Need for Corporate Governance - Essay Example

Corporate Governance Table of contents Introduction 3 Need for Corporate Governance 3 Modules of Corporate Governance 4 Disclosure 4 Internal Control 5 Financial Accounting Information 6 Risk Management Strategy 6 Guidelines for Corporate Governance 7 Conclusion 8 References 10 Corporate Governance 1. Introduction The highly competitive nature of emerging new models of global business has increased the risks and responsibilities of the organizations. The role of corporate governance has, therefore, become increasingly vital to the strategic management of the organization and projection of its aims and objectives in the eyes of the public and stakeholders. Corporate governance can be broadly defined as the creation of business environment within and outside the organization that would effectively meet the challenges of the time and improve and improvise the productivity of the performance outcome. In other words, corporate governance directly influences the core business strategies of the organizations and helps to formulate policies and strategies that would create appropriate business environment. 2. Need for Corporate Governance In the fast changing environment of globalization, factors like accountability, responsibility and reliability have become important pre-requisites for business to create a credible environment for their trade and investment. The lack of effective controls vis-à-vis malpractices in accounts and auditing, security of confidential information, corrupt practices etc. have become crucial risks factors that have resulted in huge economic loss for its shareholders as well adversely affecting its credibility in the market. ‘Corporate disclosure to stakeholders is the principal means by which companies can become transparent’ (Solomon, 2007, p143). Thus, Corporate Governance promotes effective control measures to safeguard the interest of all its stakeholders, investors and business partners. 3. Modules of Corporate Governance The recent cases of misuse and abuse of shareholders rights in the various countries have catapulted the role of corporate governance into the prominence. The increased risks to the interests of the stakeholders have forced the governments to impose strict code of conduct for the higher hierarchy of management who are intrinsic part of corporate governance and established codes of corporate governance. Risks have been defined as ‘the possibility of loss as a result of the combination of uncertainty and exposure flowing from an investment decision or a commitment’ (Boritz, 1990). All the factors and element of governance, that adversely affect and dilute the rights of the shareholders and other stakeholders of the organization, are risks that need to be addressed urgently. 3.1 Disclosure The disclosure policy of the company has major impact on market risks on the capital market. Under the codes of corporate governance, the disclosure mainly relates to the policy of the company to disclose relevant information about its budgets, annual financial statements and short term and long term management forecasts and other mandatory information that gives indication of the company’s positioning in the market. ‘The lifeblood of market is information’(Cadbury Report, 1992, p33). The information is communicated on the company’s website that gives necessary impetus to the investors’ confidence and promotes transparency in corporate governance. 3.2 Internal Control Internal control is another key factor that has the power to put the stakeholders’ interests at risk. The Turnbull report says that the aim of framework of internal controls is to ‘reflect sound business practice whereby internal control is embedded in the business process’ (Turnbull Report, 1999, para. 8). The internal controls of the company are various inter-related processes within its different departments which facilitate smooth operation, conforming to the prescribed parameters of managerial and policy controls. Internal controls are intrinsic part of strategic management which streamline various operational, productive and administrative processes that are designed to produce improved productive performance leading to better financial outcome. 3.3 Financial Accounting Information Financial accounting information is one of the most important aspects of corporate governance that has significant element of risks that can effectively damage the investors’ trust. The financial system along with effective auditing provides an easy means for the stakeholders to monitor the performance of the company or organization. The various financial statements and the role of auditors, help to give credibility to the company’s projected forecasts and at the same time, facilitate better decision making tools to realistically gauge the disparities between the productivity and financial outcome, projected or otherwise. 3.4 Risk Management Strategy Risk management strategy of the organization is yet another important factor that determines the extent of risk to the stakeholders. The business faces challenges from hordes of issues, both within and outside the precincts of the organization that may pose considerable risk to its overall performance impacting its long term missions and vision. Issues like pollution control, environment conservation, long term measurement for protection against damages due to various factors like natural calamities, fire etc. are issues that need to be incorporated in the risk management strategy. Abraham and Cox have asserted that ‘corporate risk disclosures appears to be related to institutional ownership… companies with more fluid investors tended to disclose more risk information’ (Abraham & Cox, 2007). Development and implementation of such strategies allow the corporate governance to effectively manage the risks. 4. Guideline for Corporate Governance In the recent past, the world has witnessed great slide in the standard of corporate governance that has considerably damaged the goodwill of the public. The lack of strategic control mechanisms and effective regulation has been responsible for the decline of the overall performance of the company, making them an easy target for the unscrupulous elements, both within and outside the organization. The number of financial scandals resulted in various reports and guideline. Turnbull report and later revised guidelines for corporate governance became the guiding principles for the United Kingdom companies to reinforce internal controls to reduce risks and through transparency in the corporate governance. BP in its annual states that ‘..the board continued its ongoing evaluation processes to assess its performance and identified areas in which its effectiveness, policies or processes might be enhanced…regular evaluation of board effectiveness underpins our confidence in BP’s governance policies and processes and affords opportunity for their development’ (BP, 2005, p161). These guidelines are important principles and not legal acts. Though the UK government has recently introduced reforms in its company laws and incorporated features of corporate governance, it has yet to come up with any mandatory instructions or laws with respect to corporate risk disclosure that are design to safeguard the interests of its investors and stakeholders alike. The risk disclosures are voluntary and the company is not bound by legal strictures to disclose its information. 5. Conclusion Indeed, one can conclude that the codes of corporate governance have been developed to ensure effective and transparent functioning of the business processes of the corporation. Mallin states that ‘the introduction of corporate governance codes has generally been motivated by a desire for more transparency and accountability’ (Mallin, 2007, p.21). The implicit and explicit corporate ideologies that are distinct to a corporation are reinforced and emphasized through governance reporting that gives a written confirmation to their commitment to the codes of good corporate governance. It is for this reason that government, through various regulations and parliamentary acts have incorporated the necessity of reporting the details of the practices followed to ensure transparency in governance. (1116) Reference Abraham, S., Cox, P. (2007). Analysing the determinants of narrative risk information in UK FTSE 100 annual reports. British Accounting Review. Forthcoming September 2007. Boritz, J Efrim. (1990). Approaches to Dealing with Risks and Uncertainty. CICA. Cadbury Report. (1992). Financial Aspects of Corporate Governance. The Committee on the Financial Aspects of Corporate Governance and Gee and Co. Ltd. Mallin, Christine A. (2007). Corporate Governance. Second Edition. Oxford. Solomon, Jill.( 2007). Corporate Governance and Accountability. Second Edition. John Wiley & Sons, Ltd. BP Annual Reports and Accounts. (2005). Available from: [Accessed 19 April, 2009]. The Turnbull Report. (1999). Internal Control: Guidance for Directors on the Combined Code. ICAEW; London. Read More