Corporate Governance Has Become an Important Issue Both for Policy Makers and Academics - Case Study Example

Corporate governance has become an important issue both for policy makers and academics since early 2000s Corporate governance has been defined as a process wherein policy decisions and choices relevant to law, and institutions have an impact on the manner in which policy decisions are formulated and implemented within a given corporation (Monks and Minow, 2004). This would therefore mean that corporate governance would take into account the micro and macro environment within which a given company is administered and managed. Corporate governance is also inclusive of the association between the shareholders included and the objectives keeping which in mind the corporation is managed. The members involved in the process of corporate governance are shareholders and the decision makers in the management of the company, the board of directors. The process of corporate governance would also therefore include labor (employees), customers, creditors (e.g., banks, bond holders), suppliers, regulators, and the community at large. Corporate governance is a multi-faceted subject. One of the most pivotal aspects that underlies the concept of corporate governance is that the process ensures a certain sense of accountability that would belie an effort on the part of certain members of the company targeted towards the reduction or elimination of the principal agent problem. A related but separate thread of discussions focuses on the impact of a corporate governance system in economic efficiency, with a strong emphasis on shareholders' welfare (Wei, 2004). There are yet other aspects to the corporate governance subject, such as the stakeholder view and the corporate governance models around the world. There has been renewed interest in the corporate governance practices of modern corporations since 2001, particularly due to the high-profile collapses of a number of large U.S. firms such as Enron Corporation and MCI Inc. (formerly WorldCom). In 2002, the U.S. federal government passed the Sarbanes-Oxley Act, intending to restore public confidence in corporate governance. Corporate governance guidelines and codes of best practice arise in the context of and are affected by, differing societal values. Although boards of Directors provide and important internal mechanism for holding the management accountable, effective corporate governance is supported by and dependant on the market for corporate control, securities regulation, company law, accounting and auditing standards and judicial enforcements among other things. There are some governance codes that are linked to the listings and disclosure requirements. There are others that are purely voluntary in nature, but may be designed to help forestall further government or listing body regulation. Over the past decade and half the codes of corporate governance have had many sources like stock exchanges, corporations, institutional investors and associations o directors and corporate managers. Law does generally not mandate compliance with these governance recommendations, although the codes linked to stock exchanged might have a coercive effect. In developing nations on the other hand, both voluntary and guidelines and more coercive codes of best practices have been issued as well. Anglo-Saxon Model of corporate governance: The liberal model is followed mostly in the Anglo-American countries. More often than not the model being followed is determined by the level of liberal capitalist culture acceptation in a given country. The Anglo-Saxon model then keeping with the traditions o capitalism provides priority to the shareholders’ stakes. The model is also known as the liberal model of corporate governance. This model lays stress on sweeping modernization and cost competition. The idea therefore is to create an organization where the culture of decision making is centralized within the hands of the cent5ral management leadership. A compnay would therefore be managed by a board of directors which inturn makes a choice of a chief executive officer or the CEO entrusted with sweeping authorities of management of the corporation on a daily basis. Decisions on policy setting, decision-making, monitoring management's performance, or corporate control are the domain of the board and the employees are just salaried people who do their job and have no role to play in the actual management decision making. The system is also known as the outsider systems in which the owners of firms tend to have a transitory interest in the firm and do not have close relationships with those in senior managerial positions within the company. Rather, these systems are characterised by relationships between management and shareholders being fluid and arms-length. Outsider systems are also characterised by the existence of an active 'market for corporate control'- takeovers, particularly hostile ones, are seen as both a remedy for managerial failure and a disciplinary mechanism on managers, ensuring that they act in the best interests of shareholders. The idea therefore is the creation of a system that would ensure the growth of a corporate with maximum possible benefits for the parties involved in the transaction and the process of corporate management. The process therefore is result driven and aims just at the creation of higher profits.  In contrast the insider system is a lot more focused on a greater system of interaction between the employees and the owners and stakeholders within the firm. The idea in essence is that the owners of company possess an enduring interest in the company and are responsible for the overall deployment of responsibilities that holding senior positions would mean for the firm (Corporate Governance). While there is a system whereby the seniors hold key positions on the board of directors or other senior managerial positions there is always a stable and close interaction between management and shareholders. There is issue that would mean a stability of ownership that would work in alliance with the legal and institutional barriers. The idea is to make the process of a merger, a takeover or a hostile bid with as much accountability as is possible and employ the offices of all the parties that would be affected by the decisions that would be made. The idea of a market corporate control in terms of the free market mechanism is relatively less. Moreover, insider systems are characterized by the existence of formal rights for employees to influence key managerial decisions, often through supervisory boards or works council-type bodies. The insider system is said to be found in varying forms in continental Europe. The idea therefore is that in terms of advantages and disadvantages, there are pros and cons to both systems. The fact of the matter remains that the ultimate accountability in terms of dealing with repercussions of the decisions that a board comes to rests with stakeholders (Hovey and Noughton, 2007). This would therefore create a case for keeping most power with the party that would take the brunt of results that the process would have. This is the basic argument that has favored the outsider mode of corporate governance. The recent economic crisis however and the collapse of a giant like General Motors functioning on the principles of outsider corporatism has made a stronger case for the German Japanese mode of corporatism. The basic idea in this system is to give power and accountability to all the factors that would be affected by a decision irrespective of the degree of impact. The basic principle of halving institutionalized outside regulation in terms of the government nor bank control also means that the decision making process is influenced by expertise that a simple process centered around stakeholders wo9uld not be able to give the company. The German corporate governance system has pursued a path that is quite different from the Anglo-Saxon model and yet this model has been able to nurture one of the most successful corporate economies of the world (Corporate Governance). In Germany, the banks instead of the market have played an important role in corporate control. Germany’s economic performance has stimulated academic argument that close financial tied and relationships between corporations and banks may just be a more efficient manner of corporate governance than the market control mechanism through which an agency works aiming at the reduction of costs. The argument is permitted on claims that the German system leaves corporations less affected by the pressures of short termism and more concerned about lomng term shareholder and employee values, thus placing the corporation in a better position for sustainable corporation development. Although many are not convinced by the argument, the German experiment itself has demonstrated that there is more than a singular way to achieve effective corporate governance. The coordinated model of corporate governance facilitates incremental innovation and quality competition. The coordinated model that one finds in Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community. While there cannot be a single most accepted model of corporate government, that could be well accepted as the principle of ‘good’ governance. One would also need to understand that fact that every country has its own brand of corporate culture, national personality and sense of prioritization. The factors of individual nation identity and corporate personality therefore need to be addressed before an actual decision on the process of corporate governance is arrived at. The fact of the matter remains however that unquantified power in the hands of executives that do not think beyond short terms goals and profits is a system of corporatism that needs to be analyzed closely and modified to include the needs and wishes of the other parties involved. Corporate greed therefore has to be traded in for prudent thought and careful action. References: Hovey M and T Naughton, 2007, A Survey of Enterprise Reforms in China: The Way Forward, pub, Economic Systems, Vol.31 No.2, pp138-156 Shleifer A. and RW Vishny, 1997, A Survey of Corporate Governance, pub, Journal of Finance, Vol.52 No.2, pp737-783 Corporate Governance, accessed October 7, 2009, < http://www.eurofound.europa.eu/eiro/2002/09/study/tn0209101s.htm> Monks R A and Minoe N, 2004, Corporate Governance, pub, Wiley Books, pp195-202 Wei Y, 2004, Comparative corporate governance: a Chinese perspective, pub, Kluwer Law International, pp202-225 Read More