Practical Motivation
The concept of corporate governance is becoming most important for the sustainable growth for companies in present business environment. This is because the development of a corporate governance framework within an organization ensures the presence of effective rules, procedures and regulations for monitoring and controlling the overall business practices. It involves balancing the interests of the stakeholders of a company that are shareholders, management, customers, suppliers, government and the community. The business executives are responsible for developing the framework of corporate governance to manage and control the overall business activities. However, despite of the increase in the interest of the corporations in corporate governance system in the recent years there have been rise in the case of corporate failures such as Enron and Worldcom. The corporate failures have known to occur due to lack of presence of an effective governing system to control the nature of business operations. These corporate failures have lead to establishment of the fact that there exists a need for reforming the corporate governance policies and corporate failures (Rajagopalan and Zhang, 2009). In this context, the present research is undertaken to examine the influence of corporate governance on corporate failure. The research is highly important as it evaluate whether there is an increase in the probability of corporate failure due to poor corporate governance policies within business entities. This has been carried out by the use of relevant theoretical basis that examines the relation between the two concepts with the implementation of appropriate governance theories.
The contemporary accounting issue selected for conducting the present research is highly important for accountants as they have an important role in providing valuable information about the performance of a company to its stakeholders. As such, it is essential that accountants abide by the policies of corporate governance to depict true and fair view of the corporation to its stakeholders by the use of adequate accounting standards and policies. Also, the business managers need to be aware of the impact of corporate governance on corporate failure as they hold the important role of strategic decision-making. Thus, it is necessary that they carry out their responsibilities in an honest manner that intends to maximize the value created for stakeholders. In addition to this, the research is also highly important for the regulators and general public. The regulators can gain an insight about the importance of developing the relevant corporate governance rules for promoting transparency in business operations. Also, the general public can gain an understanding that presence of a corporate governance framework within a business corporation ensures that there is accountability within the business practices.
The research is also highly important as it will help in developing an insight into the importance of different accounting theory concepts and their implications on the issue of corporate governance. The accounting theories concepts will be used for depicting the relation between the concepts of corporate governance and corporate failure. The occurrence of the corporate failure of large corporations such as Enron has highlighted the issues related to the impact of weak corporate governance policies on their failures. As such, there have been various researches undertaken by the researchers in the context of examining the cause of the failure of such big corporations for identifying the reasons for the occurrence of such scandals. In this context, the present research will prove to be highly useful for developing an insight into the relation between the corporate governance and corporate failures that have been explained by the previous researches also. It will provide an additional investigation into the issue of corporate governance and the findings can be utilized by the researches in the future context for demonstrating a relation between the corporate failure and the governance.
Theoretical Motivation
The present research will be useful for depicting a relation between the corporate governance and the corporate failures that are the two research variables. The relation between the two research variables can be predicted by the use of corporate governance theories. According to Valentine and Abdullah (2009) there are multiple corporate theories that discuss the importance of corporate governance mainly the factors that influence the interests of the stakeholders. Some of important corporate governance theories are agency theory, stewardship theory and stakeholder theory. Agency theory provides that managers of organization and shareholders are two distinct persons where managers act like an agent for the shareholder. Managers are likely to work for the shareholders in order to fulfill their requirements following the ethics and corporate governance. The boards of directors are meant to exercise control as per theory as they put strict control, supervision and monitoring on the performance of agent so to protect the interests of principal. Thus, corporate governance provides a set of ethical and moral guidelines to agent for achieving the requirement of principal in successful manner (Valentine and Abdullah, 2009).
Fung (2014) in this relation has also explained the importance of corporate governance theories. Stewardship theory has also stated that the business managers or executives of a company act as stewards of the owners and them both share common goals. The theory has suggested that the role of board of a company is to empower the executives for delivering higher performance. Thus, it is responsibility of the Board for monitoring and controlling the overall functioning of the business executives so that they act in the direction of maximizing the interest of the owners. Therefore, as per the theory the Board should develop corporate governance policies to monitor the functions of the executives and the business managers so that they remain accountable in carrying out their roles and responsibilities. In addition to this, the theory of stakeholder has also emphasized that all the stakeholders such as customers, suppliers and communities other than shareholders have a stake in a company. Therefore, the Board has the responsibility of protecting the interests of all these stakeholders by ensuring that corporate practices should be accountable and fair (Fung, 2014).
In this context, Lutui and Ahokovi (2017) have also stated that these accounting theories have emphasized the relation between the presences of effective corporate governance policies to the successful growth of an organization. This is because corporate governance can be defined as the organization system which contains rules, guidelines, processes and various practices through entity can be directed and controlled. These rules and practices are established by the Board of a company for ensuring that the business executives carry out their responsibilities in manner so as to maximize the interests of stakeholders. The purpose of corporate governance is to effective balance the interests of stakeholders and to provide guidelines to the managers following them they can take company to the path of success. It has seen in many cases that failure to achieve the corporate governance within the organization can lead to substantial damage on the part of organization and even complete failure of the organization (Lutui and Ahokovi, 2017).
Literature Review
This can be illustrated by the examples of the corporate scandals of Enron and Worldcom. Lakshan and Wijekoon (2012) have stated that the main reason for the corporate failures of these organizations can be cited to be absence of effective governance policies within their workplace. Corporate failure can be defined as inability of a company to generate profit for meeting up its expenses due to occurrence of inadequate management skills or inability to compete. The corporate failure of Enron has illustrated the role of board of directors of a company to oversee the corporate management by establishing proper governance rules for protecting the interest of shareholders. However, the Enron Board has allowed the CFO to carry out business by establishing private partnerships. These partnerships have a major impact on the reported profits of the company by concealing the debts and liabilities Lakshan and Wijekoon, 2012).
Similarly, as per the views of Noor (2012) the corporate scandal of WorldCom has highlighted the corporate governance problems that can results in the downfall of business corporations. The scandal has occurred due to improperly recording of capital investments in its financial statements and as such involves manipulating the financial results for reporting higher profits. The scandal has highlighted the issues of corporate governance that have occurred due to lack of adequate rules and policies for controlling the executive functions (Noor, 2012)
As analyzed from the previous researches held in this context, their major strength is that they have linked the corporate failures to the presence of problems of corporate governance. The reasons for the occurrence of these scandals have been explained adequately in the past researches. However, the limitation of the past researches is that they have not placed emphasis on implementing changes in the corporate governance regulations for preventing the issue of occurrence of corporate scandals. Thus, the present research will also place emphasis on the necessity of implementing reforms in the corporate governance policies for protecting the stakeholder’s interests. Thus, the research will help in providing an insight into the relation between the corporate failures and the need for implementing reforms in the corporate governance policies.
On the basis of overall discussion held in the research report, the following hypothesis has been developed to be tested that are stated as follows:
Hypothesis 1: There exist a direct relation between the corporate failures and the need for reforming the corporate governance policies
Hypothesis 2: There does not exist a direct relation between the corporate failures and the need for reforming the corporate governance policies
References
Cuong, N. 2011. Factors causing enron’s collapse: an investigation into corporate governance and company culture. Corporate Ownership & Control 8(3), pp. 585-593.
Fung, B. 2014. The Demand and Need for Transparency and Disclosure in Corporate Governance. Universal Journal of Management 2(2), pp. 72-80.
Lakshan, A.M. I. and Wijekoon, W.N. 2012. Corporate governance and corporate failure. Procedia Economics and Finance 2, pp. 191-198.
Lutui, R. and Ahokovi, T. 2017. Financial fraud risk management and corporate governance. Australian Information Security Management Conference.
Noor, Z. 2012. Corporate Governance and Corporate Failure: A Survival Analysis. Prosiding Perkem VII (1), pp. 684 – 695.
Rajagopalan, N. and Zhang, Y. 2009. Recurring failures in corporate governance: A global disease? Business Horizons 52, pp. 545-552.
Valentine, B. and Abdullah, H. 2009. Fundamental and Ethics Theories of Corporate Governance. Middle Eastern Finance and Economics 4, pp. 89-96.
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