Good Corporate Governance Is The Foundation For Long Term Development Of Large Enterprises

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.


Good corporate governance is the foundation for long-term development of large enterprises. For a company, usually, there are five objectives as follows:

1) Dominant market share (retail industry)

2) Profit maximisation - much more acceptable objective

3) Maximisation of shareholder wealth

4) Survival

5) Maintain happy and stable workforce

In which one of main objectives of a firm is to maximise shareholder wealth. However, for two statements are extracted from the annual report and Financial Statements of Marks and Spencer 2010:

Statement 1

"Governance helps us do the right thing, the right way - for our shareholders and our customers, employees, suppliers, local communities and the environment. Our governance is focused on how to get it right, not only in the board room but also across the business…" (Page 46)

Statement 2

"Our aim is to build a sustainable business through consistent, profitable growth and to make sure that our customers and wider stakeholders can always trust us to do the right thing. We recognise that creating shareholder value is the reward for taking acceptable risks." (page 54)

It appears that the companies do not just focus on shareholders.

In my opinions, although shareholder wealth maximisation should be a superior objective over stakeholder interest, but Corporate governance needs to harmonize and coordinate mechanisms inside and outside, which may emphasize more on internal mechanisms rather than market mechanisms to manage effectively the company. Therefore, I agree with the above two statements


Before starting to learn the views of researchers around the world on this issue, we learn a few concepts are as follows:

Shareholder wealth maximisation means maximising the flow of devidends to shareholders through times - there is a long term perspective (Glen Arnold, 'Corporate Financial Management' pp.13).

Stakeholders: As defined by the U.S. General Accounting Office, a stakeholder is "an individual or group with an interest in the success of an organization in delivering intended results and maintaining the viability of the organization's products and services. It may include shareholders, investors, rating agencies, partners, suppliers, vendors, customers, employees, consultants, governments (local, state, national), surrounding communities, citizens, and communities of interest such as certifying bodies and professional associations.

Stakeholder interests are likely to include

• accurate reporting on the effectiveness and productivity of the enterprise

• creation, preservation, and enhancement of the organization's reputation

• availability and reliability of services (business resilience)

• demonstrated due diligence with respect to protecting against malicious attacks (internal and external) and accidents that can be anticipated

• ensuring of only authorized access to enterprise information

• protecting the privacy of stakeholder information

Inside mechanisms include: (i) Shareholders and General Meeting of Shareholders, (ii) Board and the management of the company, (iii) The internal control system and (iv) Mode salary, bonus and other incentive.

External mechanisms include: (i) the types of markets (capital markets, suppliers, employees, customers, creditors) and (ii) legal and regulatory state.


According to Tri Pham Hung (2008), there are two corporate governance models common in the world: Corporate governance mechanisms operating through internal and external mechanisms.

Based on two this mechanism, many models of corporate governance has been applied in the world, but can be grouped into two main groups:

- Shareholder-oriented model. Shareholder oriented model, popular in Britain, the United States as a tool for company shareholders to maximize their benefits.

- Multi-stakeholder model of governance. This model is common in continental European countries and Japan, but also appeared in many successful companies of the United States. This model recognizes the rights of workers, managers, suppliers, customers and communities. Support multi-stakeholder governance model, Professor Bill George, Harvard Business School, has been famous article: "Shareholders come third," The interests of shareholders-only ranked third after the interests of clients and labor.

Corporate governance is set on the size of the separation between management and ownership. The company is the owners (investors, shareholders ...), but to corporate existence and development must have the guidance of the Board, the executive board and the contribution of labor, but these people do not always have the common will and interests. Clearly, there must be a mechanism to regulate and control to investors, shareholders can control the operating companies to deliver the best performance.

Corporate governance focused on handling problems that often arise in relation to authorization (Principle-agent) in the company, prevent and limit the abuse of management powers and duties assigned to use the property , business opportunities the company serve private interests of themselves or other persons or loss of resources by the company's control.

According to Carrillo (2007), Corporate Governance deals with Corporations organisation and decision making structures. One of its main purposes is to ensure the efficient confluence of otherwise competing interests that are affected by Companies' activities. The debate about the relationship between shareholders' interests (those of investors and owners of the issued shares of the Corporation) and other stakeholders' or "other constituents" interests (those related to a varied number of constituencies such as employees, citizens of the Community where the Corporation interacts, etc) is as old as Corporations. Shareholders' theorists of Good governance tend to follow Milton Friedman statement that social responsibility of business is to increase business and consider that shareholders interest in the increase in value of their shares is paramount of Corporations goals.

Further, Shareholders' theorists are favourable to acknowledging shareholders rights over decisions on how their investment is used, and are concerned by the information asymmetry between the principal and the agent. These lines of thought are often based on the idea of perfect and efficient markets that can be rooted in some of the main Utilitarian philosophers such as Bentham who advocated the pursuance of self-interest to maximize utility. Adam Smith's economic theory is seen as leading a similar strategy for business. He considered that business acted in a self-interested manner, that the market place would regulate their behaviour and that its "invisible hand" would ensure social benefit.

According to James M. McTaggart and Peter W. Kontes (1993), the company's governing objective should be to maximize the economic benefits to any group other than the shareholders, ie maximising customer satisfaction.

Without a doubt, the stakeholder group that is seen to pose the greatest challenge to the primacy of shareholder interests is customers. It goes without saying that no company can create great wealth for its shareholders without a stable and growing revenue base, which can only come from having very satisfied and loyal customers. The company's management work hard to satisfy its customers and create good returns for shareholders.

The specific questions we want to address here are: Under what circumstances does the objective of maximizing shareholder value conflict with the objective of maximizing customer satisfaction?

And when a conflict does arise, how should management choose to resolve it?

We begin by noting that every product and service provides benefits to customers based on its expected usefulness, or utility, and that these expected benefits have an economic value.

As long as management sets the price of each product or service no higher than the average dollar value of benefits provided to customers, and the expected benefits materialize, most customers will be satisfied with the transaction (it will be viewed as a fair exchange). In other words, customer satisfaction occurs when the product or service meets or exceeds expectations and is acquired at a price no higher than its perceived value.In addition to the value perceived by customers, every productand service also makes some contribution to shareholder value.


In summary, the governing objective for all companies should be to maximize the value of the company for shareholders.

To achieve this goal, business managers not only serve the interests of the owners of the company but also serve the economic interests of all stakeholders over time. While some stakeholders facing economic harm in some cases, such as the restructuring of enterprises, organizations can also economic interests of all stakeholders will be maximum from the decision in the interests of the shareholders. In short: Maximizing shareholder value is not only the best but the only way to maximize the economic benefit of all stakeholders over time.

Business is a game selection. Hundreds of decisions are made every day in large enterprises related to the balance between current income and long-term payoff or between maintaining profitability and maintain market share. All large companies need a clear goal to help the decision-making is more accurate and reasonable.

Depending on each different stage, but business managers priority focus for the goal to maximize profits or enhance corporate governance, to the benefit of the parties involved, success in creating value to create a core competence.

To do this usually requires to be updated timely information for strategic analysis, decision-making changes in organizational structure and management processes, efficient production processes, generate higher profit strategic planning. When the advantages of institutional development, human resources and finances of the company also expanded, providing strategic advantage in their business activities.