Factors Impacting Development of Effective Corporate Governance - Literature review Example

Strategy and Governance Introduction Effective corporate governance is important for the sustainable development of the organisation. Most organisations consist of various stakeholders that include, for example, the investors, employees and customers. As such, organisations need to embrace fairness and transparency to its key stakeholders in all its transactions. In a globalised business environment, organisations need to develop a governance system that can guide their future development. In this regard, corporate governance plays an essential role in promoting sounding practices in a competitive and globalised business environment. Without a focus on sound practices adopted by organisations, success in terms of sustainable development becomes elusive. In essence, effective corporate governance denotes the commitment of the top management of an organisation towards safeguarding the interests of its key stakeholders. On the same note, corporate governance provides a broad spectrum of governance systems that is necessary to establish a working relationship among the stakeholders of a company and also help to improve performance (Subramanian, 2015). In most organisations, scandals are increasingly deterring future development and, therefore, it is necessary for the top management to understand the consequences of corporate degradation in the current business world. In a constantly changing business environment, the issues and challenges impacting on organisations appears unpredictable. As a result, establishing effective corporate governance by companies is critical in ensuring that unethical practices influenced by a competitive business environment are avoided. Many corporations around the world have collapsed due to a lack of an effective corporate governance system, for example, Enron. In this regard, the future development of corporate organisations depends on the establishment of a governance system where the various stakeholders embrace sound practices geared to meeting the overall objectives of the organisation (Subramanian, 2015). This paper examines the internal and external factors impacting on the future development of effective corporate governance. The need for effective corporate governance Corporate governance essentially denotes a set of systems, processes or principles that guide how an organisation is managed or governed. In addition, it involves conducting business activities in a manner that conforms to the basic principles or the laws guiding the prudent management of corporate organisations. In a business environment where effective corporate governance is adopted, there is need to establish a working relationship between, for example, the management, board, shareholders and other key stakeholders (Fulop, 2014). Effective corporate governance requires integrity as a basic principle of governance. For instance, the board of a corporate organisation should be accountable to the shareholders by ensuring that their interest in an organisation is safeguarded. On the other hand, the management should ensure that the employees adopt sound practices geared at developing the long-term reputation of an organization (Fulop, 2014). Corporate governance is also important in terms of cementing the relationship between the company and the society at large. While businesses exist to make profits, it is necessary that their operations obey the established rules and regulations in the corporate world. At the present, concerns are emerging in the corporate world regarding the standards of corporate governance. In most firms across the world, the directors’ role involves serving the interest of shareholders; however, cases have arisen where directors tend to use their positions for personal gains at the expense of other key stakeholders. This is evident in the increase of excessive debt financing, executives awarding themselves high pay rise and there is less focus on transparency (Ionescu, 2010). In this regard, corporate governance is necessary because it ensures organizations develop a framework necessary to establish a long-term trust with prospective investors. It also contributes to strategic thinking by the top management who play an important role in the implementation of plans meant to improve performance and productivity both at present and in the future. Corporate governance also plays a role in rationalising the management and enhances risk mitigation in a competitive business environment (Ionescu, 2010). Through effective corporate governance, the liability of the top management is minimised by the adoption of sound practices. In addition, corporate governance promotes long-term relationship among an organisation’s key stakeholders both internally and externally. On this note, corporate governance is integral to the survival of organisations in the competitive business world. Without the establishment of effective corporate governance, organisations tend to face numerous challenges such as difficulties in accessing capital due to lack of investor confidence, for example (Misangyi & Acharya, 2014). The internal factors impacting on the future development of effective corporate governance The integrity of the management and the board of directors The top management and the board play an important role in ensuring that the responsible practices are embraced in an organisation. While the board’s role involves safeguarding the interest of the shareholders, the management on the other hand, is responsible for the operations of the organisation. As such, the future development of effective corporate governance depends on the cooperation between the management and the board in terms of meeting the overall goal of the business. However, where there is a conflict of interest between the management and the board, the future development of effective corporate governance is impeded (Capriglione & Casalino, 2014). Effective corporate governance entails an emphasis on accountability and transparency, for instance, as a way of moving the organisation forward in terms of performance. In this regard, the integrity of the personnel at the top of an organisation is important in terms of laying out a framework for ethical practices in an organization (Filatotchev & Nakajima, 2014). Conversely, where the top management and the board serve their own interest, corporate governance is affected because they engage in malpractices such as embezzlement of funds meant for different projects. As a result, most firms collapse due to the accumulation of debts or are placed under receivership. Due to the malpractices by the management and the board in an organisation, the future development of effective corporate governance is affected because of lack of controls to check on the top management and board’s excesses in an organization (Filatotchev & Nakajima, 2014). However, where the top management and the board emphasise integrity in the management of an organisation, the development of effective corporate governance is enhanced due to the establishment of governance systems that ensures the interests of key stakeholders are safeguarded. In this sense, the future development of effective corporate governance depends on the top management and the board’s emphasis on accountability and transparency (Grant & McGhee, 2014). On the other hand, the future development of effective corporate government requires the board, for instance, to possess the relevant skills necessary to understand and constantly review the management’s performance in an organisation. When choosing corporate personnel and board members, organisations should make integrity a mandatory requirement. In addition, organisations should also develop a code of conduct that guides directors and other executives as a way of minimising unethical practices by those holding top positions. The future development of corporate governance also requires organisations to demystify the roles and responsibility of both the management and the board (Grant & McGhee, 2014). Internal controls The future development of effective corporate governance also depends on the establishment of internal controls that ensure sound practices are established. For instance, the internal auditors play an important role in ensuring that the top management and other employees embrace accountability and transparency at the workplace (Florea, 2013). The creation of internal control in an organisation ensures that the board is in a position to monitor various risks that can impact negatively on the shareholders interest. Through the internal control, the board can also monitor the corporate strategy on behalf of the shareholders. In essence, internal controls are important in the future development of effective corporate governance because it ensures quality standards with regard to management is emphasized (Florea, 2013). In addition, internal controls ensure that stakeholders are updated on the progress of the organisation through the production of annual reports, for instance. Through these reports, corporate governance is enhanced by implementing policies meant to mitigate future challenges. In addition, developing strong internal controls, such as an internal auditing system that cannot be compromised is necessary for the future development of effective corporate governance. The establishment of internal controls in an organisation also plays a role in guiding practices related to compensation, remuneration and promotion of the management and other employees, for instance (Giao & Raposo, 2014). In most organisations, corporate governance is affected by the lack of proper internal control systems that ensure the management and other employees embrace sound practices. In a competitive business environment, having a well-established internal control system ensures that organisations avoid corporate scandals such as corruption, which eventually impact negatively on the business reputation (Baker, 2012). Further, the existence of internal audits is also a key factor in the future development of effective corporate governance because regular internal audits help to assess the effectiveness of governance processes. Carrying out internal audits also ensure that organisations implement policies that safeguards the interests of key stakeholders such as, the investors, employees and the public at large. The future development of effective corporate governance also requires the establishment of a proper balance of power. In this sense, the existence of a control system ensures that checks and balances are in place to minimise the abuse of power by the top management (Florea, 2013). Leadership In terms of the future development of corporate governance, ethical leadership is necessary and should begin with the top management of an organisation. In order for organisations to improve corporate governance, it is important for those in the leadership positions to inculcate a culture of integrity. In addition, leadership is important for purposes of producing ethical outcomes. In this regard, the ethical leadership requires the top management to ensure the practices embraced by other employees in an organisation are responsible and geared towards improving reputation and performance (Tiller, 2011). Ethical leadership for the future development of effective corporate governance also requires the management to establish rules and regulations that govern the conduct of all the employees at the workplace. On the other hand, where there is a lack of ethical leadership, malpractices thrive and this impacts negatively on the future development of effective corporate governance. Those in the top positions in the organisation have a responsibility to ensure that employees engage in practices that are in tandem with the organisation’s goals and objectives (Jakada & Inusa, 2014). The future development of effective corporate governance also depends on how the management treats other employees at the workplace. For example, where the management focuses on hierarchical leadership, ethics needs to prevail in terms of work co-ordination where the management does not abuse their power at the expense of other members in the organisation. Governance in this sense, require the management also to understand the needs of other employees while implementing various organisational strategies. In addition, the future development of effective corporate governance will depend on the leadership style (Okpara & Wynn, 2011). Because of a constantly changing business environment, a participative leadership process is important in ensuring that good governance prevails in an organisation. This is because the changing business environment places the top management in a precarious situation where they need to implement new plans on a frequent basis to remain competitive in the marketplace. However, organisational change also comes with numerous challenges and as such; there is a need for good governance by the top management to ensure that other stakeholders support the change process (Castaner & Kavadis, 2013). On another note, the attitude of employees in an organisation, for instance, is also critical in the future development of effective corporate governance. As such, the leadership style adopted by organisations should play a role in ensuring that employees develop a positive attitude towards the establishment of effective governance systems. Due to the globalised nature of business today, organisations are operating across borders and effective leadership is necessary to establish a working relationship with stakeholders in the different regions where organisations are setting up their operations (Sapra et al. 2014). External factors impacting on the future development of effective corporate governance The shareholders Since the shareholders are the owners of most corporate business, their influence in the development of effective corporate governance is essential. The shareholders have a direct or indirect influence in the corporations that they invest. As such, the future development of corporate governance requires shareholders to take a direct role in terms of ensuring that the organisations they invest embrace ethical practices. This involves making sure that the management and the board is accountable for their actions in the organisation. In today’s competitive business environment, investor confidence is influenced by the sound practices embraced by different organisations. Consequently, the success of corporate organisations at the present and in the future will depend on the shareholders effort to ensure that checks and balances are in place to prevent incidents of fraud by the top management that impact negatively on their investment (Amao & Ameshi, 2008). Government regulations In the current globalised business environment, government oversight is necessary to prevent the increasing incidents of corruption in the corporate world. In most cases, the lack of oversight in corporate governance contributes to scandals that have led to the collapse of corporate organisations around the world. Corporate governance failures harm not only the organisations, but also the economy and the public in general (Yoshikawa et al. 2014). As a result, the future development of effective corporate governance will require the regulatory authorities to implement rules and regulations that increase accountability and transparency in corporate organisations. Responsible corporate behavior is important in terms of protecting the interests of a company’s stakeholders and the public in general. For instance, the use of independent regulators plays an important role in reducing incidents of fraudulent practices by the top management, for instance (Schneider & Scherer, 2015). Competition The competitive nature of a globalised business environment also impacts on the future development of effective corporate governance. This is because the market competition has a direct influence on the practices adopted by organisations. In a constantly changing business environment, the competition is stiff, and an emphasis on effective corporate governance is a strategy that organisations can use to gain a competitive advantage (Zahra, 2014). Effective corporate governance ensures that organisations adopt sound practices in conducting their business operations. In a globalised business environment, the reputation of an organisation is important in enhancing investor confidence. Due to the numerous scandals affecting the corporate world, good governance is a necessity for organisations to survive in a globalised business environment. In this regard, accountability and transparency of business operations dictate the marketplace in terms of influencing the decisions of prospective investors (Starbuck, 2014). Societal factors Due to the globalised nature of the business environment, societal factors also impact on the future development of effective corporate governance. For instance, organisations across the world are engaging in initiatives that benefit the society. In the modern business environment, organisations do not exist solely for profit making purposes but are also involved in socially responsible practices. As a result of pressure from civil society and other non-governmental organisations, the success of organisations in the corporate world also depends on their responsibility towards the community and the environment. In this sense, effective corporate governance requires organisations also to consider corporate social responsibility as a strategy of improving an organisation’s reputation in the corporate world. While organisations generate profits, effective corporate governance also requires a focus on giving back to the communities that contribute to the success of these organizations (Lin et al. 2015). Case Study: GlaxoSmithKline corporate governance strategy GlaxoSmithKline acknowledges the importance of conducting business with honesty and integrity. The company requires its employees to embrace sound practices that are geared towards developing the firm’s good reputation. In addition, the company requires employees to establish working relationships that is based on trust and treat each other with respect and dignity. On the other hand, the company’s stakeholders are required to understand the rules, policies and procedures that guide various operations. This is important to help the company avoid unlawful practices that can harm its image. In addition, the company emphasises the need to minimise conflict of interest in its transactions by providing accurate and reliable information to key stakeholders. Employees are also required to uphold standards with regard to how they conduct the firm’s business (Thomas, 2015). Further, the company also requires the senior management to act as the role model for other employees and failure to comply with the firm’s ethical code of conduct can lead to disciplinary actions that include the termination employment contract. The firm also considers the importance of consultation between the top management and other employees to avoid misunderstandings that affect performance and productivity. The company has also developed an efficient audit system that plays an important role in identifying and dealing with incidents of non-compliance. In essence, the firm’s commitment to integrity and high standards in conducting business has significant benefits to the key stakeholders that include shareholders, employees, customers, and the community (Thomas, 2015). As a way of improving corporate governance, the company has also established a corporate compliance office where employees can seek guidance or raise their concerns, and this is critical to the sustainable development of the company. On the same note, the competitive nature of the business environment requires the establishment sound practices that ensure the company’s image is safeguarded. Since GlaxoSmithKline deals in pharmaceutical products, its integrity and reputation at the marketplace is critical because of the high standards required in the production and sale of therapeutic drugs (Thomas, 2015). The future development of effective corporate governance at GlaxoSmithKline As a company that operates in different regions of the world, a constant review of its governance structure is necessary. This is because the company, for instance, employee workers from different parts of the world and ethics may vary depending on the cultural background of the workers. In this regard, instilling sound practices in the company will require the management to accommodate different cultural values and beliefs in their ethical code of conduct (Bushee et al. 2014). On the other hand, since the competition in the biotechnology sector is stiff, ethical leadership will be necessary to ensure that the company does not engage in malpractices. Companies in the biotechnology sector deal in life sciences and integrity is necessary to enhance brand image. As such, GlaxoSmithKline needs to continue being transparent on how it conducts its business. Further, trust is a driving factor in the biotechnology sector, and the future prospect of the company will depend on the establishment of a governance system that emphasises responsible practices (Seamer, 2014). The future development of corporate governance in the company will also depend on the organisational behaviour. In this sense, employees’ role in supporting good governance is critical for the company to maintain its good reputation in the market. On the same note, the management should involve other employees in the decision-making process to ensure that they support the firm’s corporate strategy. This also includes embracing responsible practices at the workplace (Peters & Romi, 2015). Further, it is also necessary for the company to strengthen its internal control systems to ensure that there are no gaps that can contribute to unethical practices by the management and other employees. In this sense, checks and balances are also necessary for the future development of effective corporate governance because they help to improve accountability and transparency in the company (Filatotchev & Nakajima, 2014). Conclusion The future development of effective corporate governance depends on a number of factors that include the integrity of the management and the board, for example. This is because the top management of an organization acts as the role model for their followers. As such, their integrity at the workplace is important in terms of ensuring that accountability and transparency is enhanced. In addition, effective corporate governance is also enhanced by the establishment of internal controls to ensure ethical practices are not compromised. Further, ethical leadership is also necessary to ensure that employees support and embrace sound practices at the workplace. Other factors that impact on the future development of effective corporate governance include market competition, government regulations, societal factors and shareholders active involvement in the organisation. References Amao, O., & Ameshi, K., 2008. Galvanising shareholder activism: a prerequisite for effective corporate governance and accountability in Nigeria. Journal of Business Ethics, 82(1), 119-130. Baker, R. 2012. Toward effective governance of financial institutions. 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