The Importance of Corporate Governance
The aim of the study is to delve deeper subjectively and objectively on the corporate governance which can be ideal and good. The study breaks the myth of good governance by suggesting the means to inculcate a good governance in an organization. The study also explores the essential theories of corporate governance like the agency theory, stewardship theory, resource-dependence theory which helps us to understand the concept of corporate governance on a wider spectrum and analyze its vitality in the business organization. Corporate Governance is a crucial element for the organization to operate efficiently and achieve the goals and objectives of the organization in the right manner. It is the broad structure of process and practices which enable the company to manage its business activities and affairs to ensure to meet its long term sustainability (Tricker and Tricker 2015). There are many elements such as laws which is based on the corporate legislations, court decisions, security regulators, securities laws and policies, which are undertaken in the best interests of the company and good faith. Further, there are many external factors which shape the governance structures such as the shareholders, stock exchanges, interest groups and others whose influential role in the organization mandate the directors to frame a right practices to be practiced in order to meet the expectations of the stakeholders. Intense competition, dynamic market trends, and frequent change in taste and preferences of the customers need to be studied and critically analyzed in order to infuse the competitive spirit among the employees and promote a healthy competition so as to attain the desired level of performance of employees in the organization (McCahery, Sautner & Starks 2016). A good and ideal corporate governance ensures an accountable management and help in establishing string and efficient internal controls, better engagement of the shareholders, prompt risk management techniques, flexibility in the operations and meet the targets and deadlines more effectively. Thus, a good corporate governance ensures a positive growth trajectory of the organization and accelerate the growth and expansion of the business operations.
To inculcate a right spirit in work force and enable them to adapt to the work culture, it is essential for the employees to understand the structure of the governance. When all the employees adhere to the structure of the governance and work according the organization demand reinforcing transparency, accountability and responsibility among the professionals (Khan, Muttakin and Siddiqui 2013). Corporate governance varies according to different types and size of the organization, as there is no concept of one size fits all, rather every organization has their own unique way of operation which has established their own way of functioning. Based on their own performance level, right governance practices are formulated to enhance the long term sustainability of the organization. An organization should build a qualified and experienced board of directors having adequate knowledge, skills, expertise, experience which are extremely relevant to the functioning of the organization and devoid of any kind of nepotism in the board (Armstrong et al. 2015) This competent and versatile board of directors should enthuse a strong set of ethics and integrity in a phased manner so that the gaps are filled adequately. A competent team can identify the loopholes exactly and implement adequate practices suitable in addressing the issues of the organization. There has been a lot of interference in the functioning of the board of directors which makes the whole purpose redundant hence they should be competent and independent and should not be a member from the management team so that there is not any indirect or direct material relationship which could influence or interfere in their judgment. Further, there should be a mandatory evaluation of the performance of the directors so as to ensure that they are fulfilling their required duty timely. The roles and responsibilities of the every directors must be well defined and conflicts of interest must be addressed with adequate deliberation and discussion with the concerned stakeholders and parties. The delegation of the task, evaluation of the performance of the employees consistently, training them periodically in case of any new change or upgrading of the management. There should be adequate mechanisms of reinforcing transparency and accountability so that when responsibility is fixed on a person one should be accountable for that particular task. This enhances productivity and faltering in their services is minimized (Du Plessis, Hargovan, and Harris 2018).
Types of Corporate Governance
Corporate governance spring from many theories among which the agency theory arise from the difference between owners of an organization and executives who are appointed to manage the functions or execute the activities of the organization. These owners or shareholders are called the agent and agency theory explains that the agent has a different goal from that of the principals and often are conflicting each other. It is assumed that the principal often suffer from agency loss. This agency loss is the reduced return on investment as they do not play a direct role in managing the company. This theory suggest to reward the executives financially which will increase the profit of the shareholders of the company (Bushee, Carter, and Gerakos 2013). It also suggest a supervisory board to control and monitor the performance of the agent so as to protect the interest of the principals. The board are occupied in the managerial processes like making deliberations to arrive at decisions and also equally accountable to the shareholders. This distinction is a major cause of loss hence for increasing the productivity and profit of the company the executives need to be given financial rewards so to fillip the growth trajectory of the company. A common instance of agency theory is between the employers of the organization and the employees of the organization. The employees which are hired for providing their service to organization in order to meet the goals (Bell, Filatotchev and Aguilera 2014). Google hires plenty of expertise of software developers and serve as employees. However, the increasing number or corporate scams show that the relationship between two is not the way it should be. Sometimes, the employees go against the work ethics of the organization and cause immense loss to the business. This grave misconduct on the part of employees can also result the company to wrap its operation and exit from the market.
Steward theories underlines that managers as well as the executives are regarded as stewards of the owners of the company sharing a common goal of the organization. The board can play an influential role by supporting and empower the executives which acts as a positive impact on the organization. This theory suggest that the relationship between them can be improved and enhanced by periodic training, improvised mentoring and their participation so as to ease the decision making process (Westphal and Zajac 2013). There is another theory of corporate governance which is known as resource-dependence theories arguing that a board of the company are obliged to provide the required resources to the employees and other executives in order to help them to achieve the goals of the organization. This theory suggest that the board of directors should intervene in order to provide intangible as well as tangible support such as human or financial support to the designated executives. For instance, the members of the board can mentor the candidates or train them in the critical areas of operations. This theory suggest that a majority of the decision are taken by the executives which are approved by the board. It also argues that when resources are provided the suppliers, involved local community and the customers have certain stakes in the company (Misangyi and Acharya 2014). The managers also have special obligations which ensures that every stakeholder also receive a fair return from their stake in the organization.
Theories of Corporate Governance
In the era of 21st century, the corporate governance has been a bone of contention amidst the rising corporate scandals as witnessed in Enron and WorldCom which costs huge amount of financial losses to the company as well as the investors. A good and ideal governance aids in preventing such discrepancies, avoid scandals which can tarnish the image of the corporation immensely. Further, the reputation of the organization is inextricably linked with how the governance of the company functions which adds to the goodwill of the company. The good governance structure adds an extra value to the company thereby attracting some of the best professionals. When a company or organization is known for its smooth and transparent governance structure, the company tends to give a positive perception of its operation, due to which investment becomes an easy task to venture (Sikka & Stittle 2017). Further, a company can expand depending upon the investment, hence it needs to form similar kind of governance structure so as to maintain its uniformity across the nations and bring synchronization as well as uniformity in its functioning. In order to reinforce a proper governance structure and implement a strong mechanism for influencing control in the management, is by making the relevant report, published a well-informed targets and decisions of the company to its stakeholders like the investors which needs to be updated regularly in order to safeguard their own interests in the company. There should be adequate disclosure of the information to the audit committee, board of directors by proper evaluation of the internal and external controls and risks. This measure enhances the ease of the decision making process (Marnet 2007). OECD has also defined the term Corporate Governance as the procedures and processes according to which an organization is directed and controlled’. The divergence in the corporations can be tackled promptly and can also be minimized. Looking at instance of Cadbury committee which has played a crucial role in establishing good practices of governance in not only UK but also in many other countries across the world (Clarke 2004). There are many corporate governance practices which requires an independent regulator to regulate and keep in check that it is not involved in any kind of unethical practice to meet its ends (Marnet 2007). Financial Reporting council is an independent regulator to regulate the activities of the corporations in UK. Similarly many countries have evolved their own set of code of ethics which makes sure that all the organizations have aligned their governance structure ethical working on the some honest and ethical guidelines (Filatotchev, Jackson and Nakajima 2013). Ethical codes gives a satisfaction to the employees and enhance their efficiency in their work performance. A sense of gratitude and confidence also springs from the members of the organization when a company has a strict and strong sense of governance and ethical code.
If we look at the corporate governance, there has been concerning issues arising frequently, which requires greater independence of the directors since they are accountable to the organization as a whole as well as the shareholders, which demands that their action is enacted and taken in the best interests of the company (McNulty, Zattoni and Douglas 2013). It also requires that along with the independence of the board of directors, the democracy of the shareholders, is maintained adequately, which can strengthen the structure of the governance. The regulators also need to adhere to the competency matrices where recruitment is done through a proper process of assessment of the employees, so to appoint and select a most suitable candidate to work on a particular task (Daily, Dalton & Cannella 2003). Discrepancies in recruitment can hamper the whole motive of governing the organization. It is a quintessential element of not only the management process but also an important for an organization to reinforce a better and ideal corporate governance in the company. When it comes to the risks that a company goes through while operating in a dynamic environment, the organization is prone to risks heavily and become vulnerable to the recent trends (Agrawal and Cooper 2017). For instance, when a company takes a risk to launch a unique product or a new variety of a product, it takes a huge onus of risk on itself (Letza, Sun & Kirkbride 2004). Hence, it cannot garner proper sales and acceptance from the market, the whole intensive process cost heavy to the organization. In such a vulnerable situation, managing the financial as well as other associated risks requires not only a versatile team but also a right governance structure to absorb the shocks of the market. Therefore, risk management is an onerous task which needs to be rightly aligned and integrated with the corporate governance (Iatridis 2013). The compensation governance requires equal attention when it comes to corporate governance, which should be governed through various mechanisms such as pay ratios, compensation committee, and independence of the advisor. In a good governance structure, the shareholder has a greater accountability and control in the selection as well as the removal of the board of directors. The strategy, aims, mission, targets of both shot and long term must be clearly defined as every employees should have a clear vision and mission, and aware of the ethical principles of the organization so as to maintain the quality as well as productivity in a right balance (Tallon 2013). There should be regular performance assessment where best performing directors should be appraised as well as at the executive level, the best performing employees must be appraised simultaneously. A company should further be aware of the advanced technology which can be a potent tool to tap the efficiency and bring better control such as cyber security, engagement with the interested public through social media and digital platforms. With rapid rise in the privacy breaches, the company needs to safeguard its activities through in-built security systems to prevent any kind of financial as well as other loss of confidential information of the company. The IT risks should be managed with required expertise which ensures that an organization has built its governance structure in letter and spirit (Liu and McConnell 2013).
Best Practices for Corporate Governance
It can be concluded from the in-depth assessment how an ideal corporate governance can built through the lens of the current theories of the corporate governance. Corporate governance is the quintessential element which forms a solid foundation for the business to flourish in every parameters and instill a right spirit among all the departments and employees to work towards their goals and objectives of the organization. It is also essential for the company to avoid any kind of mishap by any of its executive or director which can land them into trouble thereby harming the goodwill and reputation as it can create financial losses thus disrupting its operations. Corporate governance should be a vital part of good governance which should infuse transparency, accountability and responsibility at all levels of hierarchy. Further, in order to safeguard the interest of all parties and stakeholders associated with an organization organizations should reinforce sincerity towards their duty, integrity among the employees and passionate workforce. The employees should also be motivated to increase their productivity as well as their performance. A right mixture of every element in the corporate governance helps the company to attain its goals and objectives more promptly and actively.
References
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