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Corporate governance is the implementation and management of set of systems, procedures, policies, processes and frame work by the board of directors in which how organisations are directed and controlled to satisfy share holders and stake holders as well as effective use of resources by good decision making without effecting the goals of the organisations (Matheson, 2004).
The Past: Governance and the Joint Stock Companies:
The purpose of corporate governance from the beginning of Industrial era started form the concept of joint stock companies which is developed from the field of capitalism between 13th to 16th centuries. Capitalism is the generation of wealth by investing money in return of profit where merchant started solo trading risking his money in buying and selling of goods. As the days goes on the trading enterprises undertaken by individual merchants, working in family groups or partnership acted on their own behalf (Gascoigne, 2009).
In the 16th century the government encouraged the traders not only for the national income but also setting up colonies in other countries and resulted in charted companies. Merchants in charted company had monopoly on trade for specific region and given number of years by giving legal powers to operate their business (Gascoigne, 2009).
Due to high investment and long period in analysing the profit the concept of joint stock companies had approached where the company were issued shares to the investors for increase in capital and the investors became the partners of the company, and the profits were distributed in proportion to the investment. For example, East India Company is one of the joint stock companies. In this process lot of risks were involved to all the investors and the joint stock approach to companies which were not registered with royal charter were also set up and investors can buy the shares irrespective of relation to the company. These shares can be sold based on agreed price between the buyer and seller in which the element of capitalism had evolved once again (Gascoigne, 2009).
In the 17th century the entrance of specialist brokers came in to picture for arranging deals between the sellers and buyers and speculation between the shares caused huge loss for investors. For example in 1633 the tulip market in Holland goes into a speculative spam and made huge losses to many investors (Gascoigne, 2009).
Hence, it became a gambling and shares in such companies can be bought and sold at Jonathan's coffee house. The brokers who arrange the deals called themselves as Stock Exchange. Due to massive speculative and scandals all the investors lost their money as the share price went to peak and suddenly dropped. Because of this, the bubble act which is restricted to create joint stock companies had been implemented and this lasted for several years (Gascoigne, 2009).
Due to economic boom and pressure from the investors the bubble act had been removed in 1826 by allowing joint stock companies. In the year 1844 joint stock company act came in to picture which brought regulations to avoid fraud for honest investors by registration and incorporation of companies with specific legislation (Gascoigne, 2009).
Hence, a set of rules and process has started by joint venture act and this was implemented by United Kingdom which was one of the western capitalist countries and this model became a basis for governance (Gascoigne, 2009).
Modern Corporate Governance in 19th and 20th Century
In 19th century the business engaged in the form of solo trader, partnership and un-incorporated body where managing partners took over the firm and sleeping partners provide the funds and they are liable for the creditors. In the mid of 19th century the concept of company was developed with incorporation of legal entity separate from owners. The ownersââ‚¬â„¢ liability of company debts is limited to their investment and the company can continue after the death of the owner and shares can be transferred to the company. This company laws became the foundation for the corporate governance. As the years pass on, the separation of management from ownership had taken place and shares of many public companies are listed on various stock exchanges in different countries (McRitchie, 1995).
In the year 1970, the major development had undergone by the important link between the organisation, environment and board power attention. In addition to corporate governance thinking, the US emphasis on independent directors and audit committees and in Europe promulgation of the two tiers board and on both sides of Atlantic debates about stakeholder notions (McRitchie, 1995).
In 1980, stakeholder concern and director responsibility to increase in share holder- value was reinforced and the profit performance model became a basis for the privatisation of state run entities. Therefore, in 1983 corporate governance and practises, procedures, principles of board of directors came in to picture in report title (McRitchie, 1995).
In 1993, the corporate governance is very much influenced by Cadbury report on the financial aspects which was attached to a code of best practise as well as importance of independent non executive directors. Moreover, this report is mainly about potential for abuse of corporate power , recommending the use of audit committees as a bridge between the board and external auditor, the separation role of chairman of the board and chief executive. The Greenbury report added a set of principles on the remuneration of executive directors and further to that in 1998, the Hampel report by UK Committee developed principles of corporate governance with the outcomes of the above reports (McRitchie, 1995).
Therefore, in the end of 20th century there was a dynamic change in corporate governance in implementing new corporate structures and the ability to respond to poor performance as well as values to shareholders and stake holders (McRitchie, 1995).
Corporate Governance in New Zealand in the 21st century
The objectives of corporate governance is Transparency, Accountability, Stake holder analysis , Delivering value and Legal & financial discipline and Corporate social responsibility to achieve shareholder and stake holders satisfaction. However, the corporate governance reports vary to different countries (Matheson, 2004).
In New Zealand the securities commission developed a set of principles for companyââ‚¬â„¢s directors and board in achieving high standard of corporate governance duties and responsibilities supporting existing laws and regulations. These principles focus mainly on reporting and disclosure of corporate governance practises, structures, processes to stake holders and shareholders (seccom.govt.nz, 2003).
The implementation of these principles with help of guides lines (best practises such as structures, processes and relational mechanisms) provided by securities commission are required for good governance in public organisations (seccom.govt.nz, 2003).
According to security commission in New Zealand (seccom.govt.nz, 2003) the best practises to achieve good corporate governance in public listed companies are as follows:
The board of directors should encourage high ethical standards by having code of ethics addressing issues of integrity, uses of company assets and resources to all the share holders and stake holders by fair dealing with them along with compliance of laws and regulations (seccom.govt.nz, 2003).
Board Compensation and Performance:
For the effective work in the organisation from the board of directors the balance of independence, skills, knowledge and experience is considered equally and the roles and responsibilities of executive and non executive directors are clearly defined and board should review the performance of Chief Executive Officer (CEO) as well as independent directors (seccom.govt.nz, 2003).
The set up of board committees for specific purposes can improve effectiveness in key areas of the organisation where board should retain responsibility. For a publicly owned company board should establish an audit committee with responsibilities to appointment of external auditors and promote integrity in financial reporting this audit committee compromise of all non executive directors with attest one director as a chartered accountant (seccom.govt.nz, 2003).
Reporting and Disclosure:
The board has to disclose fairly the practises and activities to all the share holders and stake holders as well as companies should report their performance against the governance principles (seccom.govt.nz, 2003).
The rewards given to directors and executives should be transparent, fair and reasonable and this should disclosed in annual reports (seccom.govt.nz, 2003).
The board should verify the exiting processes and structures to identify and manage potential risk and board of issuers should report annually to investors and add-on relevant internal controls (seccom.govt.nz, 2003).
Share holder Relations
The relations between the share holder and board should be transparent and encourage them to engage with the entity, and pass the information about organisation in annual general meeting (seccom.govt.nz, 2003).
Stake Holders interest:
The board should respect stake holderââ‚¬â„¢s interest within the context of the entityââ‚¬â„¢s ownership and its fundamental purpose (seccom.govt.nz, 2003).
Accreditation of directors will be feature of the governance in the future as well there will be quarterly or half yearly meeting instead of annual general meeting (Matheson, 2004).