CORPORATE GOVERNANCE AND ITS IMPACT ON THE MANAGEMENT OF AN ORGANIZATION

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CHAPTER TWO

LITERATURE REVIEW

Concept of Corporate Governance

 Corporate governance refers to the relationship that exists between the different participants and defining the direction and performance of a corporate firm. The following bodies are the main actors in corporate governance. The Chief Executive Officers (Management), the Board of Directors and Shareholders (Kesho, 2008).

 Similarly, Okoh (2009) opined that corporate governance is a number of processes, customs, policies, laws and institutions which have impact on the way a company is controlled. Corporate governance involves a number of inter-related and mutually supportive components. These components centre on creating transparency and accountability (Shore & Wright 2004) Furthermore, these intended outcomes are, aimed at mitigating principal-agent problems and promoting the long term interests of stakeholders (Gilardi 2001). Corporate governance is a multifaceted concept that centres on notions of organisational accountability and responsibility (Williamson 1998, 2005). Governance implies that institutional structures (i.e. norms, values and assumptions) whether formal (e.g. laws and regulations) or informal (e.g.cultural values) create constraints on the behaviour of a given party (Gayle, Tewarie & White 2003). Such constraints are implied to be in the interests not just of the party under direct governance, but of the parties who, by virtue of their imposition of governance mechanisms, have an interest in the governed party. Governance necessitates the formulation, monitoring and enforcement of institutional structures by third parties, as well as the adherence to such institutional structures by individuals purported, subject to such institutional structures (Rutherford, BA 1983).

 The issue of corporate governance is thereby replete with complicated issues concerning ideal institutional mechanisms, effective monitoring and the balancing of competing interests of

 stakeholders (both internal and external to the corporate governance structure) (Williamson 2005). Today, “corporate governance is complex and mosaic, consisting of laws, regulations,

 politics, public institutions, professional associations and code of ethics” (Babic 2003, p. 1).

 Governance explains more than the board processes and procedures which includes relationships between the boards, management, shareholders and other stakeholders such as employees and the community (Bain & Band 1996; Chowdary 2003).

 Corporate governance comprises several elements including government, capital structures, labour market, organisation along with their regulatory mechanisms and the processes that connect the structures with agents, including management control and accountability, rules, regulations, laws and institutionalized procedures, self regulatory arrangements and norms (Alawattage & Wickramasinghe 2004)

 According to Sir Adrian Cadbury (2000) the corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources to stakeholders. The aim is to align as nearly as possible the interests of individuals, corporations and society. “The corporate governance framework should be developed with a view to its impact on overall economic performance” (Obed,2004, p.)

Principles of Corporate Governance

 According to Okoh (2008) corporate governance has the following as the principle of guiding its operations: First, Rights and Equitable Treatment of Shareholders:Rights of shareholders keep shareholders to exercise those rights. They can help shareholder exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings.Secondly, Interest of other Stakeholders: Organizations should recognize that they have legal, contractual, social and market driven obligations to non-shareholders stakeholders, including employees, inventors, creditors, suppliers, local communities, customers and policy makers. Thirdly, Role and Responsibilities of the Board: The board needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment to fulfill its responsibilities and duties.

 Fourthly, Integrity and Ethical Behaviour: Integrity should be a fundamental requirement in choosing corporate officers and board members, organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. Finally Disclosure and Transparency: Organizations should clarify and make the public know the roles and responsibilities of the board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company’s financial reporting. Disclosure of material matter concerning the organization should be timely and balanced to ensure the validations of their respective codes.

 Corporate governance principles and codes have been developed in different countries and issues from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect. For example, companies quoted on the London, Toronto and Australian Stock Exchanges formally need not follow the recommendations of their respective codes.