Corporate Governance Of Multinational Non Business Organizations Commerce Essay

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The topic of corporate governance came to the forefront of global business limelight from the shadows after a series of collapses of high profile companies. Enron, energy giant based in Houston Texas, and the telecom behemoth, WorldCom, shocked the business world with their large scale of unscrupulous and illegal operations. When the corporate practices in the US companies came under attack, it was apparent that the problem was more widespread. From Parmalat in Italy to Hollinger Inc., the multinational newspaper group, revealed deep-rooted problems in their corporate governance. Even the prestigious New York Stock Exchange had to replace its director, Dick Grasso, due to public outcry over excessive compensation. It was obvious that something was missing and not quite right in the area of corporate governance all over the world.

Corporate governance has been an important field of query within the finance order for years. Finance researchers have intensively investigated this field for more than a quarter century (Jensen & Mecking, 1976) and the father of modern economics, Adam Smith recognized the problem over two centuries before they happened. Several arguments about whether the Anglo-Saxon market- model of corporate governance is better than the bank-based models of Germany and Japan have taken place. However, the differences in the quality of corporate governance in these developed countries are no comparison to the gap that exists between corporate governance standards and practices in these countries as a group and those in the developing world (Shleifer and Vishny, 1997).

Corporate governance has been a central issue in developing countries even before the recent corporate scandals in advanced economies made news. Corporate governance and economic development are inherently linked. Effective corporate governance systems help to promote the development of strong and stable financial systems irrespective of whether they are largely bank-based or market-based. This in turn, has a positive effect on economic growth and poverty reduction (Claessens, 2003)

There are several ways through which this causality works. Effective corporate governance increases access to external financing by firms, leading to greater investment and higher growth and employment. The proportion of private credit to GDP in countries in the highest quartile of creditor right enactment and enforcement is more than twice than that in the countries in the lowest quartile (La Porta et al, 1997). With respect to equity financing, the ratio of stock market capitalization to GDP in the countries in the highest quartile of shareholder right enactment and enforcement is about four times as large as that for countries in the lowest quartile. Poor corporate governance is detrimental to the creation and development of new firms.

Good corporate governance reduces the cost of capital by reducing risk and helps to create higher firm valuation thus boosting real investments (La Porta et al, 2000). Good corporate governance mechanisms ensure that resources are allocated better and it increases the return to capital through the management. The return on assets (ROA) is about twice as high in the countries with the highest level of equity rights protection as in countries with the lowest protection (Claessens, 2003). Good corporate governance can reduce the risk of nation-wide financial crises. There exists an inverse relationship between the quality of corporate governance and currency depreciation (Johnson et al, 2000). Poor transparency and corporate governance norms were the sole reasons behind the Asian Crisis of 1997. Such financial crises have great economic and social costs and can set a country several years behind in its path to development.

At last, good corporate governance can eliminate mistrust between different stakeholders, reduce legal costs and significantly improve social and labor relationships and external economies like environmental protection. Ensuring the manager's act on behalf of the owners of the company that is the stockholders and pass on the profits to them are the prime issues to be dealt with in corporate governance. Limited liability and dispersed ownership are the essential features that the joint-stock company form of organization thrives on that inevitably lead to a distance and inefficient monitoring of management by the owners of the business. Managers enjoy real control of business and may not always work towards the best interests of the shareholders. These potential problems of corporate governance are universal. In addition to this, the Indian financial sector is stained with a relatively unsophisticated equity market that is very vulnerable to manipulation and with rudimentary analyst activity which is a dominance of family firms; a history of managing agency system; and a generally high level of corruption. All these features are responsible for making corporate governance an important issue in India.

The basic definition of corporate governance is: "The system by which organizations are directed and controlled." It is concerned with mainly systems, processes, controls, accountabilities and decision-making at the heart of and at the highest level of an organization. Corporate governance is about the manner in which top managers execute their responsibilities and authority and how they account for that authority with respect to those that have entrusted them with assets and resources. It is particularly concerned with the abuse of the power and the need for openness, integrity and accountability in the decision-making processes of the organization. This is equally relevant to any organization, regardless of whether it is public or private. Effective corporate governance accompanied by clinical governance, is necessary for the Primary Care Trust (PCT) to achieve clinical, quality, and financial objectives. Fundamental to effective corporate governance is having the means to verify the effectiveness of this direction and control. This is achieved through what is called by the NHS as "controls assurance". Risk management is the common thread that links corporate and clinical governance. Risk management is defined as "the culture, processes and structures that are directed towards the effective management of potential opportunities and adverse effects".

Aims and objectives of the study

All the countries whether they are developed or developing face the same problems when it comes to corporate governance. Because the corporate boards lack the institutional memory and experience, traditional economies face many hurdles. They also face a number of challenges that developed economies do not face:

The objectives of the study are:

To study structure of corporate governance followed by organizations in India

To study the state of corporate governance in India

To study the structure of corporate governance followed by organizations in China

To study the state of corporate governance in China

To compare the structure of corporate governance in India and China

To compare the state of corporate governance in India and China

Review of literature

All the countries whether they are developed or developing face the same problems when it comes to corporate governance. Because the corporate boards lack the institutional memory and experience, traditional economies face many hurdles. They also face a number of challenges that developed economies do not face:

Establishing a rule based system of governance

Combating vested interests

Dismantling pyramid ownership structures that allow insiders to control and, at times, siphon off assets from publicly owned firms based on very little direct equity ownership and thus few consequences.

Severing links such as cross shareholdings between banks and corporations.

Establishing property rights systems that clearly and easily identify true owners even if the state is the owner

Depoliticizing decision making and establishing firewalls between the government and the management in corporatized companies where the state is a dominant shareholder

Protecting and enforcing minority shareholder rights

Preventing asset stripping after mass privatization

Finding active owners and skilled managers among diffuse ownership structures and

Cultivating technical and professional know how (CIPE,2002)

(By Robert W. McGee, Springer Science, 2009)

A mushrooming empirical literature has begun to record important features of corporate governance in India. Jayati Sarkar and Subrata Sarkar demonstrated that corporate boards of large companies in India in 2003 were a little smaller than those in the United States (in 1991), with an average of 9.46 member in India compared to 11.45 in America (Sarkar & Sarkar, 2000).

Busy independent directors appear to be associated with a greater degree of earnings management when measured by discretionary buildups (Sarkar, Sarkar & Sen, 2006) Multiple positions and non-attendance of board meetings by independent directors are associated with higher discretionary accumulation in firms. Even after controlling these characteristics of independent directors, board independence does not seem to affect the degree of earnings management. However, CEO-duality, where the top executive also chairs the Board, and the presence of controlling shareholders as inside directors, are associated with a greater earnings management. Shareholding patterns in India have revealed a significant level of concentration in the hands of the promoters. In 2002-03, Jayati Sarkar and Subrata Sankar found that promoters held 47.74% of the shares in a sample of almost 2500 listed manufacturing companies, and held 50.78% of the shares of group companies and 45.94% of stand-alone firms (Sarkar & Sarkar, 2005a). In comparison to those figures; the Indian public's shared amounted to 34.60%, 28% and 38.51%, respectively. As for the impact of concentrated shareholding on firm performance, an earlier study by the same authors finds that in the mid-90's (1995-96) holdings above 25% by directors and their relatives was associated with higher valuation of companies while there was no clear effect below that threshold (Sarkar & Sarkar, 2000). More recently, based on 2001 data that distinguishes between "controlling" insiders and non-controlling groups, Ekta Selarka reports a U-shaped relationship between insider ownership and firm value, with the point of variation lying at a higher level, between 45% and 63% (Selarka, 2005).

Given that almost two-thirds of the top 500 Indian companies are group-affiliated, issues relating to corporate governance in business groups are naturally very important. Tunneling which may be described as "the transfer of assets and profits out of firms for the benefit of those who control them" is a major concern in business groups with pyramidal ownership structure and inter-firm cash flows (Johnson, LaPorta, Silanes & Shleifer, 2000). Marianne Bertrand and her coauthors estimate that an industry shock leads to a 30% lower earnings increase for business group firms compared to stand-alone firms in the same industry (Bertrand, Mehta & Mullainathan, 2002). They suggested that firms farther down the pyramidal structure are less affected by industry-specific shocks than those nearer the top, which means that positive shocks in the former are siphoned off to the latter thus benefiting the controlling shareholders but which ends up hurting the minority shareholders. However, Bernard Black and Vikramaditya Khanna question how this logic would make them less sensitive to negative shocks (Black & Khanna, 2007).

There is also some evidence that firms associated with business groups have superior performance as compared to stand-alone firms (Khanna & Palepu, 2000) Raja Kali and Jayati Sarkar argued that diversified business groups help to increase the non- transparency within-group fund flows and thus driving a wider wedge between control and cash flow rights. A greater degree of diversification also helps tunneling. Kali and Sarkar find that firms with greater ownership opacity and a lower wedge between cash flow rights and control than those in a group's core activity are likely to be located farther away from the core activity using data for Indian firms in 385 business groups in 2002- 03 and 384 groups in 2003-04. This incentive for tunneling explains the persistence of value destroying groups in India and occasional heavy investment by Indian groups in businesses with low contribution to group profitability.

By using a sample of over 600 of the largest (by revenues) Indian firms in 2004, Jayashree Saha found out that, after controlling for other corporate governance characteristics, firm performance is negatively associated with the extent of related party transactions for group firms but positively so for stand-alone companies. This further strengthens the circumstantial evidence of tunneling and its adverse effects (Kali & Sarkar, 2007). Two cross-country studies that were published in 2003 declared India among the worst nations in terms of earnings opacity and management (Bhattacharya, Daouk & Welker, 2003). Indian accounting standards provide considerable flexibility to firms in their financial reporting and differ from the International Accounting Standards (IAS) in several ways that can often make interpreting Indian financial statements difficult. In a 2007 study of Kee-Hong Bae and co-authors, India continues to be below the median within their 49 country sample in terms of the number of divergence from International Accounting Standards (Bae, Tan & Welker, 2007).

The nature of corporate governance can affect the capital structure of a company. Debt can prove to be a disciplining mechanism in the hands of shareholders or an impounding mechanism in the hands of controlling insiders in the presence of well functioning financial institutions,. After studying the relationship between leverage and Tobin's Q in 1996, 2000, and 2003, Jayati Sarkar and Subrata Sarkar concluded that the disciplinary effect has been more noticeable in recent years as institutions have adopted a significantly greater market orientation (Sarkar & Sarkar, 2005). They also found little evidence of the use of debt as an impound mechanism in group companies (Linda S. Speeding, 2004)

In recent years, corporate governance has been receiving a lot of attention in China. The reason for this attention is the debate if China can develop an effective corporate governance system to improve its companies' performance and protect the minority shareholders. The Chinese stock market was created in the late 1990s. It has grown to become the eighth largest in the world in less than 15 years. Based on the statistics from the China Securities Regulatory Commission (CSRC), there are about 70 million investor accounts opened across the country. Approximately 200-300 million Chinese people, directly or indirectly, invest in the stock market and are affected by it.

Questions on how to maintain the investors' enthusiasm regarding the stock market and strengthen their confidence in the market has always remained a heated point of discussion in the public policy arena. It is even more relevant and urgent now that a series of recent corporate scandals have damaged the investors' confidence.

Corporate governance reforms gained prominence only in the past three years even though China's transition from a state-planned into a market-oriented economy started almost two decades ago. In 2001, a local business publication, "Caijing Magazine," exposed the YingGuangXia Chinese Renminbi (RMB) which was a 745 million fraud, the biggest economic scandal in the history of mainland China. This revelation drew the attention of regulators and public investors to the importance of corporate governance and exposed the weakness of the country's legal, regulatory, and accounting systems. Corporate governance has since then been given top most priority. This topic has been mentioned often in all of the recent keynote speeches by China's premier, the chairman of the Central Bank, the chairman of the China Securities Regulatory Commission (CSRC), and numerous other government officials and scholars.

 Within a mere two years, China has made great strides on the corporate governance front. The consent to improve corporate governance is the top most priority among all sectors, including government bodies, regulators, intermediaries, corporations, and investors. Legislators, regulators, and professional institutions have since issued a number of laws, rules, regulations, and standards with the intention of laying a strong foundation for good corporate governance. However, change may not happen overnight because the separation of ownership and management of a company is still a very new concept in China.

The progress of the corporate governance reform depends on the efforts at the individual company level to close the gap with global best practices and the ongoing country-level initiatives that have a hand in shaping China's corporate governance infrastructure. Individual companies, through their own efforts, can achieve top-notch corporate governance independent of the local market's governance infrastructure. External environment factors however play a huge role in raising the country's standards by incentivizing or consenting to sound governance practices. The four major areas that comprise corporate governance infrastructure are market infrastructure, legal environment, regulatory environment, and informational infrastructure.

Even though there have been a few positive developments on the legal and regulatory fronts that have led to some top-notch corporate governance codes, guidelines, and listing requirements, effective implementation and enforcement of these principles may prove to be elusive for many years. Yet, such progress has been partially damaged by some inconsistencies and redundancies around these new rules and institutions, partly as a result of different government and market sector groups that wish to bring about reform without full coordination and common oversight. Rules and regulations safeguarding governance of the financial and capital markets are ingrained in the PRC Company Law, Securities Law, and the Code of Corporate Governance. It is necessary that Companies traded on public exchanges adapt a two-tiered board system. There are no clear necessities regarding the responsibility and accountability of the board members. In practice, truly independent and effective board failed to notice that executive appointments and compensation cannot be simultaneously legislated and implemented. Selective enforcement is still commonly sighted.

Research methodology

Two forms of research are undertaken in order for the purpose of satisfying the objectives of the study:

Primary Research: Data collected through first-hand sources

Secondary Research: Second-hand data collected through different sources

Primary research- Quantitative Research

Quantitative research method will be followed in order to create a detailed analysis of consumers' perception regarding emails and direct mails as marketing medium in India. Quantitative research offers several advantages to the study: Brower et al (2000, pg. 366) assert that "quantitative researchers pursue- and insist that they generate- value-free, unbiased data". Similarly, McLaughlin et al (2002) highlight the following uses of quantitative approach:

Research and establish explicit hypotheses

Uses accurate measures of concepts

Uses tests of statistical significance

Uses controls for other explanatory variables

Provides a clear theoretical context

Case-studies

The term case-study usually refers to a fairly intensive examination of a single unit such as a person, a small group of people, or a single company. Case-studies involve measuring what is there and how it got there. In this sense, it is historical. It can enable the researcher to explore, unravel and understand problems, issues and relationships. It cannot, however, allow the researcher to generalize, that is, to argue that from one case-study the results, findings or theory developed apply to other similar case-studies. The case looked at may be unique and, therefore not representative of other instances. It is, of course, possible to look at several case-studies to represent certain features of management that we are interested in studying. The case-study approach is often done to make practical improvements. Contributions to general knowledge are incidental.

The case-study method has four steps:

Determine the present situation.

Gather background information about the past and key variables.

Test hypotheses. The background information collected will have been analysed for possible hypotheses. In this step, specific evidence about each hypothesis can be gathered. This step aims to eliminate possibilities which conflict with the evidence collected and to gain confidence for the important hypotheses. The culmination of this step might be the development of an experimental design to test out more rigorously the hypotheses developed, or it might be to take action to remedy the problem.

Take remedial action. The aim is to check that the hypotheses tested actually work out in practice. Some action, correction or improvement is made and a re-check carried out on the situation to see what effect the change has brought about.

The case-study enables rich information to be gathered from which potentially useful hypotheses can be generated. It can be a time-consuming process. It is also inefficient in researching situations which are already well structured and where the important variables have been identified. They lack utility when attempting to reach rigorous conclusions or determining precise relationships between variables.

Sample size

This study takes into consideration the corporate governance practices of Infosys Technologies located at India and iSoftstone technologies located at China.

Secondary Research

Secondary data is the information what was collected in the past for some other purpose. Usually, researchers start their investigation by studying a rich variety of already accessible data, to see if they can make a breakthrough in the study partly or wholly, without the use of expensive, time-consuming first-hand research. The following forms of secondary data will be used to research purpose:

Books

Journals and articles

Newspapers

Magazines

Online web portals

Annual Reports

Government Agencies

Independent Agencies

Government official reports

Limitations of the study

The study is limited to multinational companies alone and does not involve any other type of companies.

This study takes into consideration the corporate governance practices of Infosys Technologies located at India and iSoftstone technologies located at China alone

This concentrates on the corporate governance practices adopted by those companies alone and does not concentrate on any other practice

This concentrates on the corporate governance practices adopted by those companies alone and does not concentrate on any other practice.

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