Corporate Governance - Research Paper Example

Corporate Governance Generally, corporate governance is a terminology that refers to the processes, rules and laws that through which businesses are controlled, operated and regulated (Clarke 12). It can refer to factors determined internally by officers, stakeholders or a corporation. It as well can refer to external factors like clients, consumer groups or government groups. When corporate governance is well enforced and well defined, it provides a structure that works well to benefit everyone concerned. To achieve this, the rule of corporate governance works to ensure that the accepted ethical standards are adhered to, and the best practices are maintained. Due to the high rate of alleged crimes by corporate officers, through abuse of power and high profile scandals, corporate governance has received attention in the recent years. Corporate governance can also be seen as the way in which companies are controlled and governed. It also entails relationships among stakeholders with the same goals to benefit the welfare (Clarke 18). Corporate governance has several good components that ensure proper governance. To begin with, directors and senior officers take up the task of implementing new requirements that have been imposed by the Sarbanes- Oxley Act and associated SEC and stock market regulations. They need tostay in focus with the broader and strategic objectives of corporate governance (Shakespeare 333). Businesses will grow stronger if they comply with legal and regulatory requirements. They should also maintain high profile risk management. The boards of directors are primarily responsible for ensuring there is effective governance. They not only have to ensure that sound systems of governance are in place, but also that such systems work effectively through evaluation of performance and thorough monitoring (Julien & Rieger 4). On the side of legal and regulatory reforms, a lot of attention has been particularly, focused on boards and their performance especially when it comes to the independence of the board management. There also has to be a lot of scrutiny on the side of directors, they should be watched more closely to ensure there is a high level of transparency. Good corporate governance in a business will always translate to good financial performance. Profitable investment opportunities and increased reliance on external financing are attributes exhibited by firms with strong corporate governance, according to the University of Michigan Business School. Also, it is true that companies with high governance standards will always receive the best premium from investors. Good corporate governance defines the business strategy of a business, enhancing competitive positions. A company can therefore recruit and retain productive employees if it possesses a stable base of corporate governance (Julien & Rieger 8) Enron failed greatly in corporate governance. From violating the recommendations by government reformers where Ken Lay served as CEO and chairman of the board, to having significant shares of Enron being owned by board members, and also the board members earning money working on Enron’s projects. Enron also suffered complicated accounting and finance transactions needed approval by an external auditor and lawyers even before getting to the board members. There was a major problem with Enron’s code of ethics, as senior stakeholders were prohibited from having any financial stake in organizations dealing with Enron. Corporate Governance has played a major role in the auditor’s evaluation of a company’s financial systems and internal control systems. Corporate governance ensure that that board members act transparently and maintain accountability in their actions, this greatly assists the auditors in ensuring that there is no fraud committed by the board members thus reducing the overall task of auditing. Corporate governance also ensures that the senior members of the companies including the directors and managers are scrutinized, and thoroughly checked for fraud. With corporate governance, auditors are satisfied that, good controls are in place for ensuring compliance with laws, supervisory requirements and relevant internal policies (KPMG 3). To ensure that auditors have a smooth sailing, the corporate governance is charged with the responsibility of ensuring the internal audit department, enjoys all the benefit enjoyed by other stakeholders. Corporate governance ensures that there is effective monitoring and reviewing of the internal audit function (KPMG 1). Since the institution of the Sarbanes-Oxley Act in 2002, the corporate governance has introduced some governance policies that are essential to both stakeholders and auditors. These policies are in regard to the legal compliance of the directors and senior managers, and their transparency. This also ensures that there is freedom for the stakeholders to confront the board members in case of a problem. Good corporate governance has also worked to ensure that there is financial growth. Any company with a good set of rules, is guaranteed to have desirable financial outcome. Corporate governance has ensured there is clear accountability and delegation. This has greatly eased up the work for auditors. There has also been the introduction of a risk management system. With the introduction of the risk management, early warning to upcoming events will be sent thus allowing the company to turn some of those risks to opportunities and avoid some of the risks that can be avoided. In the event of a tragedy, at least the company prepares for it (NSW 3). Corporate governance ensures there is a well-defined committee responsible for directing and controlling the company’s activities. Finally yet importantly, a good code of conduct is established and maintained in the company. This should be available and followed by all staff members. This code of conduct should be reviewed as often as possible and proper documentation made too (NWS 5). Personal Opinions Corporate governance will play a great role in the prevention of future scandals at the organizational level. With proper auditing and accountability in place, little chance will be left for fraudsters to engage in scandalous deals. This is especially so considering the current effects of the Sarbanes-Oxley Act in regard to organizational management. The application of strict corporate governance policies will ensure that corruption is reduced within the organization as the internal auditors will be better placed to carry out their duties without fear. However, it must be noted that corporate governance alone may not fight all kinds of scandals that may occur in an organization. In this respect, other specific control measures should be employed so as to seal any loophole that may exist in an organization. Conclusion In conclusion, inception of corporate governance has played a major role in the reduction of corporate scandals. This has been made possible by the introduction of code of conduct which has ensured discipline among the staff members. The introduction of a select committee ensures the existence of law and order in the organization. This in turn will avoid unnecessary arguments and scandals within the company. The inception of clear accountability and delegation ensures that all staff know what to do and do it well. This avoids conflicts between staff members. Works Cited Clarke, Thomas. "Theories of Corporate Governance: The Philosophical Foundations of Corporate Governance". London and New York: Routledge. 2004. Print. Julien, Rick & Rieger, Larry. Seven components of good corporate governance. High Beam Business. July 1, 2003. Viewed 27 January, 2012 https://secure.easy-forex.com/int/en/tctechnicalanalysis.aspx KPMG. Internal audit’s role in modern corporate governance. Thought Leadership Series. Viewed 27 January, 2012 http://aci.kpmg.com.hk/docs/AC/Internal_audit_role.pdf Lagace M. Enron's Lessons for Managers. Harvard Business School. July 12, 2004. Viewed 27 January, 2012 http://hbswk.hbs.edu/item/4253.html NWS. Corporate Governance Strategic Warning System. 2011. Viewed 27 January, 2012 http://www.audit.nsw.gov.au/ArticleDocuments/191/05_Vol_2_2011_Corp_Governance.pdf.aspx?Embed=Y Shakespeare, Catharine (2008). "Sarbanes–Oxley Act of 2002 Five Years On: What Have We Learned?". Journal of Business & Technology Law: 333. Read More