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Corporate Governance Company
Effects of Good Corporate Governance to Company Conduct and Performance
Corporate Governance, is an act that helps regulate the corporate industries in order to ensure protection for the shareholders and also to regulate behavior and performance within a company. In this paper, we shall focus on the effects of good governance to a company’s performance and behavior, and also the theories that relate to this topic.
Every business organization or company has different internal organizations, having a variety of functions. The internal organizations that comprise the whole business are interrelated and are working together to ensure the company’s success in profiting from the market.
The more functions each of the organization perform; the better is the performance of the company as a whole. This gives each of the companies their corresponding advantages and benefits from the market and their consumers.
Also, every company has a need to be overseen by something much greater. This is where corporate governance comes in. In this paper, we shall view the different theories that are part in explaining and proving the connection between effective corporate governance to the behavior and performance of the company.
Overview of the Topic
Competition, typically the most powerful external force, is increased by the advent of globalization. The number of companies and the number of countries where these companies operate and the way governments are dealing with the impacts of globalization is accelerating. The interaction of changes in government policy and business innovation has actually made globalization even faster.
If a company does not become a global, it would simply be shut out of new markets. This is what pushed firms around the world to adopt Corporate Governance. Also, a company must be able to make contact with its consumers. According to most theories on strategic management, the customer is the ultimate judge of competitiveness; that is, by buying the products of a firm, the customer indirectly decides which firms will continue to exist and which firms will go bankrupt. (Drejer, 2002).
The reasons for the turmoil are numerous: a sputtering economy, increased global competition, the implementation of new technologies that displace jobs, the deregulation of certain industries, and the general consolidation of other industries, such as banking and health care. Observers will see a continuing progression in the ruinous steps which have forced the industry into a socio-politico-economic corner.
The industry is likewise linked closely to the policies of governments, the earnings of banks. The industry’s approach to dealing with political institutions has not always been brilliant. It tends to be good on technical issues, although it has not always fully presented the longer-term options, in order to make the choices and their implications clear.
In this paper, good corporate governance will be subjected to research.
But before tackling the topic of good governance, first, one must define what corporate governance is.
“Corporate governance is the set of processes, customs, policies, businesss and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.” (Wikipedia, 2007).
In another definition, this time by Shann Turnbull, “Corporate governance describes all the influences affecting the institutional processes, including those for appointing the controllers and/or regulators, involved in organizing the production and sale of goods and services. Described in this way, corporate governance includes all types of firms whether or not they are incorporated under civil business.” (Turnbull, 1997).
Good corporate governance includes many aspects. One major aspect of corporate governance handles matters that are greatly concerned with “accountability and fiduciary duty”, making sure that policies and guidelines be followed so that protection of shareholders can be ensured.
One other major aspect is “economic efficiency view”, in which, the corporate governance system’s main goal should be “to optimize economic results, with a strong emphasis on shareholders welfare.”(Wikipedia, 2007).
Definitions of Effective Corporate Governance
What is effective governance? Effective governance, in the context of this paper, may be defined as an act which enhances the overall performance of a firm, lessens the threat to the downfall of the firm and ensures the safety and continuity of the firm.
According to Peter Little, there are expected outcomes of effective corporate governance. Some of them are:
- “ enhanced organisational performance
- effective risk management
- improved investor and stakeholder confidence
- enhancing an organisation’s reputation
- benchmarking accountability
- assisting in the prevention and detection of fraud, dishonesty or unethical behaviour “ (Little, 2003).
In another reference, it was sighted that in an effective corporate governance scheme I banks, the director strengthens the system by:
- “Understand their oversight role and fiduciary responsibility
- Meet regularly with senior management and internal auditors to establish and approve policies and procedures and to monitor progress toward corporate objectives
- Serve as checks and balances
- Feel empowered to question management
- Provide dispassionate advice
- Absent themselves from decisions when they are incapable of providing objective advise
- Avoid conflicts of interest
- Do not participate in the bank's daily management. “(Ortiz, n.d.).
Relevant Theories to Corporate Governance
Many theories may address the topic which revolves around effective governance and its possible effects on a company. One theory, as proposed by R. Edward Freeman in 1984, and as revised by Wikipedia, states that stakeholder theory,
“identifies and models the groups which are stakeholders of a corporation, and both describes and recommends methods by which management can give due regard to the interests of those groups. In short, it attempts to address the "Principle of Who or What Really Counts."
This theory puts the interest of the stakeholders first. Though of course, the theory also knows that there are other existing bodies that are part of the system. This view is very much an integral part and is of great help to the corporate industry, suggesting that “integrating both the resource-based view as well as the market-based view, and adding a socio-political level.” (Wikipedia, 2007).
Another relevant theory to the topic may be the “stockholder theory”.
“The stockholder theory states that stockholders advance capital to corporate managers who act as agents in advancing their interests.” (Wikipedia, 2007).
This theory, basically deals with the process of increasing the profits of the stockholder, as long as it’s within the limits, according to Milton Friedman. To quote Mr. Friedman, "There is one and only one social responsibility of business: to use its resources to engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud." (M. Friedman, Capitalism and Freedom 1962, p. 133.). According to Hasnas, it is very vital to take into consideration that
“the utilitarian argument for the stockholder theory may be seriously fbusinessed does not mean that the theory is untenable. This is because the deontological argument for the theory, which has frequently been overlooked, is, in fact, the superior argument.
To the extent that it has received serious consideration, the primary objection against it seems to consist in the contention that it is not wrong to spend other people's money without their consent as long as it is being done to promote the public interest.”
The third leading theory is the Corporate Social Responsibility (CSR), which states that corporations are in a way, indebted, or their sole purpose is to meet and fulfill the interest of the “customers, employees, shareholders, communities, and ecological considerations in all aspects of their operations.” (Wikipedia, 2007).
The Stockholder Theory is solely based on acquiesce, due to the fact that upon the acceptance of a position, the person holding the office is subjected to the knowledge that he or she must utilize the company’s resources in according ONLY to the likings of the stockholders (Hasnas, 1997).
The Stakeholder Theory is also based on acquiesce firmly, since it also deals with the people who hold office and their obligations to all the benefit of the stakeholders. Also, it argues that all stakeholders have a claim to the decision that should be made in the company.
Relevance and Effects on the Topic
In an article by Emmanuel Fernando, he cited the importance and relevance of corporate theories to corporate governance. The following is an excerpt from the article:
“theoretical underpinnings for a mode of corporate governance, which takes into account ethical and public concerns, and not just profit making. The moral environment of stockholder theory was tightly constrained, focused as it was only on the duties of management toward the stockholders to maximize the profits of the corporation.
Stakeholder theory, on the other hand, opened the door to bringing fundamental moral principles to bear on corporate activity. For under that theory, the obligation of business was not to seek profit for its stockholders but to coordinate stockholder’s interest.”
Since the topic is much concerned with the relevance of effective governance to the company’s behavior and performance, it is very wise to include the stakeholder theory in it. Stakeholder Theory is relevant to the topic since it deals mostly with the interest of the shareholders of the company, also including with it the interest of people who are part of the system.
Since it helps in directing the company, it is possible that it also helps in giving out positive effects to the company’s welfare. It brings with itself the morality clause, therefore controlling and putting into perspective the behavior of every the organizations included in the system. Also, effective corporate governance is mostly concerned with the efficiency of the firms that are part of the institution.
Stockholder Theory, though mostly focused on the profitable aspect of the company, can still be considered relevant to the topic. As was mentioned, stockholder theory is more concerned in increasing the profits of the company by any legal means and within bounds.
When, for example, the stockholders chose to buy a factory, if it is in no way illegal, then the managers are obligated to carry out this undertaking. The relevance of this theory to the topic may be to the fact that it governs the advancement and betterment of the company performance.
Thus, I can conclude that in fact, effective governance does positively affect company behavior and performance. With the data gathered above, one can see the connection of governance to the behavior pattern and performance of a company. Though no results may be definite, the outcome may be generalized and can therefore be predicted.
One must remember the theories that are related to the said topic. Stakeholder theory, which states that “identifies and models the groups which are stakeholders of a corporation, and both describes and recommends methods by which management can give due regard to the interests of those groups. In short, it attempts to address the "Principle of Who or What Really Counts." (Wikipedia).
Stockholder Theory, which states that “stockholders advance capital to corporate managers who act as agents in advancing their interests.” (Wikipedia, 2007).
And lastly the Corporate Social Responsibility (CSR), which states that corporations are in a way, indebted, or their sole purpose is to meet and fulfill the interest of the “customers, employees, shareholders, communities, and ecological considerations in all aspects of their operations.” (Wikipedia, 2007).
Companies set out in adopting corporate governance is in the right track. But aside from good company governance, there are also other aspects that a company must look into.
In today’s business world, the value and importance of customers is not something that should be set aside by companies. Marketing plans that includes forecasting and budgeting and strategic planning would be incomplete without paying much consideration to the customers.
Customers will always be a part of the agenda in any marketing plan of any company. Because of the implications for profitability and growth, customer retention is potentially one of the most powerful weapons that companies can employ in their fight to gain a strategic advantage and survive in today's ever increasing competitive environment (Lindenmann, 1998).
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Subjects of analysis and variables relating to corporate governance