Why Corporate Governance Should Be a Matter for Shareholders, not Governments' - Essay Example

? Corporate Governance Corporate governance should be a matter for shareholders, not governments' Discuss. Defining Corporate Governance The separation of ownership and control brought about many changes in the running of a business. Modern business environment calls for the protection of rights of a larger number of stakeholders than were before. Wolfensohn (1999) emphasizes on the governance matters by stating that “governance of the corporation is now as important in the world economy as the government of countries.” The reason for such a claim and many others in relation to the running of the companies is not merely dependent on the shareholder rights to be protected. Such an argument is made with specific reference to the role that companies play in the social and economic lives of the society at large. The governance of corporations is also debatable at governmental level as per the political powers they may exercise and the world wide reach of the business in the globalized economy. Governments are taking keen interest in the governance matter of the companies not only to secure the national economy and shareholders rights but also to protect the global share of the country in the international markets. On the other hand, the finance providers including the individuals, banks, financial institutions and governments (in their role as investor) seek guarantee that their resources are being utilized in an efficient manner and create sufficient profits for them. This guarantee or assurance leads to the necessity of good corporate governance in place. In other words we can say that good corporate governance leads to increased shareholder trust and attracts potential investors due to the assurance that their resources will be secured (Macey 2008). Corporate governance can be defined in a number of ways. The most general and widely acceptable concept of corporate governance, however, incorporates the relationships and issues surrounding managers, board and the shareholders. Broadly speaking, it considers the association of companies to the society and other stakeholders. Since corporate governance is aimed at insuring that shareholders’ value is protected a sufficient returns are generated for them, it requires the board of directors to follow the rules, regulations, laws and other practices that attract customers and investors towards the business. The main idea is the governance of corporations with an aim to increase stakeholder trust and confidence in the company’s operations, strategies, outputs and practices. Such a system of running businesses lead to the compliance with legal, constructive and social obligations which further enhances the credibility of the corporation in terms of gaining trust and assurance of the stakeholders (Monks & Minow 2004; Ali & Gregoriou 2006). Economic Reasons The corporations are governed by the directors through the managers and lower level staff, however, shareholders holds the directors accountable for the matters concerning the businesses. Corporate governance should be a matter of shareholders as their investments are at stake with the business’s reputation, operations and governance. Shareholders need an assurance of the security of their shareholdings. The returns that the business generates are eventually distributed among the shareholders. The governance of a corporation, hence, is of immense importance to the shareholders in terms of the economic benefits it may bring. Alternatively, any inappropriate action or decision taken by the directors held them accountable to the shareholders. Friedman (1962) suggests that the shareholder theory claims that corporation decisions should be made to enhance the value of shares to increase returns for the shareholders. Further, the agency relationship that exists between shareholders and directors may form the basis of good corporate governance practices, whereby, directors act as agents to the shareholders. In other words, the corporate governance codes and practices, as per the shareholder theory and agency relationship, are meant to increase economic benefits for the shareholders. On the other hand, governments are increasingly concerned about the governance issues. Various corporate scandals like Enron, Worldcom and others are the examples of corporate failure which lead to the emphasis on corporate governance. The increasingly developing world markets and globalization of the business sector has led the societies to rely upon the private sector organizations for economic development. Businesses are incorporated in order to attain a separate legal entity status and enable the public at large to invest in the corporations and gain benefits from them. Corporations are inevitably seen as individuals in the light of law. These entities are generated by the law and the social benefits that such corporations bring attract governments to take part in the governance issues surrounding these entities. These corporations merge the resources i.e. labor, assets, material, skills and abilities to make goods and services available for the public at large. The whole society, then, benefits from the outputs that corporations generate. Governments are increasingly concerned about the living standards of the public and aim at improving the lives of the people. Governments tend to take part in the governance issues in order to avoid the corporate failures from happening again as mentioned above. The governments are further concerned about the employment opportunities, tax income and foreign trade that these corporations generate. These social and economic benefits that governments seek motivate them to influence the governance practices in their respective countries (Monks & Minow 2004; Iskander & Chamlou 2000). The corporate governance practices are important to the shareholders in order to protect the financial benefits and rights of the shareholders. Good corporate governance practices lead to efficient usage of resources, capability to attract capital with low costs (including finance charges, transaction costs etc.), facilitate meeting social responsibilities and improving the overall organizational performance (Millstein & MacAvoy, 1998). Regulatory Factors In order to successfully run a business, the corporations are required to follow the applicable laws, standards and stock exchange rules (for listed companies). The failure to follow the rules leads to dishonor the social expectations. Corporations cannot be judged as inherently ethical or unethical. Corporations may take the corporate citizenship as a core basis of its activities and protect its reputation in the business market. The governments, however, put laws and rules in place which may protect the rights related to the civil society. These laws are enforceable on all citizens including the corporate citizens. Hence, the corporate governance codes are implemented in order to protect the civil rights and social order. The reason for the shareholders to become increasingly sensitive about corporate governance issues is the opportunistic behavior of the management in order to increase shareholder value in economic terms. The management may seek to obtain economic advantages by employing child labor to reduce costs or neglect environmental impacts which may breach the laws that are enforceable on corporations. Hence, shareholders need to ensure that proper corporate governance practices are followed regardless of the higher returns they attain. On the other hand, governments are increasingly concerned to protect the violation of laws within the country. Frequent violation of laws lead to government failures and hence, governments need to ensure that legal entities or corporations adhere to the applicable laws. The governments, to avoid such situations, also hold corporations liable to the damages that they bring by violating the environmental, social or civil laws (Broomhill 2007; Mitchell 2009). Discussion The corporate failures, financial crises and scandals resulted in the wider public demand for an action to enhance the credibility of corporate governance. Owing the pressure from the public, policymakers made some immediate reforms. An example of such reforms include Sarbanes-Oxley act during 2002. This act called for changes in financial controls as well as disclosure regulations implemented on public listed organizations. In addition, The Securities and Exchange Commission (SEC), the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) also adopted new approaches to standardize public organizations and security dealers. Another effort emerged in the face of Public Company Accounting Oversight Board (PCAOB) which aims at reviewing the roles, responsibilities and obligations of auditors. Furthermore, the government and regulatory authorities have taken immediate and strict legal actions against the corporate leaders and managements who are held liable for the violation of regulatory requirements, rules and have led to corporate failures in pursuance of personal interests. On the other hand, the impact of these regulations and government’s active role in reduction of corporate failure debate is questionable. Can laws and regulations eliminate the risk of unacceptable practices? Can the government justify the actions of each company in the light of the rules set? Can all situations that corporations face in the real life be included in the laws and regulations? Is there any set criterion to give certain organizational circumstances the title of ‘exceptional’ cases and morally justify their actions? Can governments be stricter and more involved in the corporate governance of all corporations than the immediate shareholders/owners of the organization? (Broomhill 2007; Macey 2008) The answer to these questions may vary as we go through different organizations and analyze the regulations. One-size-fits-all approach to corporate governance cannot be justified in most of the cases. The shareholders’ right and responsibilities in relation to corporate governance should be set free in order to maintain a level of independence when judging the internal and external matters pertaining to a specific organization. Shareholders benefit from the success of the company and hence, will be more interested in attaining the long term success than do any other stakeholder. The reason for such an involvement in the corporate success is the returns that corporations generate for them and the shareholder value in the long run. Corporate governance is dependent on factors both internal and external to the organization. The governments may not be able to fully concentrate on each area of the governance as thoroughly and flexibly as the shareholders can do. The recent study of National Bureau of Economic Research revealed that the restricted shareholder rights reduced the returns and shareholder values by nearly 9% during 1990 and 1991 as compared to those with lesser limitations imposed. Shareholder freedom, hence, may be judged as a key indicator of good corporate governance leading to increased shareholder value which is the ultimate goal of incorporating companies (ASI 2011; Mitchell 2009) The concerns of the shareholders and governments are no longer limited to the financial grounds. The corporations, today, are accountable to the larger stakeholders as the increasing competition suggests. The customers, suppliers, tax authorities, environmental agencies, local residents, managements and others are increasingly becoming aware of their social and moral rights which need to be answered. These stakeholders further emphasize the organization on participating in activities which are ethical, environmentally sustainable and socially acceptable. The need for regulations and laws cannot be denied, yet, the competitive markets burden the shareholders and directors to be aware of their responsibilities to the wider society. This increasing burden leads to better corporate governance practices in place and stricter corporate practices to be followed. The shareholders play a key role in reducing corporate failures and risks of fraud, malpractice and violation of laws. The reputation of the business is not solely dependent on the financial performance of the company but the longer-term success is also reliant on the exercise ‘best practice’ and corporate social responsibility adherence (Broomhill 2007; Monks & Minow 2004). Conclusion The governments play a major role in controlling the corporation leaders from abusing the powers and authorities bestowed on them by the shareholders. However, the shareholders’ concerns about the corporate success are more reliable in determining the malpractice, violation of laws and possibilities of fraud. Shareholders understand the business conditions and nature more explicitly and are more inclined towards achieving the longer-term success of the corporation. The reason for such interest by the shareholder is the eventual increase in the shareholder value which is the aim of most of the businesses. Corporate governance is a concept which requires continuous review and maintenance. The circumstances should be reviewed before judging the moral or ethical viability of the actions taken by the management. In order to maintain this level of flexibility in the attitudes towards judging the corporate activities and board’s decisions, shareholders are required to implement proper practices to review the work of the executive board. Non-executive directors, auditing and review of internal controls are some steps which are crucial to attain a level of assurance on good corporate governance in an organization. References James D. Wolfensohn, “A Battle for Corporate Honesty,” The Economist: The World in 1999 at 38. Friedman, M Capitalism and Freedom. University of Chicago Press, 1962. Ira M. Millstein & Paul W. MacAvoy, “The Active Board of Directors and Performance of the Large Publicly Traded Corporation,” 98 Columbia Law Review 1283, 1291-1299 (June 1998) ( Top of Form Monks, R. A. G., & Minow, N. (2004). Corporate governance. Malden, Mass: Blackwell Pub. Top of Form Broomhill, R. (2007). Corporate socal responsibility: Key issues and debates. Adelaide, S. Aust: Don Dunstan Foundation. Adam Smith Organization 2011 < http://www.adamsmith.org/think-piece/regulation-and-industry/making-corporate-control-work/> Top of Form Macey, J. R. (2008). Corporate governance: Promises kept, promises broken. Princeton: Princeton University Press. Top of Form Ali, P. A. U., & Gregoriou, G. N. (2006). International corporate governance after Sarbanes-Oxley. Hoboken, N.J: John Wiley. Top of Form Mitchell, L. E. (2009). Corporate governance. Farnham, Surrey, England: Ashgate. Top of Form Iskander, M. R., & Chamlou, N. (2000). Corporate governance: A framework for implementation. Washington, D.C: World Bank. Bottom of Form Bottom of Form Bottom of Form Bottom of Form Bottom of Form Bottom of Form Read More