Corporate governance –
which can be defined narrowly as the relationship of a company to its shareholders or, more broadly, as its relationship to society….”
Corporate governance is a multi-faced subject. An important part of corporate governance deals with accountability, fiduciary duty and mechanisms of auditing and control. In this sense, corporate players should comply with codes to the overall good of all constituents .
Another important focus is economic efficiency, both within the corporation (best practices guidelines) as well as externally (national institutional frameworks).The concept of government controlling the commanding heights of the economy has been given up .This ,in turn, has made the market the most decisive factor in setting economic issues.
This has also coincided with the thrust given to globalization because of the setting up of the WTO and every member of the WTO trying to bring down the tariff barriers. Globalization involves the movement of four economic parameters namely , physical capital in terms of plant and machinery ,financial capital in terms of money invested in capital markets ,technology ,labor moving across national border .
The pace of movement of financial capital has become greater because of the pervasive impact of information technology and the world having become a global village.
Corporate governance represents the value framework, the ethical framework and the moral framework under which business decisions are taken .
In other words ,when an investor wants to be sure that not only is their capital handled effectively and adds to the creation of wealth ,but the business decisions are also taken in manner which is not illegal or involving more hazards.
The subject of corporate governance leapt to global business limelight from relative obscurity after a string of collapses of high profile companies. Enron, the Houston, Texas based energy giant, and WorldCom, the telecom behemoth, shocked the business world with both the scale and age of their unethical and illegal operations.
Corporate governance has, of course, been an important field of query within the finance discipline for decades. Researchers in finance have actively investigated the topic for at least a quarter century1 and the father of modern economics, Adam Smith, himself had recognized the problem over two centuries ago.
Corporate governance has been a central issue in developing countries long before the recent spate of corporate scandals in advanced economies made headlines. Indeed corporate governance and economic development are intrinsically linked.
Effective corporate governance systems promote the development of strong financial systems – irrespective of whether they are largely bank-based or market-based – which, in turn, have an unmistakably positive effect on economic growth and poverty reduction.
There are several channels through which the causality works. Effective corporate governance enhances access to external financing by firms, leading to greater investment, as well as higher growth and employment.
The proportion of private credit to GDP in countries in the highest quartile of creditor right enactment and enforcement is more than double that in the countries in the lowest quartile.
4 As for equity financing, the ratio of stock market capitalization to GDP in the countries in the highest quartile of shareholder right enactment and enforcement is about four times as large as that for countries in the lowest quartile.
Poor corporate governance also hinders the creation and development of new firms. Effective corporate governance mechanisms ensure better resource allocation and management raising the return to capital.
The return on assets (ROA) is about twice as high in the countries with the highest level of equity rights protection as in countries with the lowest protection.
7 Good corporate governance can significantly reduce the risk of nation-wide financial crises. There is a strong inverse relationship between the quality of corporate governance and currency depreciation.
Finally, good corporate governance can remove mistrust between different stakeholders, reduce legal costs and improve social and labor relationships and external economies like environmental protection.
Corporate governance therefore calls for three factors:
Transparency in decision making.
Accountability which follows from transparency because responsibilities could be fixed easily for actions taken or not taken
The accountability is for the safeguarding the interest of the stakeholders and the investors in the organization .Implementation of corporate governance has depended upon laying down explicit code which enterprises and the organizations are supposed to observe.
which can be defined narrowly as the relationship of a company to its shareholders or, more broadly, as its relationship to society….”
Corporate governance is a multi-faced subject. An important part of corporate governance deals with accountability, fiduciary duty and mechanisms of auditing and control. In this sense, corporate players should comply with codes to the overall good of all constituents .
Another important focus is economic efficiency, both within the corporation (best practices guidelines) as well as externally (national institutional frameworks).The concept of government controlling the commanding heights of the economy has been given up .This ,in turn, has made the market the most decisive factor in setting economic issues.
This has also coincided with the thrust given to globalization because of the setting up of the WTO and every member of the WTO trying to bring down the tariff barriers. Globalization involves the movement of four economic parameters namely , physical capital in terms of plant and machinery ,financial capital in terms of money invested in capital markets ,technology ,labor moving across national border .
The pace of movement of financial capital has become greater because of the pervasive impact of information technology and the world having become a global village.
Corporate governance represents the value framework, the ethical framework and the moral framework under which business decisions are taken .
In other words ,when an investor wants to be sure that not only is their capital handled effectively and adds to the creation of wealth ,but the business decisions are also taken in manner which is not illegal or involving more hazards.
The subject of corporate governance leapt to global business limelight from relative obscurity after a string of collapses of high profile companies. Enron, the Houston, Texas based energy giant, and WorldCom, the telecom behemoth, shocked the business world with both the scale and age of their unethical and illegal operations.
Corporate governance has, of course, been an important field of query within the finance discipline for decades. Researchers in finance have actively investigated the topic for at least a quarter century1 and the father of modern economics, Adam Smith, himself had recognized the problem over two centuries ago.
Corporate governance has been a central issue in developing countries long before the recent spate of corporate scandals in advanced economies made headlines. Indeed corporate governance and economic development are intrinsically linked.
Effective corporate governance systems promote the development of strong financial systems – irrespective of whether they are largely bank-based or market-based – which, in turn, have an unmistakably positive effect on economic growth and poverty reduction.
There are several channels through which the causality works. Effective corporate governance enhances access to external financing by firms, leading to greater investment, as well as higher growth and employment.
The proportion of private credit to GDP in countries in the highest quartile of creditor right enactment and enforcement is more than double that in the countries in the lowest quartile.
4 As for equity financing, the ratio of stock market capitalization to GDP in the countries in the highest quartile of shareholder right enactment and enforcement is about four times as large as that for countries in the lowest quartile.
Poor corporate governance also hinders the creation and development of new firms. Effective corporate governance mechanisms ensure better resource allocation and management raising the return to capital.
The return on assets (ROA) is about twice as high in the countries with the highest level of equity rights protection as in countries with the lowest protection.
7 Good corporate governance can significantly reduce the risk of nation-wide financial crises. There is a strong inverse relationship between the quality of corporate governance and currency depreciation.
Finally, good corporate governance can remove mistrust between different stakeholders, reduce legal costs and improve social and labor relationships and external economies like environmental protection.
Corporate governance therefore calls for three factors:
Transparency in decision making.
Accountability which follows from transparency because responsibilities could be fixed easily for actions taken or not taken
The accountability is for the safeguarding the interest of the stakeholders and the investors in the organization .Implementation of corporate governance has depended upon laying down explicit code which enterprises and the organizations are supposed to observe.