Corporate Governance

Introduction

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation (or company) is directed, administered or controlled. In corporate governance, the relationships among the many stakeholders involved and the goals for which the corporation is governed is also included.

Five Corporate Governance Mechanisms

The corporate governance systems are typically described as “insider” versus “outsider” systems, as “shareholder” versus “stakeholder” capitalism, or as involving “equity-financed” versus “debt-financed” firms. The corporate governance models as well as the reforms around the world are diverse but are evidentially in use of the corporate governance mechanisms.

Organizational Design

The corporate governance has the best way to keep managers in check is to ensure that they operate in an environment in which all structural checks and balances are in place. The Board of Directors are deliberately designed and exercised on behalf of the shareholders. It promotes the different committee that has different functions and power in accordance of their duty within the organization.

Ownership Concentration

The corporate governance’s best way to keep the managers in check is to reduce the degree of separation between the ownership and control by concentrating the ownership of the corporations in the hands of one or few powerful investors. This concentration of ownership will lead the investors to make means and the motive to monitor the managers as well as controlling them.

Dispersed Ownership

This is another ownership-oriented conception of managerial control of the corporate governance. The idea in solving the agency problems to render the separation between ownership and control more or less harm by assuring the rights of all the shareholders which are legally enforceable.

Managerial Empowerment

The best way to ensure the benevolent ideas of managerial control is contributed as much as possible to the goals and objectives to facilitate on the stewardship and empowerment rather than those that monitor and control. This stimulates managers to contribute to the greater good of the corporation by means of rewarding good and punishing mistakes through a proper monitoring.

Esteem Responsive

This final factor entails the conception of managerial control by controlling the flows of blame and praise they receive. The controlling effects arises from the views of intrinsic and extrinsic components, much more, the focus on the system and the people are emphasized.

Principles of Corporate Governance

The practical models for governance have commonly accepted different principles toward its effectiveness and efficient corporate governance. The rights and equitable treatment of shareholder is where organizations should respect the rights of shareholders and support them to exercise their rights including the security of ownership of their shares, right to vote, sharing information, and making participation in decisions. Also, the organization should recognize that they have legal and other obligations to all legitimate stakeholders such as giving emphasis on their interest.

The roles and responsibilities of the board are scope the organization’s range of skills and understanding. This is meant to deal with various business issues and have the ability to review and challenge the existing management performance. The integrity and ethical behavior is about the development of the code of conduct within the organization which starts from the directors and executives that promotes the ethical and responsible act in decision making. The principle of disclosure and transparency is the clarification made by the organization through media setting to publicly identify the roles and responsibilities of board and management to provide shareholders with a level of accountability.

The Advantages of Corporate Governance

The discussed principles of the corporate governance reflect on the main advantages such as stimulating the debates about the problems or issues in relation to the corporate governance. Another is encouraging the companies to adopt the recognized standards of governance, offers justified explanations to investors about requirements and practices of corporate governance. In addition, ensuring the informational strategy as a basis in improving the regulations of the capital market and the company law is considered advantage.

The corporate governance codes and principles is also evidently visible in different entities, such as stock exchanges, corporations, institutional investors, or associations or institutes of directors and managers. Although there are many advantages, corporate governance also faces challenges due to developing, emerging, and transitional economies. Moreover, the idea of corporate governance takes considerable advantages once the system proved itself to be effective. First is promoting the efficient use of resource of both within the company and the economy. And because corporate governance can lower transaction costs associated with corporate information access, the managerial incentives that are risky for profits are diminished. It also facilitates the proper access to capital, and could complement to institutional and legal framework of the organization. And most of all, corporate governance can contribute to lessen the corruption in the business.

Works Cited:

Heugens, P., & Otten, J., 2005. Corporate Governance Reforms around the World. Tjalling C. Koopmans Research Institute. [Online] Available at: http://www.uu.nl/uupublish/content/05-08.pdf. [Accessed 25 Nov 2009].

Vasilecu, L., 2008. Corporate Governance in Developing and Emerging Countries. The Case of Romania. [Online] Available at: http://mpra.ub.uni-muenchen.de/10998/1/MPRA_paper_10998.pdf. [Accessed 25 Nov 2009].