Corporate Governance and Company Performance - Coursework Example

Corporate Governance and Company Performance The study examines the impact of corporate governance on organizational performance by analyzing the strengths and the weaknesses of corporate governance. According to Spitzer (2010), corporate governance refers to a system involving relationships and processes at the disposal of the top company organs for the facilitation of value provision to the shareholders of a corporation. Corporate governance focuses on the long-term activities concerning corporation’s stakeholders based on norms and laws of the corporation. Corporate governance thus provides a solid foundation with reference to the principles of good company management. Vibrant corporate management thus provides an organization the impetus for improvement in the performance of the organization. Corporate governance is a mechanism suitable for the achievement of efficiency, profitability, sustainability and productivity in an organization. Efficient corporate governance improves the competitive advantage of business. With the changing business paradigm from manufacturing and assembling activities to knowledge management economy, there is a requirement for the corporate managers to maximize the creation of value from the human intellectual capital resources for achievement of success in the competitive corporate world. Song et al. (2013) assert that corporate governance is largely synonymous with public companies though small organizations may also reap benefits from the practice. Corporate governance prescribes rules that direct the actions and roles of top management individuals within an organization rather than the processes that take part in the organization. The focus of corporate governance is on enhancing better management procedures, processes, and minimization of ethical and legal problems from encumbering the organization. Corporate governance sets regulations on the procedures for utilizing the funds of organizations. The major focus of the business funds usage regulated by corporate governance regulate usage of business funds for personal use, employment of family members, conflicts of interest disbursing of profits, organizing key meetings and major meetings of the business. The Question of Corporate Governance According to Joseph & McDonnell (2014), whether corporate governance is good for a company is a question that needs critical considerations. This question is often answered by the situations in the marketplace in terms of the results of the companies that strictly follow corporate governance. Sometimes corporate governance can be injurious to the organization. Sometimes the company may miss opportunities because of some aspects of corporate governance leading to costly liabilities. For this reason, as good as corporate governance is, sometimes it is good to leave the directors at liberty to decide on some issues away from the stringent corporate governance requirements. When such decisions are made, the directors should be given an opportunity for explaining the rationality of their decisions and justify the outcomes of such decisions. Due care is for this reason of the essence taking into consideration the probable impact of certain decisions not consistent with corporate governance on the shareholders. Such decisions could lead to resentment from the shareholders making them flee in case of undesirable outcomes of decisions inconsistent with corporate governance. However, when such decisions lead to satisfaction within the company stockholders, they would be for the betterment of the organization and value for stockholder's investments. Highlights of Corporate Governance Benefits against Company Performance Crook (2006) says that significant implications for the growth and development of an organization are attributable to corporate governance. Good practices of corporate governance are considered to be essential in the reduction of risks for the investors and to attract prospects for investments and capital for the improvement of the performance of organizations. Corporate governance differs in many countries and companies in terms f organization. The differences, which are notable, are dependent on the social, political and economic situations in different countries of the companies domicile. Preston (2011) says that corporate governance practices have burly links and influences to the performance of organizations. Companies that are open to scrutiny and are willing to have their information shared openly with the shareholders are expected to experience good ratings on their stock prices. On the other hand, an organization that is unwilling to share information that concerns finances for scrutiny by the shareholders do not experience good performance of their stock prices as the other companies that share their information. Even though corporate governance is just one of the factors affecting one of the factors and not the only factor that affects an organization’s share price, better governance contributes majorly to the performance of an organization. Better corporate governance leads to improved share price of a company and the improvement of an organization's share price. Schneider & Scherer (2015) assert that corporate control helps in streamlining the control environment of the fiscal function. Streamlined controls function of an organization improves the assessment of the attitudes and levels of awareness of the different groups within an organization for the enhancement of controlling the financial and human resource functions of an organization. Efficient governance also checks and ensures that the organization’s Board of Directors has independent oversight of the organization facilitated by audit committees of the organization. Through efficient corporate governance, the philosophy of the management is streamlined for the encouragement of integrity in the organization aimed at improving the organizational performance. Schneider & Scherer (2015) further assert that companies that practice good corporate governance accrue several benefits. The companies can raise exceedingly more capital cheaply despite the prevailing deficiencies in capital attributable to scarcity in resources. Good corporate governance imparts confidence in the investors and stockholders of a company. Even during recessionary periods, the company stockholders confidence does not wane and for this reason they would pump in more funds to the organization in attempts to turn the results of the organization. Confidence makes the running of a corporation more sustainable because even in cases when the board of the company makes decisions in error no suspicion can be raised on their integrity. For this reason, the board and management of the organization are empowered to make decisions for dealing with uncertainties of the future in confidence, increasing the chances of the organization to reap benefits. Reputation of the organization is thus enhanced because of good business control. According to Bushee et al. (2014), corporate governance enhances the reputation of an organization. Companies that their corporate governance are publicly known, have good reputations. When a company’s corporate governance policies are made well known to the public, detailing their intricate ways of working, the willingness of more stakeholders to get on board the company to invest would be augmented. More willingness would be generated in various people to work with the company. The prospective partners of the company would include lenders who would be attracted by the company’s vibrant financial policies and strong internal controls. Other organizations would include suppliers, government institutions, suppliers, and vendors. When a company shares internal information with the main stakeholders of the organization shows that the company is transparent, and transparency instills more confidence in stakeholders that there is nothing to be hidden by the company. Misangyi & Acharia (2014) contribute that when a company embraces corporate governance, it implies that the company is in adherence to the policies and regulations that stipulate the requisite institutions of an organization. Adhering to the requirements of the institution of a company implies compliance with the local, state and federal requirements instituted by the government. Compliance with such statutory requirements means that the company conforms to the legal requirements that stipulate the constitution of the board of directors and rules for hiring them too. The government has guidelines that need compliance in relation to the rules of hiring for instance regulations of free opportunities provision by the organizations. Other regulations include the statutory requirements placed by the government for conduction audits of the company by external qualified auditors corresponding to the statutory periods stated by the government. Noncompliance with such policies may attract legal actions against the organization and thus may increase interference in the company when the directors are required to answer to legal suits. Compliance with government requirements, for this reason, reduces the frequency of legal suits against the company and offsets the costs and time wasted attending to such suits. According to Filatotjer & Nakajima (2014), compliance to corporate governance reduces cases of fraud and conflicts within an organization. The possible deviant behaviors from employees are minimized because rules are instituted by corporate governance policies aimed at deterring the deviant characters and actions that would be prevalent in the employees in the absence of the corporate governance policies. Fraud is also deterred as there are specific codes that stipulate the usage of company funds and the procedures and circumstances in which expenditures of the company can be carried out. For instance, the top managers of the company can compel the directors to declare their conflicts of interest or otherwise on certain procedures and transactions of the organization. The top management is thus enabled to avoid situations where they realize conflicts of interests to enable them stick to the right procedures and codes of conduct of the organization. The managers for this reason would restrain themselves from for instance awarding lucrative contracts to companies they have affiliation to or practices such as employing family members in positions where there could be other non-family members best suited to occupy. Employing qualified staff on merit ensures that the organization realizes excellent results and return for money spent in the remuneration of the staff. Corporate governance also ensures that withdrawals of company finances and provision of loans to the directors follow stringent regulations of the company. In cases when company money is withdrawn, corporate governance, policies ensure the right procedures are followed and that the rightful signatories sanction the transactions. Tihanyi et al. (2014) suggest that corporate governance ensures that a company leans towards fulfilling the best interests of the stakeholders of the company and on the interests of the company. Acting in the best interests of the company ensures amplified success for the organization as the aims of the management of the organization is aligned with the targets of the organization. The outcome of alignment of the company targets with the objectives of the administration benefits both the organization and all the company stakeholders. Chu & Shroeder (2010) assert that wastage is also reduced when a company embraces corporate governance. Corporate governance ensures and improves competence in the functions of the company. Mistakes that lead to misuse of the organization’s resources are minimized when corporate governance policies are followed. Ethical practices are ensured when the corporate management policies are embraced and staff practice restraint and avoid excesses that would be costly to the organization. For this reason, ethical practices ensure the optimization of company resource usage within an organization. The intensity and recurrence of risks are reduced in the organization because attempts of corruption practices are easily detected and deterred. Good governance practices, for this reason, would prevail at all time and are inculcated in the characters of the employees of an organization. Good corporate governance has structural efficiencies and transparent procedures that deter even the people in power within an organization from attempting or getting involved in corruption. The overall corruption incidences are for this reason minimized thus the company is empowered to achieve and maintain positive image and success. Why Corporate Governance is Compelling Value Addition Claessens & Yurtoglu (2012) suggest that corporate governance should be prioritized for the sake of value addition. Corporate governance grants an organization the opportunities for risk management and value addition to the clientele of business. Apart for the benefits individual companies attain from corporate governance, working towards the improvement of corporate governance leads to more shifting more focus to the mission of an organization for the promotion of sustainable practices and alliances to help reach a company’s objectives. Reduction if Investment Uncertainties Leventis & Dimitropoulos (2012) say that governance improves certainties and reduces risks involved in investments. Companies that are aiming to investing should employ good governance because weak governance standards lead to detrimental effects on investments of a company. Poor governance and weak enforcement of principals of governance act as derailments and obstacles to investments especially in markets that are not fully established. Improvement of issues of governance allows companies to venture even in environments of high risk. Companies also increase their valuations by that attracting more investors, and thus the opportunities available to the company are augmented, and terms of doing business with other stakeholders are simplified and made favorable. Improvement of Capital Markets According to Donka & Zahir (2008), improvement of corporate governance helps in the expansion of the money market of organizations. Organizations that are aiming to enhance their capital markets development, for this reason, must focus on the quality of the corporate management adopted in their operations. When there are poor corporate governance policies or weak policies of corporate governance particularly in relation to transparency and disclosure, an organization is likely to be affected. The effects on organizations with weak, transparent corporate governance are likely to face instabilities in their fiscal markets. To guard against such occurrences and boost the capital markets of organizations is nearly compelling to embrace corporate governance. Disadvantages Upsetting Corporate Governance Preston (2011) says that one of the problems associated with corporate governance would be the manager’s objectives that contravene the main company objectives. Such situations would lead to the agency problem and would, in the long run, be disadvantageous to the organization. Agency problem would also detrimentally affect the investors and other associates of the company. The agency problem is common among companies trading in stocks that are traded publicly. When the management and directors of the organization who are custodians of the assets of the organization try drawing personal benefits rather than working to benefit the organization, this problem occurs. According to Joseph & McDonnell (2014), another problem affecting corporate governance is referred to as insider trading. This problem occurs when the custodians of the sensitive company organizations use them inappropriately for their benefits. Such sensitive information is not publicly available but may have dire implications for the value of a business market share. The fraudulent officers can use the information to the disadvantage of people that are not aware of the information for selfish gains. Spitzer (2010) asserts that managers of an organization could also present fiscal information in a falsified manner for circumventing the payment of tax or for manipulation the company’s stock value in the market. This vice is possible through formation of complex networks by falsifying trade by conducting dealings through their subsidiaries for misrepresentation of the values of assets. Such vices affect corporate governance badly because they are mostly difficult to detect, and thus some companies get away with such malpractices. Brennan (2003) says that efficient governance of publicly traded companies requires the shareholders to have unified ideas and to speak in one voice, towards common objectives. Substantial issues of an organization require ratification by all the shareholders with common objectives and who are united for a singular purpose of promoting prosperity of the organization. With inefficient considerations and regulations, the relationship can be very political since the major shareholders would want to prevail over the minority shareholders. Such acts could lead to a takeover of the organization unfairly through hostility by the majority shareholders. When such occurrences are experienced, corporate governance would come to compromise and may cause negative effects to the organization. The business at this level may be clouded by controversies, and thus the decisions made may not be suitable for the organization. The stock price of the organizations shares would dwindle hindering the organization from achievement of set objectives and in some occasions driving an organization to losses. Conclusion Corporate governance, for these reasons, when suitably applied to businesses, helps in efficient running of an organization while improving the performance of an organization and checking on the excesses of the top management of an organization. Well-organized company governance improves the competitive advantage of business. Corporate governance is in principal synonymous with public companies. However, small organizations may also reap benefits from the practice. Corporate governance prescribes rules that direct the actions and roles of top management individuals within an organization rather than the processes. The bureaucracies associated with it may make an organization miss opportunities. Corporate governance steers all the issues involving company finance expenditures, recruitment procedures, ethics, conflicts of interest and composition of management Boards of companies, which are great determinants of a company’s performance. Corporate governance adds overall value to a company’s performance and most importantly improves and secures the long-term profitability, share value, company image, investor confidence and surety of returns on investment. Bibliography Brennan, DM 2003, 'POLICY AND CORPORATE GOVERNANCE IN THE WAKE OF ENRON'S COLLAPSE', Social Text, 21, 4, pp. 35-50, Literary Reference Center Plus, EBSCOhost, viewed 2 February 2015. Bushee, B, Carter, M, & Gerakos, J 2014, 'Institutional Investor Preferences for Corporate Governance Mechanisms', Journal Of Management Accounting Research, 26, 2, pp. 123-149, Business Source Complete, EBSCOhost, viewed 2 February 2015. 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