Benefits of Practicing Good Corporate Governance
Corporate Governance is now being increasingly practiced by companies across the globe due to the number of benefits it offers. Practicing corporate governance is beneficial for a company and its stakeholders as well for the economy as a whole. A few benefits of corporate governance are mentioned below.
Excellent Management If a company is practicing corporate governance, people not linked to the firm will also be able to assess its governance. his is because the most fundamental principle of corporate governance is transparency and the principles of disclosure. !very step taken by company authorities, having control over the company"s management, is in the best interests of the company and its stakeholders. his has a positive impact on the community and may reflect upon the market valuation of the firm and hence, its share price.
High Level of Transparency Companies that follow a set of best best practices are practices are encouraged to be highly transparent about their business. his helps them attain the trust of the community community and its stakeholders and eases the task of raising capital, when needed. As the business is easy to assess and evaluate due to its high level of transparency, many investors and financial institutions prefer funding these companies than those that are not following the core principles of corporate governance.
Stakeholder Benefits #nder corporate governance, a firm tends to act in the best interest of the firm and its stakeholders. his will ensure greater success as the goal of the company managers will now be aligned with the goals of the company. he result of this will be greater profits and faster growth which will benefit the company and all the stakeholders. stakeholders.
Reputation and Recognition he practice of good corporate governance followed by firms will allow them to gain the trust of the investors, the customers and the community at large. his will have a positive impact on the company"s reputation and it will be recogni$ed as a fair and transparent company. his image will help the company prosper in the long run and achieve achieve its goals more %uickly.
Reduces Wastage Good practices of corporate governance help companies become more efficient in their business. !mployees that are trained to follow ethical business practices will avoid e&cess wastage of company resources will tend to utili$e all resources optimally.
Reduce Risks Mismanagement and !orruption A company can reduce the amount of risks in their business as well as any attempts of corruption and mismanagement by following the practices of good governance. 'ue to the amount of transparency necessary in companies that follow the principles of good governance, many individuals intending to misuse their position and power will be unable to do so. his will reduce the overall incidences of negative acts in the company and help it achieve success and a positive image in the community.
Economic Benefit A company following good corporate governance will be able to achieve the trust of the community and hence, success in the long run. A firm"s good reputation will ensure a good flow of capital by attracting foreign investors in the economy and will benefit the economic situation of the nation.
Disadvantages Ownership-Management Separation The officers and directors who run the day-to-day affairs of a corporation and make most of its policy decisions are not necessarily shareholders. This can become a problem in large, publicly traded corporations. If no shareholder holds a co ntrolling interest in the corporation, and most shareholders vote by proxy, the corporation's assets are controlled by the board of directors and the officers. The separation of ownership and management can lead to a conflict of interest between management's duty to maximie shareholder value and its interest in maximiing its own income. ! "#$, for example, might be paid a large bonus even as the corporation approaches bankruptcy. Illegal Insider Trading The term %corporate insiders% refers to corporate officers, directors and employees because they may have access to confidential, non-public information about the corporation that might affect the value of its shares. "orporate insiders are not strictly prohibited from trading corporate shares but must report these trades to the &ecurities and #xchange "ommission. Illegal insider trading occurs when a shareholder, while in possession of confidential information relevant to the future value of his shares, sells shares to a buyer without access to this information. Illegal insider
trading can also be committed by a shareholder not directly affiliated with the corporation, such as an outside auditor, a government regulator or a relative of a corporate insider. ecause access to confidential corporate information can be widely dispersed, laws against insider trading can be difficult to enforce. Misleading Financial Statements There are many ways to present factually accurate information on a financial statement in a manner that is misleading to investors -- by, for example, selling property from a parent company to a subsidiary to maximie parent company revenues. It is also possible to present factually incorrect information that is difficult to detect by establishing complex networks of subsidiaries and cross-shareholdings. Costs of Regulation The abuse of corporate governance has triggered the enactment of a large body of state and federal laws designed to prevent such abuses from recurring. "ompliance with these laws can be burdensome and expensive for corporations. (or example, the &ecurities and #xchange !ct of )*++ reuires companies seeking to list on a stock exchange to make such extensive disclosures to potential investors that compliance can cost hundreds of thousands of dollars. ore recently, the &arbanes-$xley !ct of // reuires corporations to establish extensive systems of internal controls to ensure that their financial statements are both factually accurate and non-misleading. 1.Lack of independence
The independent non-executive director can improve the company's corporate governance system is basically relied on his nature of "independence”. ut in practice! the independent non-executive director may not actually independence. lthough there have re#uirement that the independent non-executive director of the company must not be or have been connected to a director! the chief executive or substantial shareholders! the directors $ould like to select $hose $ould co-operate $ith them as the independent non-executive director.
%ven though they cannot select the connected person! e.g. their relatives or business partners as the independent not-executive directors! they can &nd their friends or someone $ho has the same vie$ e.g. marketing strategy( $ith them as the independent non-executive director! instead of &nding some $ho are really independent and helpful in making the right decision. )t $ould be easy to say that they are not connected $ith each other. )t is especially easy to occur in case the directors are also the substantial shareholders! because the substantial shareholders as the same time the directors of the company( have the voting right in appointing the non-executive directors! *ust like the family + based companies in ,ong ong.
)f the independent non executive director being appointed is not 'independent' enough! they may not be able to protect the interests of all shareholders. They may
only agree $ith the directors and the substantial shareholders and may not be able to provide independent and ob*ective *udgment and advice to the board of director. or example! the independent non-executive director are usually the members of the audit committee! if they are not independent enough! they may not be able to provide ob*ective opinion or revie$ on the &nancial reporting process! internal controls and the audit function. /oreover! they may also take part in determining the directors' remuneration! if they are connected $ith the directors! they may consent to the unreasonable high directors' remuneration $ithout any in#uiry. 0.,olding of the shareholding interest
The independent non-executive director may hold some shares of the company! sub*ect to the re#uirement! must not be more that 1 of the total issued share of the company. That means he or she is also the minority shareholder of the company. 2o this time! instead of having the same vie$ as the directors and the substantial shareholders! he may *ust concern about the interest of the minority shareholders as he is also one of them. 2ince on of the roles of the independent non-executive director is to ensure that the interests of all shareholders! and not only the interests of a particular group! are indeed taken into account by the board of directors! if he *ust concerns about the interest of the minority shareholders! it may not be good to all shareholders and the company. )n fact! the independent non-executive director should try to balance the interest bet$een the ma*ority and minority shareholders but not only to protect the interest of one particular group. 3.Limited availability beyond regular board meetings
)n most of the companies! the non-executive directors are on the part time basis. ccording to the Listing 4ules! their remuneration cannot be &xed high enough that allo$ them to rely in their livelihood5. s the bene&ts given to the non-executive directors are lo$! but they have to bear the same liability as the executive director! they may not have incentive to $ork hard and do not devote to spend their time to attend all the meetings. ,ence! the non-executive directors *ust attend the meetings that they are interested in or attend the full board meeting. nd in overall! the non +executive directors only attend 3-6 meeting each year.
7ith the lo$ attendance of regular board meetings! the non-executive directors cannot check the acts of the directors. nd also! they cannot ensure the issues are sub*ected to dispassionate consideration by the board $ithout attend the board meetings. Therefore! even the listed companies are re#uired by la$ to have at least 0 non-executive directors! it cannot improve a company's corporate governance system $ith their limited availability. The non-executive directors cannot check $hat the executive directors had done and it provides opportunity for the directors to override all the decisions in the board meeting. 6.Limited kno$ledge about the company's internal a8airs
s mentioned about! the non-executive directors seldom participate in the board meetings. lso they cannot personally involve in the operation of the company. Therefore! they do not understand the operation and the policies of the company. ,ence! even the non-executive directors participated in one or t$o of the board meetings! they could not give any opinion regarding to the unusual or inappropriate parts. 9.e$ numbers of non-executive directors
nother problem is related to the number of non-executive directors. )n case the company has t$o independent non-executive directors! $hich satis&ed the minimum re#uirement that the company should have! but those non-executive directors may not have great in:uence on the board! as there are only t$o person present in the meeting! the executive directors may still do thing on their o$n $ithout hearing non-executive directors' opinion. Thus! non-executive directors have little po$er to a8ect the board decision! and thus they cannot improve the company's corporate governance system.
;ue to the reasons mentioned about! in real case! it is not necessary true that the independent non-executive director must al$ays improve a company's corporate governance system. )t may be only a myth. 7hether the independent non-executive director can improve a company's corporate governance system depends on his independence! #ualities! integrity! experience and many other conditions.
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>iamh rennan 0==?( according to the research before $ould like attempts to &nd a relationship bet$een boards of director and &rm performance. cademic community is reluctant to conclude that there is no relationship bet$een &rm performance and boards of directors. @rior research attempts to relate &rm performance and corporate governance! $ith little convincing evidence found to date Larcker et al.! 0==6(! although more recent $ork considerably expands the
governance factor examined! it has only been able to &nd relationship $ith a minority of those factors ebchuk et al.! 0==6A ro$n and Baylor! 0==6(
