Overview of Corporate Governance in Relation to Company Law - Essay Example

?Critically discuss the main theories of corporate governance, focusing in particular on how they apply to different types of company Overview of Corporate Governance in Relation to Company Law Corporate governance has generally been referred to as “the rules, processes, or laws by which businesses are operated, regulated, and controlled”1. The long term objective of having corporate governance in place is therefore to ensure that effective mechanisms are put in place to ensure that failures in the governance of businesses are curtailed2. But as much as this a broad spectrum of definition given to corporate governance in the face of contemporary business governance, there could a rather isolated identity given to corporate governance in relation to company law. What this means is that corporate governance could be looked at from a perspective of the legal administration of different businesses. In effect, mechanisms and acts that would constitute corporate governance in one firm or business may not constitute corporate governance in another because of differences in the legal organization of the companies involved. Interesting, the demarcations that company law gives to the various forms of companies inform the basis of the existence of various corporate governance theories. With reference to company law, corporate governance could generally be seen as the legal mandate that binds players in various organizations and institutional set ups to ensure that companies meet the interest of all stakeholders, defined to include shareholders, customers, employees and the government3. Contract Theory and Corporate Theory Contract theory and corporate theory remain two of the major forms of theories of corporate governance. As indicated earlier, these two theories are directly related to the allocation and differentiations that exists in the types of business under company law. With reference to corporate theory, its principles could be dated to as far back as the era of “artificial” entity theory. The artificial entity theory dates back to the dates before the 1800s when governments made special legislations to ensure that the power to operate corporations was vested in the power and authority of public benefit units4. Some of these public benefit entities included schools, churches and the larger community. However, these public benefit units were not the outright owners of the corporations but the government. It is in light of this simulated ownership that the theory became known as the artificial entity theory. In relation to the present study, it would be noted that the corporate theory has a lot of influence on corporate governance in the sense that because the cooperation are supposedly owned by government, there are State defined legislations that affect and influence their operations. Though many who belong to the fiction theory school of thought hold that “corporations are simply legal fictions, created and sustained by an act of the state”5 and that there are weaker internal management principles that defeat the principles of corporate governance, the reality is that in a state where institutions are made to function properly, there is no way managers can expect to go away with lapses in corporate governance. Under contract theory, reference is made to contract-based corporate theory where actors in various companies and organizations are expected to play a collaborative role in ensuring that they use asymmetric information to regularize the construct of contractual arrangements6. In effect, the contract theory expects that managers and administrators would work and function as people who have been assigned to play specific roles within a specific timeframe for a specific reward. Essentially, contract theory greatly affects corporate governance because it is said to be an avenue by which managers and stakeholders in the running of businesses feel fundamentally obliged to work and operate within the premises of the contracts they agreed upon7. In certain quarters, this has been said to influence corporate governance negatively because it does not allow managers to functions and operate in the way they would technically do because they have to abide by a set of rules that was not initiated by them8. There is also a school of thought that believe that the elements of contract theory makes corporate governance more effective because those under contract would have to manage their companies in an effective way that would ensure their continuous stay in office. Application of Corporate Governance Theories in managing different types of Companies From the discussions above, it would be noted that the two different types of corporate governance could be streamlined to different types of companies. For instance the corporate theory works well and perfectly for State owned companies and companies with public interest9. This is because apart from the fact that State owned companies are generally regarded as corporate entities, the law and legal system that bring them into existence provides that these companies do not operate with absolute ownership being claimed from the dominion of the government10. Meanwhile, contract theory is highly suitable for family-owned businesses and other forms of private companies. This is because the principles of contract theory ensures that these families and private owners who undertake personal investments, get the chance to undertake stricter monitoring of their companies by virtue of the contract that are provided to managers and administrators. In conclusion, contract theory is more suitable for instances where there needs to be strict monitoring as a tool for achieving investment results whiles corporate theory is generally recommended in cases where there are external legislations binding the regulation of companies. REFERENCE LIST Dan-Cohen, M. Rights, Persons, and Organizations. University of California Press, Berkeley, 2006, 5. Bedeian, A. and Zamnuto, R. Organizations: Theory and Design. Dryden, Chicago, 2001, 9. Ewick, P. "In the Belly of the Beast: Rethinking Rights, Persons and Organisations" (2008) 13 Law & Soc Inq 175, 179. Cyert, R. and March, J. A Behavioral Theory of the Firm. Englewood Cliffs, Prentice-Hall, 2003, 27. Ruben, D. "The Existence of Social Entities" (2002) 32 Philosophical Quarterly 295. Daft, R. Organization Theory and Design. 4th ed., West Publishing Co., St Paul, 2002, 10. Dewey, J. "The Historic Background of Corporate Legal Personality" (2006) 35 Yale LJ 655, 673. McDonald, M. "Should Communities Have Rights? Reflections on Liberal Individualism" (2001) 4 Can J of Law & Juris 217, 219. Stokes, M. "Company Law and Legal Theory" in Twining, W. (ed). Legal Theory and the Common Law. Basil Blackwell, Oxford, 1986, 155, 162. Rouse M. (2008). Corporate Governance. [Online] September 18, 2012 Read More