The orpus of orporate Governance - Literature review Example

 ROLE OF CORPORATE GOVERNANCE IN IMPROVING COMPANIES’ PERFORMANCE Abstract The Сorpus of Сorporate Governance is basically a system through, which organisations and companies are controlled and directed. It also involves the efforts that are directed towards creating relationships between companies as well as interest groups, thus determining the focus of its strategic performance. Through the appropriate application of the dynamic principles of corporate governance, organisations tend to increase their profitability, improve their competitive advantage, increase their annual returns, create a positive image among its consumers and enhance their relationships with stakeholders as well as shareholders. Companies that indicate a persistence application of higher standards of performance through corporate governance, tend to reduce risks associated with organisational operations: Such companies have an upper hand in regard to attracting investors, attracting new clients as well as creating a positive rapport with law makers. This research will focus on a detailed assessment and discussion of the role of corporate governance of companies’ performance. Key words: Corporate governance; competitive advantage; reduced operational risks. Introduction The current rate of competition among businesses and economic pressures has compelled many organisations and companies to abide by the frameworks of corporate governance, which do not only govern the operations of organisations, but also focus on, controlled dimensions of their relationships (Todorovic, 2013). There are various statutes that have been implemented to enhance the efficacy of application of corporate governance in the contemporary business environment for instance: The United Kingdom Corporate Governance Code; this code stipulates the recommended principles applicable to the companies that operate in the London Stock Exchange (Makinon, 2011). Research indicates that the compliance with such principles is an appropriate operational strategy that improves operational environment for many businesses and reduces risks that may occur due to non-compliance (Makinon, 2011). Naturally, the rules of corporate governance are statutory; therefore there is no government or administrative agency that has the mandate to formulate these rules. The enforcement of corporate governance rules may be undertaken by entities such as: Courts of Registration, which have been provided with specific authorities through companies’ registration acts (Kaen, 2012). In as much as there may be aspects of similarities in the manner through, which organisations, governments as well as non-profit making entities apply corporate governance, different versions of corporate governance definition exist in the current business environment (Kaen, 2012). The first definition of corporate governance according to European Governance Institute, is the that it is a foundation of accountability among institutions, companies as well as enterprises that attempt to balance on their social and economic goals, while taking individual as well as community aspirations into consideration. Additionally, according to the Organisation for Economic Cooperation and Development (OECD), the concept of corporate governance deals with responsibilities and rights of a company’s management, its shareholders, board members, stakeholders and policy makers (Wallace & Zinkin, 2010). The OECD asserts that how well a company is managed affects its performance and market confidence, thus good corporate governance is crucial for companies that aspire to succeed in their operations in the competitive market (Wallace & Zinkin, 2012). The OECD sets out four basic principles that guide corporate governance; the first principle is the principle of accountability: According to the code of corporate governance, accountability is a crucial aspect of organisational performance that should be taken into consideration by the corporate management board, stakeholders and shareholders. Basically, accountability is highly recommended in corporate planning, administration as well as control of a company’s resources (Turnbull, 2012). The other principle of corporate governance set out by the OECD is the principle of responsibility; this principle requires that a company acknowledge the fact that all its stakeholders have a responsibility to play and this requires greater cooperation and adherence to stipulated rules and regulations (enel.ru/en/company). Transparency is another principle of corporate governance: This principle basically requires corporates to provide timely disclosure of a company’s data i.e. financial, operational progress among others (enel.ru/en/company). This information should be accessible to all relevant stakeholders and should be provided in a great sense of accuracy. Consequently, the OECD indicates fairness as a principle of corporate governance; it indicates that a corporate should respect the rights of its shareholders and stakeholders and treat them with equal respect as well as equal fairness (enel.ru/en/company). Roles of Corporate Governance of Companies’ Performance As generally aforementioned, corporate governance is associated with various roles among both SME’s and multinational companies. A detailed discussion of these benefits is as provided below: Corporate Governance Improves Access to Capital According to the United Kingdom Committee of Financial Aspects of Corporate Governance, the application of the frameworks of corporate governance improves a company’s capacity to access capital (Mallin, 2012). There is an increase attention that policy makers have directed towards the fact that corporate governance plays a crucial role for companies to access emerging markets as well as global equity. In addition, empirical data indicates that properly managed and controlled companies tend to receive higher market values as compared to companies that do not appropriately abide by the frameworks of corporate governance (Mallin, 2012). However, the proper application of corporate governance generally increases capital flows i.e. from increased profits margins from domestic and global business operation. Value Addition Value addition is another role of corporate governance; it entails the enhancements that a company may give its services or products before they are release to the clients or consumers. Corporate governance plays a key role in a company’s value addition; through the application of corporate governance frameworks i.e. the frameworks that guide provision of quality services, a company is capable of determining flaws in its production processes thus making necessary improvements (Heracleous, 2001). Additionally, corporate governance allows companies to undertake research and network with other companies therefore learning new skills of operations that may be applicable in improving product and services quality (Heracleous, 2001). Reduction of Reputational Risk There are statutes that have been implemented to foresee the application of corporate governance frameworks among different companies in different business environments (Monks & Minow, 2013). The application of such statutes is usually monitored by authorized bodies for instance; the UK’s Committee of Financial Aspects of Corporate Governance. It is important to maintain a positive rapport with such organs, thus the adherence of corporate governance principles, enhances the relationship between companies and corporate policy makers (Strenger, 2008). In some cases, poor governance may lead to company scandals majorly due to cases of financial fraud emerging from mismanagement; on the other hand, poor reputation may also occur when companies subject their shareholders to financial losses majorly because of poor financial management (www.newstatesman.com). However, with the application of corporate governance frameworks i.e. principle of accountability, a company is in a position to reduce risks of poor reputation. In a research article published in the International Journal of Humanities and Social Science 2011, Waseem et al posits that corporate governance is an appropriate strategy that reduces reputational risk among its suppliers owing to the fact that: It creates a platform for dealing with the ways in, which suppliers engage with financial organisations and get the assurance of getting returns from their investments. On the other hand, this research indicates that corporate governance creates a platform that promotes corporate accountability, transparency as well as fairness in relation to provision of information to consumers, suppliers, stakeholders as well as policy makers. Moreover, corporate governance establishes ways through which interactions i.e. between a company’s boards and shareholders are undertaken, therefore determining the directions of the company (Waseem et al, 2011). That is, good corporate governance is not an end, but a tool that company can apply to define and attain its objectives. Development of Capital Markets In an annual report published by the International Financial Corporation in 2012, it is indicated that poor facets of governance and inappropriate application of corporate governance structures contributed extensively to the economic failures that were witnessed in the United States and Western Europe in 2008 (www.ifc.org). Additionally, the research indicates that the financial failures of the East Asian region in 1997 were as a result of poor corporate governance as well as poor management of corporate finances: However, with proper application of corporate governance frameworks, companies can improve in both private and capital markets, specifically through transparency and proper disclosure of financial resources (www.ifc.org). Waseem et al 2011, posits that the development of capital markets through corporate governance is not only achieved through internal factors, but are also achieved through external management factors. The external environment of governance basically includes mechanisms of take overs, regulations and laws that enforce the rights of stakeholders and shareholders: Waseem et al 2011, asserts that appropriate external governance environments that creates conducive business environments for organisations include regulatory organs i.e. Central banks and oversight roles undertaken by the local governments. However in their research, Waseem and his colleagues indicate that the in-depth and infrastructures available in capital markets also enhance the ability of shareholders to grow and develop through holding company management accountable: This is only achieved through application of recognised accounting standards as a part of corporate governance principles. Enhanced Investment Decision Making Process The success of any company that operates in the current highly competitive business environment is based on the decisions made by its management and shareholders (Mitchell, 2009). However, the most challenging aspect of corporate investment decisions emerges from resource utilisation and time constraints; conflicts of ideas may emerge during company meetings held for purposes of investment decision making basically due to flaws identified in financial statements (Mitchell, 2009). The application of appropriate corporate governance principles is an imperative strategy towards the reduction of such conflicts for instance: The application of the corporate governance principles i.e. principles of transparency that requires the disclosure of information and principle of fairness that requires equal treatment of shareholders as well as protection of shareholders’ rights, increases their confidence in a company managerial team, thus leading to less interference during investment decision making (enel.ru/en/company). Enhanced investment decision making can also be achieved through the structure of corporate governance, which determines the responsibilities and the rights of a company’s actors i.e. board members, stakeholders, shareholders as well as creditors (Solomon & Solomon, 2010). Corporate structures stipulates rules regarding the persons in charge of making certain decisions, thus reducing instances of conflicts that may arise in relation to who makes decisions and who does not. In this regard, it also provides the structures that enable the company to formulate its operational objectives and determination of the means through, which such objectives can be achieved. Enhanced Global Corporate Leadership and Networks Corporate governance has created platforms for dialogues and conferences among various global companies. This has not only enhanced business relationships, but also improved their operations through networking and provision of technical assistance (Mahoney, 2012). In a report published by the United Kingdom Committee of Financial Aspects of Corporate Governance, the International Financial Corporation is mentioned as one of the multinational corporates that have undertaken various initiatives towards enhancing global corporate leadership (www.ifc.org). The research indicates that the International Financial Corporation has enhanced corporate leadership among Middle East Companies and Companies in Russia through dialogues and provision of assistance in technical issues, thus enhancing international business operations. The report also indicates that the IFC provided sponsorship to the Organisation for Economic Cooperation and Development to undertake a round-table dialogue among companies in Latin America, East Asia and Eastern Europe therefore leading to the establishment of a network of companies from these regions, leading to enhanced international business leadership (www.ifc.org). Conclusion From the discussion above, it is evident that corporate governance is a fundamental operational strategy that benefits both multinational and local companies. It is associated with various benefits such as; improved access to market capital, market development, enhanced capital, and reduction of reputational risk as well as value addition. The discussion also provides the four basic principles of corporate governance that have been recommended by the OECD. Basically, these principles are the foundation of corporate governance; they are the one that are most applicable in the contemporary business environment. Many organisations are also currently focusing on leadership development through networking as a means of corporate governance strategy. 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