Corporate Governance

Corporate
Governance

Abstract

Corporate Governance is a concept that allows the operations of a business to be managed and directed efficiently and effectively. This is because corporate governance directs the operations of a company. What is meant by the operations is: how the company is controlled by shareholders, the daily running of the activities by the management, and how other stakeholders can contribute to the company’s control.

Most companies are turning to corporate governing because of its benefits. The use of corporate governing allows stakeholders and managers to work cooperatively their interests and levels of control are defined separately. Since all activities are accounted for by managers, shareholder value is increased in the long term. The firm’s performance is maintained at the top.

This paper aims at reviewing extensive literature on corporate governance. The researcher will articulate the practices of corporate governing and its effectiveness to companies. The various corporate governing mechanisms will be laid out as well. Agency problems will be discussed in this review and finding optimal ways to reducing it. The researcher saw it appropriate to discuss the conflicts that are caused by the relationship between managers and stakeholders in this review as well as the parties involved in corporate governing, the different laws administered in corporate governance, and the principles governing it. Previous research will be looked at extensively.

The importance of this literature review is to lay out a foundation for future research on this topic because it can be used as reference material, it will also help students in the study of corporate governance and it will help scholars to compare literature.

Keywords: Corporate governance, agency problem, stakeholders, managers, interest.

Introduction

Stakeholders of companies are threatened by scandals in the business world. These scandals are rising every day and they happen all over the world. For example banks being liquidated and economies are performing poorly. This threatens the economy as much as it threatens stakeholders. They are left to wonder if the management has their best interest at heart. Since the management has power to exercise duties, they make decisions that do not favour stakeholders in many circumstances. Thus, there has been need in most companies to employ corporate governance since it protects the interest of all stakeholders. Stakeholders include any party that is in contract with the company; examples include: employees, shareholders, creditors, and suppliers among many more.

Corporate governance mechanisms treat ownership and control very differently. They are separated (Berle, 1992; Jensen M. C., 1976). Agency problems come about when firms use a weak corporate governing mechanism that does not suit its needs. Agency problems are also caused by separation of control and ownership but this can be countered by good corporate governance that balances control, ownership and stakeholders (Core, 2006).

The way corporate governance is carried out in countries is not the same. It differs from one to another due to the different political, social and economic situations. This means that developed countries will have better corporate governance compared to developing countries. This is because these developed countries enjoy political stability compared to developing countries which are still suffering political instability. Political stability is directly related to social and economic stability.

Corporate governance comes in handy when a company is operated with the main aim of fulfilling one party’s interest. For example in Iran, financial institutions were majorly owned by families and wealthy individuals who controlled the institutions, with the main goal of making large returns for themselves, while ignoring other stakeholders interests. This situation is the same to that which financial institutions are not allowed to be owned by private individuals and thus their main control lays on the government which has no share in the company (Williamson, 1970; Zahra, 1989; Young, 2001).

Corporate governance reforms should be revised time and time again to ensure transparency and control of risk mispricing (Caprio, 2007). This literature review will provide knowledge to investors, mangers, regulators and stakeholders on corporate governing. It looks into management and increasing trust between management and stakeholders.   

In the 21st Century companies are not only run by managers but also shareholders. These two stakeholders usually have conflicting interests. Their interests could hinder the normal running of operations and that is why corporate governance has been embraced fully by companies; it protects the interest of all stakeholders. Corporate governance is divided into 2 different parts of responsibilities; statements of the roles of each and every stakeholder and stating out the means of reaching their goals and rules that will govern the company. It is through this that the rights and responsibilities of each individual are specified.

There have been different definitions argued by scholars over the years. They all relate in ways characteristically but each also vary. According to one definition, ‘corporate governance’ is a mechanism of ensuring that the investment of stakeholders is protected. Stakeholders constitute a high percentage of people who enable the business to exist. A business cannot exist without stakeholders just like a school cannot remain a school with no students (Shleifer, 1997).

This mechanism thus is the code of conduct that describes how a company should be run; the customs, laws and bodies; that dictate how their operations will be carried out. With corporate governance, a corporation will be able to achieve its goals, bring together the various stakeholders, and hold every individual accountable. According to Coleman (1990), this mechanism enables the management to relate well with stakeholders and the society and make every decision with the interest of stakeholders at hand. This same principle is defined differently by different scholars, Mayer’s (1997) view of it was, processes, information and structures used for monitoring the management to ensure they act in every way according to the interest of stakeholders in the company. 

This review aims to make investors believe in the management again and their ways of operations. It restores the trust that existed before. It also aims at making managers trustworthy before the eyes of stakeholders and to be able to restore the development in different countries of the economy. The researcher will investigate the different ways of using this mechanism and recommend where appropriate.

Corporate governance has been looked at by many researchers and their recommendations have helped firms to provide better corporate governance. This article aims at reviewing these researches and ascertain the effective ways to make corporate governance a successful mechanism in the firm settings. This review will therefore examine literature on; and account corporate governance to protecting stakeholder’s interest.