Introduction
Corporate governance is the framework and system of rules, practices, procedures, and processes that direct and control companies or corporations in order to ensure fairness, accountability, and transparency (McConvill 1785). These include controlling and balancing the interests of various stakeholders including management, customers, suppliers, government, and the public.
It is through corporate governance that an organization can achieve its objectives, aims, and goals. Therefore, corporate governance includes all aspects of the management, ranging from planning of actions to the measurement of performance and all internal controls in an organization or institution.
For any company to be profitable, it is important to have a good and proper corporate governance strategy. Indeed, to achieve this, the company needs to be aggressive in good corporate citizenship and environmental awareness, as well as a clear understanding of the competitive environment in which it operates (Dignam and Galanis 82). Again, the company can try to create awareness on ethical behaviors to the management and other stakeholders of the company.
Generally, a company will enhance its success by being involved in good and sound corporate practices directed towards satisfying the interests of various stakeholders.
The stakeholders in a company may include management, suppliers, the government, financiers, customers, and even the public; however, it is the role and responsibility of the governance structure, which includes the managers, and other board of directors, to specify the distribution of rights and other responsibilities to the different participants in the corporation. In addition, the management has a role of specifying the procedures and rules to be used in decision-making process in the corporate management.
Among the rules and procedures are those that are used in the regulation of functions and competencies of the company’s board. Another function of the corporate structure is to ensure that the procedures for reconciling conflicting interests in the company are in accordance with their duties, privileges, and roles. Besides, for proper control and flow of information, the management of the company must provide proper information to enhance checks and balances.
Systems of Corporate Governance
The most important difference between different corporate governance systems is the ownership and control given to the companies. This is because there are companies that use widespread systems, which are normally outside systems; other companies use concentrated ownership or control, which is also referred to as insider system.
These systems of corporate governance can be improved using corporate framework, use of innovative activity, and the use of entrepreneurship. In addition, the development of equity markets will enable the improvement of the performance of the company. Moreover, the use of concentrated ownership and the use of markets for stakeholders and other employees of the company can help to improve the economy of the company.
The most important advantage in the use of concentrated ownership system and model is that, it allows proper and best monitoring of the various management functions; it also helps in overcoming difficulties faced from the separation of ownership and the control of the company.
The only problem with this concentrated ownership method is that, it brings low liquidity in the cost. Furthermore, the use of concentrated ownership method reduces the possibility of diversification, hence, dissuading the company to enjoy a variety of different products and services.
In contrast, the use of widespread system of ownership always causes more liquidity and can as well cause reduction in the use of the right incentives in encouraging long-term relations, which are necessary and very important investment. For any company to develop fully, it is important that the managers ensure that they are not self-interested and they should use their position in the company to follow what is best for the company and other stakeholders in the company.
Corporate governance issues always arise in the urgency of a problem or a conflict of interest. This conflict may involve shareholders in the company or other members of the company. Therefore, this calls for proper and relevant corporate governance policies to be used in the event of this problem in the company, which can include conflicts between managers and other shareholders or the customers.
Again, it is always clear in the corporate structure guidelines that such problems cannot be solved through a contract. Therefore, it is important that proper analysis to the conflict be done in case of a public company; this will show that corporate governance is mostly important in the case of agency of problems.
Theories of Corporate Governance and Implications
According to the standard neoclassical theory, individuals in the company, including the shareholders play a critical role in minimizing cost while maximizing profit. This can be done through conditioning the shareholders in the company to be involved directly in the activities of the company without necessarily using other strategies to motivate them (Dignam and Galanis 154).
Again, the theory states that, the corporate governance is only important in cases where the company has urgent need to resolve problems, including disagreements. Therefore, this theory only predicts how the company can be used for maximum production without providing the best panning way to achieve that production (Dignam and Galanis 154).
On the other hand, the principal agent theory differs with the neoclassical theory as it states that some of the costs that the company incurs should be categorized as private or confidential information. This is very different from the neoclassical theory, which says that, most of the effort choices and some of the cost that the company makes are observable (McConvill 1786).
Therefore, from this point of view, it is important that the manager observe his effort of choice. This alone can motivate the manager to work hard towards the realization of the company’s goal and objectives, mainly directed towards profit maximization.
In addition, it is always important to allow the managers to work towards the company’s goal by empowering them. Moreover, it is important to protect the managers always from some of the risky factors in the company. This will allow a balance between the efficiency of the manager and the risk-bearing factor. Another important thing to do is to allow for multiple agents and provide many dimensions of action to bring out diversity of services in the company.
For proper corporate governance, it is important to reward or compensate managers in relation to their high performance of work. This can be done in the form of shares and stocks in the company. In most cases, the governance structure always provides a way for decision making in relation to future actions and events. Moreover, it is the role of governance structure to provide decisions of the future that were not provided in the initial stages of the company’s contract (Dignam and Galanis 154-158).
In the current corporate world, most decisions are always made in advance and rarely do we have residual decisions. Therefore, in line with the cost transaction, some things need to be done in advance. Firstly, it is important to do costing of the different eventualities, which can occur in the course of the contractual relationship; thus, it is important to plan on how to deal with such eventualities. The second cost that is very important is the cost of negotiation.
This will enhance the plans to work effectively. Lastly, it is important that the cost of writing down the plans be done to allow others to use them in the event of any problems, for example, in the case of disputes, the judge can use the well-written down plans in making his ruling or judgment.
Therefore, for contractual incompleteness theory, the implication is that the parties should not involve in writing a comprehensive contract and the contract should have missing gaps and provisions to allow future actions to be specified only partly. In addition, according to the contractual theory, the implication is that there must be negotiations to allow in new information.
From these theories, it can be deduced that, corporate governance is important to the small companies as well as the larger public companies. Therefore, it is important that the managers be involved in corporate governance to allow them to maximize profits in their companies.
Again, it is important that the managers delegate appropriate roles of the day-to-day running of the company for proper management practice. This will also allow for the proper separation of ownership and control. In addition, when the managers are involved in corporate governance, they would be able to monitor the daily operations in the company properly, thus leading to improved company performance for maximization of shareholders interests.
Through corporate governance, the manager’s managerial behaviors can be easily checked. This is because managers will be able to learn about putting the interest of the company and the shareholders first, before embarking on fulfilling their interests.
In addition, it is through corporate governance that the managers will be able to know that the goals of the company are very important, and therefore, it is important to involve all the shareholders. Corporate governance also enables the managers to understand that there are other people outside the company who have the ability to do the management job of the company; this motivates the managers to work hard in order to help the company achieve competition advantage.
Another important thing to do as a company is to involve the board of directors in the corporate governance to ensure that the behaviors of managers, as well as their plans in the company are monitored effectively. This may include their use of company’s finances and the threats of proxy fights and takeovers.
Again, it is important to take into consideration the plight of various outsiders in the company including the government in line with the corporate governance of a company. This is because when the government is involved it can limit the monitoring role of the board of directors.
Corporate Governance and Implication on Risk Management
In the current world of advance in technology and globalization, many companies are involving themselves in the implementation of risk management procedures for better improvement of their competitiveness. Due to the losses that were faced by managers in different companies in the past, most of the companies have currently started to engage in effective risk management (Naciri 134). This is in realization that risk management will provide better corporate governance.
For this to work effectively, corporate level executives should be at the forefront in ensuring that proper guidelines are followed in order to harmonize corporate strategies with risk management and internal control. This will enable the board of directors to be able to identify the principal business risks of the company, especially when they are involved in the implementation of appropriate systems to manage the risks.
In the past, it was found that most management teams had no formal process for evaluating risk. This is what prompted the companies to be involved in corporate governance risk management processes. Therefore, it is important that the managers be allowed and be taught the best risk management strategies, including how they should respond in the event of these risk situations, which might be internal or external (Naciri 134-138).
Through the various important guidelines provided by corporate governance, many companies are nowadays getting involved in risk management practices. This is in realization that a successful business will always encounter risks as the business grows and therefore, it needs to manage those from a corporate perspective. Indeed, this is a deviation from the past practice where companies were using traditional approaches (Naciri 134-138).
The most important benefit of risk management to managers is that, risk management procedures are achieved through the development of company-wide guidelines for risk management and increased direct interaction with the board. In addition, risk management involves more coordination with different areas responsible for risk management and more interaction and involvement in the decision making of other departments (Gup 33). This always enables effective management of risks in the company.
The main benefit of corporate risk management to managers is that, it allows consistency in risk retention limits, and therefore reduces the costs by managing better and reducing risk. Another benefit is that, it influences corporate decision making, especially when monitoring and incentives are used as motivating factors in managing the corporate risks.
Furthermore, the oversight team and the board of directors’ role in risk management demands that the management understands the risks that the company is facing and that appropriate actions are taken to mitigate such risks. Indeed, there is a departure from the past where risk management concentrated on maximizing shareholders value to a wider aspect of corporate risk governance that seeks to increase a holistic value of organization.
Corporate Governance and Implications on Concentrated Ownership
Concentrated ownership is one of the issues that companies and their shareholders need to adopt for successful management (Dignam and Galanis 44). One of the best theories explaining the importance of corporate governance dwells on ownership aspect, where it connotes that, when many small shareholders own a company, it is very difficult for these shareholders to get information about the company and therefore, most of the companies’ control and management functions remains in the hands of the management.
This later causes the principal agent challenge and it can lead to suffering of the performance of the business’ operations. Indeed, the main sufferers will be the owners of the company and other shareholders. To solve this loss in the company, it is always required that the concentrated ownership system of corporate governance management be adopted.
In most cases around the globe, the concentrated ownership system of corporate governance is always seen to thrive in companies such as family companies, institutional companies and even state-owned companies (Schleifer and Wilson Para. 3). This also applies to well-established companies where the owners of the company can be individuals who are part of bigger international networks and are listed in these larger and complex international networks.
The main reason why concentrated ownership occurs in the less developed economies is because most of their capital markets are inadequate and in most cases, the state or the well-established family companies always take the active role in controlling the ownership, since there is less equity in the hands of the larger population or outsiders (Schleifer and Wilson Para. 4).
In other cases, especially in the cases of well developed economies, there is always natural growth in the companies, leading to small and large financial institutions pulling together and consolidating funds to enable them to turn into individual small owners of large investment companies. This later brings out concentrated ownership type of corporate governance.
There are various benefits of concentrated ownership of the corporate governance. Firstly, with concentrated ownership system, large investors are always attracted to the companies, thereby enabling the managers to improve on the long-term performance of the companies; this enables managers to solve the problem of principal agency by using the resources to monitor their ways of doing things (Dignam and Galanis 72).
Again, with concentrated ownership system of corporate governance, some problems may occur as a result of prominent shareholders in the company trying to have more control than the minor shareholders, leading to diversion of the company resources. When this occurs, the company is always at risk of cross-population whereby, those shareholders close to the management cause weak oversight, leading to board failures on multiple corporations and others (Dignam and Galanis 69).
In addition, for transparency and accountability of the investors and other shareholders in the company, it is important that concentrated ownership be regulated. This can cause the company to be involved in creating risk to investors and even the community, including the wider public.
Besides, when such factors are frequent in a company, they can scare away investors and later lead to losses. Furthermore, it is through this concentrated ownership system where there is always incidences of corruption (Bozec and Bozec 185). Therefore, it is important that the international business corporate governance be put in consideration when setting-up the management systems.
Moreover, it is only in this concentrated ownership where the state-owned companies always boost the number of workers and in this case, the employees to bring more power to them. Therefore, it through concentrated ownership system where the government can influence the number of employees for political reasons, and this always affects the profits made by the company (Bozec and Bozec 182-195).
Due to all the reasons posted about, it is always advisable that companies and the management should adopt a diversified ownership to the company. This can be done through allowing the company financial sector to grow and then allowing shareholders to withdraw their savings in the company to divest in others ways, thereby achieving diffusion of ownership in the company.
In addition, for proper dilution of the ownership structure, it is always good that the company and the management look for more and new resources in order to enhance capital investment, as well as enhance research and development for improvement of managers’ skills and knowledge (Schleifer and Wilson Para. 9).
Finally, for concentrated ownership system to be effective, it is important that the managers aim at maximizing benefits and avoiding problems posed by this model of management system. Again, to improve this system, it is good that the company tries to see a better way of globalizing capital markets and liberalizing trade as a corporate governance strategy.
In addition, it is important that the public interests be included in the management to allow both the company and the public to be involved in the use of the public fund; this will promote the growth of the company. When this is achieved, corporate governance will enhance maximization of profits and stabilization of capital in the company. Indeed, this will allow managers to enhance operations and increase investments, especially when the company decides to operate in a global market (Bozec and Bozec 182-195).
Corporate Governance and Implication for Executive Compensation
For corporate governance to achieve and provide satisfaction to a majority of corporate executives, it is important that the company’s management to complement the compensated given in cash form with other related benefits. This can involve other forms of motivation given to the employees and other executive members combined with proper education and proper training to the members (McConvill 1777-1804).
The trainings may be on-the-job training or they can be outsourced for outside. This will aid in improvement and achievement of the company goals and objectives. Moreover, well-blend compensation will ensure that both the managers and the employees are interested in the company plans, thereby achieving long-term relationships (McConvill 1803).
In addition, the application of this positive corporate governance structure will lead to a link between pay and performance that will provide the best executive compensation. This link will therefore form the basis for sustainable regulation on the executive remuneration (McConvill 1786). After this is well established, it is necessary that positive traits of the executive be adopted to influence the performance of the business.
Conclusion
As discussed above, corporate governance is important in the current international business environment, which is highly competitive. Again, good corporate governance will provide a platform for harnessing trust from the shareholders, leading to improved corporate performance.
Generally, there are different systems and theories that provide an important framework of corporate governance. Indeed, governance is a culture and a climate of consistency, transparency, fairness, accountability, and effectiveness that is provided throughout. For a company to be successful in attaining competitive advantage, it needs to effectively manage risks through corporate strategies.
In addition, corporate governance has to take into consideration the executive compensation and ownership pattern in order to be successful. Indeed, corporate governance becomes more effective when executives’ pay is commensurate with performance. Nevertheless, for corporate governance to be effective, managers should always take into consideration risk management as an important ingredient in overall corporate performance.
Works Cited
Bozec, Yves and Richard Bozec. “Ownership concentration and corporate governance practices: substitution or expropriation effects?” Canadian Journal of Administrative Sciences, 24 (2007): 182–195. Print.
Dignam, Alan and M. Galanis. The Globalization of Corporate Governance, London: Ashgate Publishing, Ltd., 2009. Print.
Gup, Benton. Corporate Governance in Banking: A Global Perspective. Cheltenham: Edward Elgar Publishing, 2007. Print.
McConvill, James. Positive Corporate Governance and its Implications for Executive Compensation. German Law Journal, 6.12 (2005): 1777-1804. Print.
Naciri, Ahmed. Internal and External Aspects of Corporate Governance. London: Routledge, 2013. Print.
Schleifer, Marc and Andrew Wilson. The Corporate Governance Implications of Concentrated Ownership. 2013. Web.