· In General, corporate governance is associated with the existence of agency problem that is due to the separation of ownership and control in the corporation.
· Agency problems arise as a result of the conflict of interest between shareholders and managers.
· Also the conflict of interests between controlling shareholders and minority shareholders is also one of the focuses on corporate governance.
The Definitions of Corporate Governance
· Corporate governance received more attention in recent years in response to the financial reporting scandals such as Enron, WorldCom, and Adelphia, which decrease the trust of the auditing firms involved, and the accounting profession and financial markets. Furthermore the current economic turmoil faced by various countries, including Asia, Russia, some East European countries and some Latin American countries, to a certain extent, was ascribed to the lack of proper corporate governance in the corporate sector.
· Corporate governance regulates the contractual relations between stakeholder groups, in particular, the principal-agent relationship between shareholders and management. Ideally the separation of ownership and control allows shareholders and managers to focus on their respective competitive advantage: the provision of risk capital on the one hand and the management of real investment portfolios on the other hand.
· In reality, the contractual governance of management behavior is necessarily incomplete and direct monitoring will be under provided. Hence, management is in the position to seize residual control rights and may appropriate the shareholders’ investment return. If left unregulated, shareholders will under provide finance and companies will not be able to take advantage of all value enhancing investment opportunities. Thus the codification of corporate governance into national law or codes of best practice becomes a necessary and effective means of alleviating the under investment and limiting the implied agency costs.
· A lot of reforms have been conducted by regulators in many countries to strengthen the corporate governance practices and bring back public confidence.
There are various definitions of corporate governance.
· The most used one is of the Organization for Economic Co-operation and Development (OECD), which issued on May 1999 and revised on 2004 states that “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined” (OECD, 2004 p. 11).
· Corporate governance may define as “A set of systems, processes and principals which ensure that a company is governed in the best interest of all stakeholders”.
· It is the system by which companies are directed and controlled. It is about promoting corporate fairness, transparency and accountability.
The Major Players Affected by Corporate Governance
There are four main players can affected by corporate governance.
· Shareholders: as they are the providers of capital in exchange for the rights to profits and maximize the corporate value.
· The board of directors: as presenter of the interests of shareholders and other interested parties. They select management, set up general direction and monitor management performance.
· Management: is responsible for the daily operations of the company and reported to the board. Management is also responsible for maximizing the company value and accordingly shareholder wealth.
· Stakeholders: basically company creditors who mainly focus on ensuring debt repayment. However the stakeholders include many other parties such as employees, customers, suppliers and other public parties.
There are interrelated factors contributing to the proper functioning of the corporate governance system:
· Internal factors: board of directors, providers of capital, management and stakeholders.
· External factors: the environment that ensures effective governance, including law, regulation, competitive markets, the media, transparency and high standards of reporting.