoints.Effective corporate governance disclosure promotes transparency in corporate structures and operations. It strengthens accountability and oversight among managers and board members to shareholders (Bosch, 2002). This oversight and accountability combined with the efficient use of resources, improved access to lower-cost capital and increased responsiveness to societal needs and expectations leads to improved corporate performance. Many studies exist linking effective corporate governance with better Performance. Fianna and Grant (2005) explains that good corporate governance helps to bridge the gap between the interests of th ose that a company, by increasing investor confidence and expectant the cost of capital for the company. Furthermore, they also add that it also helps in ensuring company honours, its legal commitments and forms value-creating relations with stakeholders. Coles et al. (2001) and Durnev and Han (2002, also found that companies with better corporate governance make whoopie higher valuation. These studies results, helps in confirming the idea of good corporate governance, result in better decisions at all levels of the organization, not at top-management and board levels, but also in the better performance of the organizationAgain adequate and effective corporate governance disclosure ensures that corporate activities are run in an open and transparent manner (Brain 2005). Last, corporate governance practices boost market confidence and ensure effective allocation of capital in the market (Greenspan, 2002).From the dispense with discussions, the realization of the importance of good corporate governance practices is largely dependent on a number of internal factors. As a way of achieving this, a number of principles have been established.3. PRINCIPLES UNDERPINNING CORPORATE GOVERNANCE DISCLOSUREA number of principles underpin effective corporate governance. These principles are business probity, responsibility and fairness or equal opportunity. Corporate entities are expected to exhibit these qualities to ensure good governance. Embracing the outlined principles will improve relationships between companies, their shareholders and the overall welfare of any economy. These principles are briefly discussed.Business probity requires individuals in charge of companies to be open and honest in the discharge of their activities. According to Brain (2005) openness implies a willingness to provide information to individuals and groups about the activities of a company. In this regard, it is important to recognize that shareholders and investors need to know the positi on of a company in order to respect their performance. Timely delivery of information will enable them achieve this purpose.Good corporate governance disclosure requires handlers of companies to be honest in the discharge of their activities. silver dollar requires managers to deliver factual information. A sign of honesty is that statements of companies are believed. However, Brain (2005 p. 26) contends that honesty might seem an obvious quality for companies, but, in an age of spin, and the economic consumption of facts, honest information is perhaps by no means as prevalent as it should be.Corporate governance requires handlers of corporate entities to be responsible in the discharge of their duties. Investors require confidence that companys financial systems are secured and credible. Managers are therefore expected to work in this direction to meet investors expectation. Responsibility in the context of corporate governance includes other issues such as transparency and acco untability. These principles are vital to the survival and welfare of every company. Thus, managers have a duty to explain their actions to shareholders as well as investors so as to enhance their understanding of the direction of the companys activities.The principle of fairness requires impartiality and a lack of bias in corporate activities. In the context of corporate governance, the quality of fairness is achieved when managers behave in reasonable and unbiased manner. In this sense, to ensure good governance shareholders are expected to receive equal consideration. This means minority shareholders should be treated the same way as majority shareholders.ReferencesBerle, A.A. and G.C. Means (2003). The Modern Corporation and private property, New York, Macmillan Company.Bosch, H. (2002), The changing face of corporate governance, UNSW Law daybook, Vol. 25 No.2, pp.270-93.Brain, C. (2005) Corporate Governance, ICSA textCadbury A. (1992) Financial Aspect of corporate governanceCo les JW, Mcwilliams VB, Sen N. An examination of the relationship of governance mechanisms to performance. Journal of Management 2001 29 (1)23-50.Durnev A, Han KE. The interplay of firm-specific factors and legal regimes in corporate governance and firm valuation. 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