Corporate Governance Within Privately Held Firms - Research Paper Example

According to Durand and Vargas (2003), four distinctive characteristics make private held companies receive less attention in comparison to public companies (p. 667). The first amongst these characteristics is the isolation of private firms from the pressures of capital markets. Secondly, private firms have a less efficient labor market from that of public companies, which is a result of the frequently observed disconnect between the expected performance of an individual and their employment contract.

The third distinct characteristic of private held companies is that, they do not offer a similar palette in terms of incentives to their employees in comparison to public companies. Finally, private held companies have a different definition of performance usually shaped by the missions and goals of the firm (Durand and Vargas, 2003, p. 668). As a result, these distinct characteristics make private companies receive less attention from the media and government agencies. Nevertheless, it is essential for private held companies to institute reforms aimed at corporate governance. . According to Keasey and Wright, accountability involves “monitoring, evaluation and control of organizational agents to ensure they behave in the interests of shareholders and other stakeholders” (as cited in Uhlaner et al., 2007, p. 226).

In effect, private held firms should also implement corporate governance reforms within their operations in order to ensure accountability and avoid conflicts between the management, the owners, and any other stakeholder in the firm. Keasey, Thompson, and Wright (2005) noted “that the problem of diffuse ownership are absent as there is typically still a major ownership interest of the founders or their families” (p. 213). In this regard, corporate governance in private held firms failed to drive the need of change in such firms.

On the other hand, management’s failure in private held firms to adopt corporate governance arises from the owners’ fears that some change amount to a usurpation of powers. In this case, accountability involves delegating and decentralizing operations and responsibilities, which some owners might interpret as a usurpation of powers and oppose any means to implement adoption of such routines. However, firms need external financing in order to expand their operations in the global economy. Therefore, the augmented need for external finances and funding make private held companies become more accountable to their financiers.

In effect, since corporate reforms have a basis on accountability, private held firms implement corporate governance to ensure effective use of resources and more so the externally sourced finances. According to Uhlaner et al. (2007), ownership characteristics within private held firms “influence the quality of the two functions of governance – i.e., the monitoring and