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This chapter examines the various and diverse definitions, views, theories and models associated with corporate governance concept and it also emphasises on what constitute a good corporate governance structure and finally the relationship between corporate governance and its corporate competitiveness and firm performance.
Overview of Corporate Governance
In this world of constant changes, corporate are in a need to maintain their financial position and increasing their financial performance. A huge degree of emphasis has been laid on continuous learning, research, development and strategic planning. Corporate governance is regarded as a means to ensure that companies are run properly and at the same time, minimising the risk of corporate failure. Coyle (2007) has stated that it is an assessment system that serves as a "signal indicating" mechanism, not only can provide enterprise with a manoeuvrability basis and instruction for furnishing its corporate governance, and provide corporate governance assessment record to the society, but also at the same time, review timely the changes of strategic policy environment and provide a favourable environment for social mutual governance.
Historical Perspective of Corporate governance.
Coyle (2007) related that the main concerns for better practices in corporate governance started in the UK in the late 1980s and early 1990s. Especially in this period a series of reports were drawn which are presented below:
Produced in the wake of the demise of Robert Maxwell and his business empire, the Cadbury Report (1992) is the name for the first Code of Best Practice on good governance practices, as part of the Report of the Committee on the Financial Aspects of Corporate Governance (1992). There was no statutory regulation of the code, but the London Stock Exchange required all listed companies to include a statement of compliance with the code in their annual report.
In 1995, Paul Myners report made various recommendations concerning the relationship between institutional shareholders and company managements, including improving communications. Following this report, various groups of institutional investors have published guidance for their members, and encouraged activism where deemed strategically cost effective. The significance reason of the Myners Report is that it put forward the fact that institutional shareholders to redefine their roles and responsibilities for ensuring good corporate governance of the company they have invested in.
In 2001, Myners Report put forward a voluntary code of practice for the pension funds. The report aimed was on pension trustees and pension advisors. The reason behind this report was that pension trustees are required to be competent for their role and justify the reasonableness of their asset allocation and assumptions about future investment returns.
Following one of the Cadbury's committee recommendations, a Study Group on Directors' Remuneration was set up to review corporate governance in UK-Listed companies. The resulting Greenbury Report was published in July 1995, focussing on directors' contracts and compensation. Greenbury's recommendations consisted of mainly that remuneration committees should be made up of NEDs to make decisions on senior executive pay, reduction of maximum notice period in a director's contract from three years to twelve months and bonuses should be linked to satisfactory performance criteria. Hence the overall aim of the report was that there should be clearer window in remuneration packages. These recommendations were accepted by the LSE and were incorporated into the listing rules.
The Hampel Committee chaired by Sir Ronald Hampel was set up in 1995 to build on and to widen the scope of the Cadbury and Greenbury reports and led in due course to the publication in 1998 of the Combined Code on Good Governance. The combined code laid rules mainly concerning conduct of directors, director's remuneration, relations with shareholders, accountability and audit. In essence, these rules were designed to increase the possibility of companies being run honestly and competently and shareholders being given adequate and reliable information .The combined code was divided into two main parts, namely best practice for companies and best practice for institutional investors.
In April 2002, Derek Higgs was appointed by the UK Chancellor of the Exchequer and the Secretary of State for Trade and Industry to lead to a short independent "Review into the role and effectiveness of non executive directors". The Higgs' report envisaged a more demanding and significant role for NEDs and focused on the effectiveness of NEDs in promoting company performance as well as on issues of accountability.
The new combined code was issued in July 2003 and came into force in November 2003. The new combined code is not legally binding, but under the LSE listing rules, listed companies have to describe how they apply the code's main provisions and supporting principles and they must either "confirm or explain" that is confirm that they have comply with the Code's provisions and provide an explanation to shareholders.
Definition of Corporate Governance according to Various Writers.
Good governance is not a new concept. It has existed since the early days civilisation. Both eastern and western civilisation recognized and preached the principles of good governance. The philosophy of good governance can be related also to various religious studies like the Hinduism, Islamism, Christianism, Judaism, Buddhism and others. In the modern business world, the concept of governance has been put in the context of business management, thus corporate management and control and to end up with nowadays highly used business word "Corporate Governance"
Corporate Governance is not a new issue. It has an ancient touch, since the formation of companies. The need for corporate governance arises because of the separation of management and ownership in modern Corporation. In practice, the interest of those who have effective control over a firm can differ from those interests of the suppliers of external finance. The 'principal-agent' problem is reflected in management pursuing activities which may be detrimental to the interest of the shareholders and this problem can be mitigated through the protections derived from good corporate governance.
0'Donovan (2003) defines corporate governance as "an internal system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders, by directing and controlling management activities with good business savvy, objectivity and integrity. Sound corporate governance is reliant on external market place commitment and legislation, plus a healthy board culture which safeguards policies and processes."
O'Donovan (2003) put forward that "the perceived quality of a company's corporate governance can influence its share price as well as the cost of raising capital. Quality is determined by the financial markets, legislation and other external market forces plus the international organisational environment; how policies and processes are implemented and how people are led. External forces are, to a large extent, outside the circle of control of any board. The internal environment is quite a different matter, and offers companies the opportunity to differentiate from competitors through their board culture. To date, too much of corporate governance debate has centered on legislative policy, to deter fraudulent activities and transparency policy which misleads executives to treat the symptoms and not the cause."
Taking a finance point of view, Shleifer and Vishny (1997) define corporate governance as dealing with the various ways in which finance provider assure themselves of getting an appropriate rate of return on their respective amount of investment.
Kakabadse, Kakabadse and Kouzmin (2001) put forward that following on a survey which reads "Board Governance and Company Performance: Any Correlations?", carried out by McKinsey and Company who referred to Agrawal et al., (1996), it was clearly noticed that investors willing to pursue a growth strategy and subsequently invested in low valued or table companies were willing to pay for good governance. These investors assumed that a company with good corporate governance will have a better financial performance over a time lag and/or that good corporate governance can ultimately reduce the risks associated and attract further investments.
Kakabadse, Kakabadse and Kouzmin (2001) further put forward that though there are substantial research that creates the relationship between corporate governance to company performance, there are equally a growing range of results with different interpretations. The wide range of results can be explained because of the variability of different companies concerning their board structures, attitude towards risk, NEDs participation and others. According to Kakabadse, Kakabadse and Kouzmin (2001), there have been studies done by Zahra and Pearce (1989), Jonnegard and Svensson (1995) and Maassen (1999) based on the integrative models of board involvement, incorporating different theoretical perspectives and various board attributes, suggesting that corporate governance has, at least, an indirect effect on company performance.
Taking again a finance point of view, Mathiesen (2002) put forwards that corporate governance is an important field in economics that tries to investigate about how to secure