Corporate Governance - Literature review Example

Corporate Governance: A Literature Review By Affiliation Introduction Corporate governance refers to a set of rules or principles which areused by companies to control and direct their businesses. The basic objective of corporate governance is to address the distribution of responsibilities and rights among different stakeholders with a corporation. In this scenario, different companies can have different stakeholders for instance, managers, board, shareholders and a variety of other stakeholders (Carpenter & Sanders, 2009, p. 443). This paper presents a review of the literature on corporate governance. This paper discusses the viewpoints of different authors on corporate governance. A comparison of different perspectives will also be discussed in this paper. Corporate Governance Corporate Governance, in broader terms, can be defined as regulations, legislation and the procedures, which govern, standardize and control the whole business operations. Corporate Governance encompasses internal elements, such as managers, executives, shareholders, or organizational structure, and the external elements, such as customers, suppliers and government laws. The purpose of defining the corporate governance is to generate the well-organized and prescribed structure of the organization in a way that operates in the best manner for all organizational members. It guarantees that the corporation has implemented the prescribed rules, moral duties, and best practices. That is why, organizations have developed their operations effectively at local level, state level, and also global level. Within contemporary years, the concept of corporate governance has been attending much focus, as there has emerged eminent outrages, such as misuse of corporate authority and purported illegal actions taken by corporate managers. The establishment of “civil and criminal suits”, against the people who misuse the name of the corporation to fulfill their illegal interests, is a vital part of corporate governance (Rouse, 2008). Corporate Governance is basically the established structures, codes, and procedures, which controls the corporations. It establishes guiding principles which help in providing direction and managing the organization in order to achieve organizational objectives in the most effective way. Such established systems enhance the organizational value and are fruitful for all members in the long run. Organizational members include all stakeholders which are affected by such system, such as directors, stockholders, suppliers, managers, employees, and general people. The organizational management undertakes themselves as the representatives for other members (Thomson, 2009). Corporate governance guides organizations to perform business operations with justice and uprightness, which includes all the ethical and moral conducts, such as revealing all necessary information, being truthful for all the business dealings, conforming to all the regulations and rules, being responsible towards the shareholders’ interests, and dedication of doing business ethically. The demarcation of the private and company’s funds in organizing the company, is an important requirement of the people, which are the part of corporate governance. Such distinction is considered to be of high significance, as emphasized by SEBI report. The companies which are operating under the good corporate governance, have a good level of reliability. The board of directors must have some independent directors, which enhance the company’s reliability level in any market. This entails that the presence well-organized corporate governance is such a benchmark on which basis foreign official investors are attracted to invest in that company. It also impacted the stock price of any corporation in a positive manner. Such a reliable and positive image of the corporation, due to the corporate governance, become a great source of tranquility and inexpensive financing. It is disappointing that corporate governance is attended as a focal point of debate, only when any immense fraud is exposed (Thomson, 2009). Corporate Governance has many definitions which study some particular features, in spite of defining in absolute and definite terms. At the broader levels, national or international, the corporate governance is expressed as the organizing, controlling or supervising the organization, exactly the way managers do. Such expressions of corporate governance are the outcome of a leading perspective, where it dispenses with the manager and stockholder relationship, and most specifically, with organization and working of the Board of Directors. A demarcation between the two concepts has been given by some of the researchers, where they have argued that management is something which control and manage the company, but on the other side, corporate governance assures about the work of these managers that either they are managing the company in the best manner or not. This suggests the role of corporate governance as defining the decision making, organization and procedures, which are linked to the production, control, and responsibility. By defining these, corporate governance, as a result, gets involved in the supervision, appraisal and control of organizational managers guarantee that their actions are directed towards the welfares of stockholders and stakeholders (Talamo, 2011). Corporate governance structure and practices, within a country, are becoming the point of focus in businesses at global level. As it is discussed above that there is no single definition present in the literature, but in the traditional definition, the corporate governance is deliberated as a foundation of ethical and moral behavior with the regard to accounting principles. The ethical behavior in accounting is based on the reliability, surety and impartiality of the auditors and accountants. There is a practical example of an unreliable and unethical behavior, which was shown by accountants of Enron Company. In this case, the accountants at Enron were performing as internal and external auditors as well as the company’s consultants. Such practice makes their information presented to the shareholders, external investors and the government, to be questioned on the basis of their uprightness, accurateness and trustworthiness. In contemporary times, many scholars have evaluated the corporate governance matters from a relative viewpoint. In such view point, the Corporate Governance dispenses with the techniques which conveys the message to shareholders or investors of the company that the profits on their returns are guaranteed. From this perspective, researches empirically compare the different corporate governance systems, where a number of issues have been aroused with regard to variances in these systems, the interface between finance and the rules and regulations, the financial markets part in enhancing development, and the responsibility of establishments by the Governance in augments economic growth. The practices and functions of corporate governance vary in different forms of organizations, where they are differentiated on the basis of accounting laws, security of smaller stockholders, ownership structure, authority structure of the Board of Directors, and much more. In very specific terms, the corporate governance controls the demarcation of ownership and management, and corresponding the restrictions over the managers’ interests and the interests of stockholders. Agency issue which occurred between the interests of managers and shareholders can be overwhelmed by enforcing some regulations, such as effective corporate governance laws and systems. This will reduce the interest conflict between them, as it will be regulated by a set rules and regulations given by corporate governance, which safeguards the interests of shareholders (Talamo, 2011). The corporate governance is also defined as a process through which owners and financers of the organization regulate and get answers for the utilization of resources delegated to the organization. For that purpose, owners select a board of directors which deliver the supervisory role and are responsible to fulfill the interests of shareholders. There are many stakeholders who have entrusted their interests in “quality corporate governance”, such as shareholders, Board of Directors, Audit Committees, management, and self-governed as well as regulatory organizations (Rittenberg, et al., 2012). Figure 1 has given the general representation of the whole governance process. It provides the particulars of the responsibilities of all members in corporate governance in a comprehensive manner. In this process, governance is done by the owners and shareholders as the first part, then assigning responsibilities to board of directors, who assign to management and then to operational departments. Management is assisted by internal auditors, while the board of directors is assisted by the audit committee in governing and supervising all the operations. In this process, the governance requires back the accountability to the shareholders from the whole system. Such accountabilities are not only limited to shareholders, rather there can also be other stakeholders of the company (Rittenberg, et al., 2012, p. 43). Figure 1 Overview of Corporate Governance, Image Source: (Rittenberg, et al., 2012, p. 44) All the definitions of corporate governance suggests that it provides a structure, where the process of setting a formal structure and system of rules and regulations is held, in order to achieve its objectives. It ensures that objectives are achieved with integrity and ethical manner. It supervises the ways, these objectives are achieved. Good corporate governance should deliver appropriate encouragements for the board of directors and management to hunt for objectives that are in line with the interests of the organization and stakeholders. Moreover, they must expedite efficient supervision, thus inspiring organizations to utilize the assets in an efficient manner (Handley-Schachler, et al., 2007). Conclusion This paper has presented a review of the literature on corporate governance. This paper has discussed the concept of corporate governance with respect to different sources. These perspectives were collected from different sources such as books, web sites and research journals. A comparison of different perspectives is also presented in this paper. Almost all definitions consider corporate governance a process through which organizations establish and maintain their environment. It allows organizations to implement a standard to run their businesses ethically and effectively. Moreover, effective corporate governance allows organizations to achieve their business objectives. References Carpenter, M. A. & Sanders, W. G., 2009. Strategic Management: A Dynamic Perspective. 2nd ed. Upper Saddle River, New Jersey: Prentice Hall. Handley-Schachler, M., Juleff, L. & Paton, C., 2007. Corporate governance in the financial services sector. Corporate Governance, 7(5), pp. 623-634. Rittenberg, L. E., Johnstone, K. M. & Gramling, A. A., 2012. Auditing: A Business Risk Approach. 8th ed. Mason, Ohio: Cengage Learning. Rouse, M., 2008. Corporate Governance. [Online] Available at: http://searchfinancialsecurity.techtarget.com/definition/corporate-governance [Accessed 10 August 2014]. Talamo, G., 2011. Corporate governance and capital flows. Corporate Governance, 11(3), pp. 228-243. Thomson, L. M., 2009. What is corporate governance?. [Online] Available at: http://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporate-governance-satyam-books-fraud-by-satyam-founder [Accessed 11 August 2014]. Read More