For the economy’s stability, the existence of a system that ensures order, controls processes, and monitors compliance with all basic agreements is necessary. In this context, I fully agree that this role can be performed by the state, which develops special legislation regulating activities in the market, and by the organizations that implement corporate governance. Moreover, the state indeed plays a significant role in shaping the conditions in which corporations will develop in the future. However, in addition to the existence of legislation regulating corporate governance, several other factors have a significant impact on this practice. Although establishing stakeholder protection mechanisms in the country significantly reduces the possibility of covert and illegal practices, from my perspective, it is also necessary to pay attention to the internal components of the organization. In this context, one of the focuses should be the governing bodies and their scope.
On the one hand, the concentration of power in the hands of a narrow circle of individuals or the existence of one overwhelming stakeholder dramatically increases the chances of the formation of unfair practices. This is supported by a study by Crisostomo et al. (2020), who studied the performance of Brazilian firms and concluded that stakeholders with massive influence are more likely to pursue their own interests. This behavior is associated with a low number of incentives to maintain corporate governance which creates the need, as noted in the post, to form incentive contracts. On the other hand, an analysis by Chen and Budidarma (2021) demonstrates that too many independent stakeholders or too many directors significantly reduce corporate performance. This process is explained by the impossibility of reaching agreements on time.
In addition, such a wide distribution of powers creates more favorable conditions for various shadow schemes, as control is weakened. Therefore, to form effective corporate governance, even under insufficient legislation, it is necessary to pay attention to internal factors. At the same time, the organization should avoid both excessive concentration of forces in one place and their too wide distribution. With the right balance, one can organize a business abroad in the most efficient way.
References
Chen, H. J., & Budidarma, I. G. A. M. (2021). Performance of banks in Indonesia: The importance of bank diversification and corporate governance. Review of Integrative Business and Economics Research, 10(1), 91-104.
Crisostomo, V. L., de Freitas Brandão, I., & López-Iturriaga, F. J. (2020). Large shareholders’ power and the quality of corporate governance: An analysis of Brazilian firms. Research in International Business and Finance, 51, 101076.