The Role of Corporate Governance in Enhancing Performance and Reducing Corporate Risk - Case Study Example

Corporate Governance in Organizations Background information Corporate governance is an integral component with regard to running of organizations in contemporary world. Through corporate governance, business leaders have an opportunity to evaluate and monitor performance within corporate entities. The inherent value of such practices lies in the need to circumvent numerous challenges that face organizations in volatile and highly competitive market landscapes (Bhagat 17). Since the onset of the 21st Century, there has been heightened interest from experts who seek to demystify the essence and rationale for corporate governance in modern organizational settings. Just like any other sector, there is need for the aforementioned practices in the banking sector. The banking sector plays an important role in enhancing growth and propagation of economic best practices. It is necessary for this research undertaking to demystify corporate governance because it has been identified as a key contributor to either success or failure in relation to organizational entities (Bhagat 21). This discourse was accelerated by financial scandals that have occurred in recent past. For instance, the collapse of Enron in the United States brought forth a number of issues that relate to corporate governance, especially in the financial sector. A consequent probe into the dealings that preceded the collapse hinted on the possibility of poor corporate governance as having led to the untimely dissolution of the institution. These revelations gave rise to efforts that gear towards strengthening of corporate structures in order to accommodate corporate governance and espouse it as a crucial condiment in enhancing success in all corporate undertakings (Bhagat 23). The financial sector in the UK is competitive and volatile in various ways. For instance, due to strict oversight, most institutions find it difficult to contravene regulations. This study shall look at certain variables in the financial sector. It will look at factors that influence the likelihood and frequency of contravention among financial institutions in the UK. It shall also look at how corporate governance influences corporate culture within financial institutions in the UK. The interplay between corporate governance and accountability must come to the fore in this research undertaking. The outcomes of this analysis should give more insight on the role of corporate governance in enhancing performance and reducing corporate risk. The current global economic landscape is indicative of efforts by world economies to reap the benefits that emanate from corporate governance. Economic and financial advisors in developed and developing economies are keen on promoting corporate governance as a sure way of guaranteeing success and resilience in a competitive global economy. This is occasioned by the desire by corporate to access opportunities in the global economy, especially in this era of globalization and technological advancement (Raheja 43). Due to its broad nature, it is impossible to come up with a single definition that covers all aspects that are embodied in this phenomenon. Corporate governance has been described as a culmination of internal structural mechanisms that seek to ameliorate operations through enactment of best practices that ultimately lead to realization of an organization’s vision and mission. Although this definition is not exhaustive in its evaluation of corporate governance, it covers the basic realities that characterize its actualization in modern terms. However, it is important to note that corporate governance must affect decision making and relationships within an organization (Raheja 44). Decision making and relationships are crucial components in regard to daily operations within organizations. As much as corporate governance must focus on other areas, it is important for management teams to focus on the above aspects in order to ensure success. On decision making, corporate governance must focus on the source and the intended target for such decisions. The decision makers must have the right scope of mind while developing corporate policies. On the other hand, they must ensure that the targeted recipients have the right attitude and the willpower to implement the decisions (Coles et al. 24). Modular approaches to corporate governance The mere existence of corporate governance in organizations does not guarantee success with regard to operations in such entities. The most important aspect is the approach in relation to formulation and implementation of policies that seek to drive change and prosperity in corporate entities. In the past, scholars have brought forth numerous models that highlight the most common approaches to corporate governance. Through such modular approaches, experts have the ability to capture and amplify pertinent areas that characterize corporate governance (Coles et al. 24). The Agency Model centres on the role of managers in fostering appropriate relationship with other stakeholders in organizations. The model argues that the management team must always ensure that employees, who are usually the target of decisions, are in the right scope of mind in order to implement policies in organizations. This model is effective in entrenching the rationale for good relationship between the organization and its stakeholders. It goes forth to demonstrate how personal interests could lead to collapse of an organization. In such cases, stakeholders are perpetually monitoring the managers in a bid to bolster their investment and consequent returns. On the other hand, managers could manipulate issues in order to entrench their financial gain, often to the detriment of the organization (Coles et al. 25). The Stewardship Model argues that managers are solely responsible for success or failure in organizations. According to this model, it is important for managers to understand the core values that are espoused by the principle of corporate governance. The assumption in this model is that managers are always inclined towards undertaking policies that bring forth growth and profitability for the organization (Coles et al. 26). The Stakeholder Model argues that stakeholders in organizations have a duty to give back to society because it accords them an opportunity to propagate their efforts towards prosperity of their organizations. In fact, society gives managers the necessary support to enable them pursue their interests in exploiting resources for the benefit of organizations. This assertion forms the basis for this model and highlights the rationale for corporate social responsibility by organizations towards society. The Political Model highlights the role of government in enhancing success in organization. Under this premise, the government has a duty and responsibility to formulate policies that cater for the greater good of society and its constituent entities. The thriving of corporate entities is largely dependent on its relationship with all faculties that constitute the government. Political procedures must always act in the interests of organizational entities in order to promote their existence in society (Coles et al. 29). The above models of corporate governance are crucial pointers to the reality of the need for such in the financial sector. Although corporate governance entails all aspects in organizational leadership, it must focus on pertinent areas that facilitate formulation and implementation of policies (Carter et al. 65). In absence of corporate governance, it is impossible for the actors in financial sector to guarantee success and accountability to stakeholders. The UK banking sector is fraught with cases of malpractice and dishonesty. Such cases offer an opportunity for introspection with regard to the essence of appropriate corporate governance frameworks within organizations in the banking sector. However, it is important to note that the UK banking sector is generally thriving and responsive to demands and challenges that face it the modern economic landscape (Carter et al. 66). Conclusion From the above analysis, it is evident that corporate governance has a crucial role to play in ensuring success with regard to organizations in modern society. For instance, it enhances corporate performance through promotion of best practices within organizations. In fact, corporate governance anchors the most basic ideals in organizational leadership because it encourages transparency and accountability. Corporate governance is also instrumental in reducing corporate risk in the financial sector (BCBS 32). Through its principles on organizational leadership, corporate governance leads managers into adopting policies that reduce likelihood for loss in organizational settings. In contemporary corporate settings, management teams have embraced the importance of corporate governance and consequently adopted it as a guide to prosperity in their corporate jurisdictions. The adoption of corporate governance has led to decrease in cases of fraud and financial impropriety in the UK. This shows that if well applied, the principle of corporate governance has the capacity to transform organizations into centres of excellence (BCBS 35). Most ideals that characterize corporate governance centre on the ability of organizational leaders to foster working relationships within corporations in modern world. Works Cited Bhagat, S., Black, B. The non-correlation between board independence and long-term firm performance. Journal of Corporation Law 27, 231–273, 2002. Print. BCBS. Enhancing Corporate Governance for Banking Organisations. Consultative document. 2006. Print. Carter, D.A., Simkins, B.J., Simpson, W.G. Corporate governance, board diversity, and firm value. The Financial Review 38, 33–53, 2003. Print. Coles, J. L., Daniel, N.D., Naveen, L. Managerial incentives and risk-taking. Journal of Financial Economics, Vol. 79, pp. 431-468, 2006. Print. Raheja, C.G. Determinants of board size and composition: a theory of corporate boards. Journal of Financial and Quantitative Analysis 40, 283–306, 2005.Print. Read More