How Good Corporate Governance Affects Market Growth - Literature review Example

Name: Institution: Title: How Good Corporate Governance Affects Market Growth Tutor: Course : Introduction Corporate governance refers to a process and structure by which an organization and its affairs is directed and controlled. According to Dwyer (2009), the main goal of corporate governance is to increase long term shareholder value via developing corporate performance and accountability while considering the interest of other shareholders. Corporate governance can also be referred as a set of policies that define the association between the board of directors, management and shareholders of an organization. It can greatly influence the way an organization is operating. McKay (2000) notes that at its most fundamental level, it usually associates with matters that result from separation of management and ownership. Corporate governance can go past merely establishing a clear relationship among shareholders and managers. Currently, many regulators are primarily focusing on corporate governance since it usually affects the growth of the market. Corporate governance, if well practiced, can increase investor confidence and ensures appropriate investments’ management. Sound corporate governance is important for market growth stimulation (Bonnett, 2008). Importance of good corporate governance and how it affects investment and market growth According to Summers and Smith (2006), sound corporate governance promotes sustainable economic growth by increasing the performance of organizations and enhancing their access to the outside capital thus playing a significant role in stimulating market growth. Good corporate governance is a significant component of investment climate. Developed corporate governance practices in organizations can enhance the transparency of corporate sector thus creating a suitable climate for investment. This normally leads to much needed financing and investment thus stimulating market growth in any economy. Prasad (2003) says that sound corporate governance can ensure that the business environment is good and transparent and that organizations are held accountable for their activities. Therefore, good corporate governance is essential in enhancement of positive investment climate. This normally attracts many investors in the market thus boosting investor confidence. A sound corporate governance management is essential to efficient employ of capital (Dwyer, 2009). Good corporate governance fosters market confidence, assists in attracting additional long-term foreign and domestic investment, and promoting market discipline via suitable disclosure and transparency. Kuiper (2007) argues that good corporate governance also assist in ensuring that corporations considers the interests of a broad range of constituencies, specifically when the board identifies that corporate social duty can jointly benefit an organization and its operating surroundings. The activities, in turn, assist to ensure that corporations functions for the benefit of the whole society and induce steady business enhancement and growth, sustainability and lower risk. This normally attracts more investors in the market and thus stimulating market growth (Satterwhite, 2007). According to Satterwhite (2007), the experiences obtained from economic transition and recurrent financial crises in emerging market economies have verified that a weak institutional structure for corporate governance is not compatible with sustainable monetary markets and private sector enhancement. This can negatively affect the investors’ confidence which in turn might minimize market growth. As a result, sound governance frameworks are highly considered by investors, specifically those seeking to broaden their portfolios to incorporate stakes in emerging nations. Investors can also mitigate the threats that are caused by weak institutions (Summers &Smith, 2006). Corporate governance structure The main components of good corporate governance structure are; Board directors Executive offices, that is, chief executive officer, chief financial officer and the company secretary. Regulators Reports The corporate governance flow normally comes from top through the board. It is then utilized in the company via chief executive officer. The flow is always reflected within the reporting procedure with transparency. The total flow is normally affected by external shareholders (Southwick, 2004). How corporate governance structure affects market growth Board of directors According to Maher and Andersson (1999), sound corporate governance is often applied down from the top of the company. The role of board of directors therefore plays an important role in the total corporate governance of any company. The board is always responsible for enhancing rules and communicating the objectives of the company to operational levels. These objectives need to be enhanced in line with the controls and demands of different stakeholders. Therefore, if good corporate governance is applied by board of directors, it will lead to long survival of organizations in the market thus stimulating market growth. Chief executive officers are usually appointed by the board of directors. According to Choi and Dow (2008) the performance of any organization is greatly affected by the type of chief executive officers selected. Therefore, for organizations to do well in the market, board of directors need to ensure that they select chief executive officers that are competent enough. Chief executive officers normally play an intermediary part between the owners or principals and agents, that is, management and workers, so that they can attain the goals of the company (May, 2009). Bonnett (2008) argues that the board of directors needs to be of adequate size and fully aware of shareholder and the objectives of other shareholders apart from organization environment. The board of directors primarily comprised of persons with huge share of ownership in an organization. However, if necessary, other directors might be hired. The hired directors are normally referred as executive directors. The selection of directors therefore needs to be done thoroughly through elections at organization meetings on specified time intervals. Board of directors normally influences the performance of organization. The selection of directors therefore is vital since it ensures long survival of organizations in the market and thus stimulating market growth (Bonnett, 2008). The chief executive officer The chief executive officer plays the most important role in managing the company and principal-agency relationship. The chief executive officer is always the highest paid person and is responsible and accountable for the activities and performance of organizations. A good chief executive officer therefore is vital for the successful functioning of the company. McKay (2000) notes that an effective chief executive officer needs to have enough qualification and ability to communicate objectives of the board to lower layers of hierarchy and to implement them into performance. An organization therefore will only survive long in the market if it has an effective chief executive officer. The good corporate governance applied by chief executive officers therefore ensures that organizations remain in the market thus stimulating market growth (Fleet, Summers & Smith, 2006). The chief financial officer The chief financial officer is the most significant post after the chief executive officer. The chief executive officer posses an important amount of say and power in an organization and is responsible, accountable and in management of all financial activities of the company. The chief financial officer also needs to be confirmed by the Securities and Exchange Commission. The officer is also required to have appropriate financial qualifications. McCahery (2002) notes that Chief executive officers are normally the second best ranked officers in companies and they usually get a healthy remuneration. Effective chief executive officers normally provide good corporate governance. Good corporate governance is vital for long survival of organizations in the market. Good corporate governance therefore promotes market growth (Brown & Keeley, 2010). The company secretary The company secretary is also an important figure within organization’s corporate governance. The company secretary is mainly liable for ensuring that the interaction of shareholder with the company and regulator offices is in line with the policies and controls laid out within the corporate law. He or she is also liable for sustaining interaction with regulators and shareholders. The company secretary needs to communicate to the appropriate members about the meetings’ schedules, elections, outcomes and other announcements (Kuiper, 2007). Reports and meetings Reporting on how the company is performing is a significant element for good corporate governance. The best corporate governance exercise needs a complete and transparent reporting system. There are a number of conflicts in this regard that occur among the different components of corporate governance. Cottrell (2005) notes that the expense of mailing reports to all shareholders is at times viewed as burdensome, particularly when the incurred cost is for reporting to small shareholders. Reporting however is considered as a very vital part of corporate governance. Chen (2004) argues that organizations need to report about their performance to shareholders and all other relevant stake holders. The stake holders might include the regulators, general public, creditors and other rights groups. The regulators need to made particular reports compulsory to be published and delivered to concerned persons and institutions on fixed time intervals (Cottrell, 2005). Some of the main reports that are usually published are: yearly reports Quarterly reports Regulators reports Stock exchanges reports Marketing reports Investment reports Performance assessment reports The yearly report and quarterly reports are taken to be the most vital reports for every stakeholder. According to Bovee et al. (2008), they normally offer a thorough fiscal analysis, performance analysis and information that is essential for regulators, investors and the general public. This therefore is important since it normally display how well an organization is being governed. Reporting is essential in promoting market growth since if it is done transparently in organizations, the organizations’ performance will increase. This implies that many organizations will remain in the market thus stimulating market growth (Bovee et al., 2008). Conclusion From the discussion it is clear that good corporate governance stimulates market growth. Good corporate governance promotes sustainable economic development by enhancing organizations’ performance and their access to outside capital. It is also evident that good corporate governance boost investor confidence. Developed corporate governance practices in organizations can enhance the transparency of corporate sector thus creating a suitable climate for investment. Good corporate governance ensures that corporate activities, agents that are management and workers, and assets are directed towards attainment of objectives established by corporation’s shareholders. The corporate governance structure is usually considered mostly by organizations since it usually touches on the board balance and independence, board performance analysis, conflicts of interest, professional enhancement and the yearly general reports and meetings. Bibliography Dwyer,J 2009, Communication in business: Strategies and skills, 4th edn, Sydney: Pearson Education, Frenchs Forest. Bonnett, A 2008, How to argue; a student’s guide, Pearson Education, New York Bovee, CL et al 2008, Business communication today, 9th edn, Prentice-Hall, Upper Saddle River, NJ. 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Retrieved April 16, 2011 from < http://www.ecgi.org/research/accession/cgeu.pdf > McCahery J., 2002, Corporate governance regimes: convergence and diversity, Oxford University Press, Oxford. Read More