What Enron did for the world, Satyam did for India. And what was that? Bring corporate governance to the forefront of business operations. The importance of governance has gained prime importance in the strategic management of firms. Now, companies emphasize on honesty, accountability and transparency in their operations. Stakeholders, investors and people in general demand a clean record of companies. They want the companies to abide by the laws and rules and adhere to the norms laid out for business.
Corporate governance is a relationship between the stakeholders that gives a sense of purpose and direction to the firm. It controls the strategic direction and performance of the firm and allows for effective implementation of the strategy in the firm. In simple terms, corporate governance establishes an order between the top management of the firm and its stake and shareholders. However, scams and treasury are rampant in any firm as the interests of the top management may come into conflict with the values of the organization. The principal-agent conflict captures the essence of the companies that flout the norms of the corporate governance.
Most big corporations have a clear demarcation between ownership and management control. Company ownership is divided between among its many shareholders while the operations of the firm are carried out by a different set of people who comprise the top management. The shareholders, who hold the stock of the company become residual claimants and reduce their risks with diversified portfolios. The professional management carries out the decision making roles in the organization. Although, this division leads to an efficient specialization of tasks, it leaves the risk of entrepreneurship to the owner for profits, while the strategic development and decision making choice is with managers for a salary sans the risk. This segmentation of tasks and benefits leads to conflict of interest between the two.
The OECD defines corporate governance as "involving a set of relationships between a company's management, its board, its shareholders and stakeholders". Corporate governance also provides the structure through which the companies are set, the means for gaining these objectives and monitoring performance. Good corporate governance should provide proper incentives for the board and the management to pursue objectives that are in the interest of the company and its shareholders and should facilitate effective monitoring.
Below is what is stated in OECD's Principle of Corporate Governance. Corporate governance is only a part of the larger economic context in which firms operate, that includes, for eg. the macroeconomic policies and the degree of competition in product and factor markets. The corporate governance framework also depends on the legal, regulatory and institutional environment. In addition, factors such as business ethics and corporate social interests of the communities in which a company operates, can also have a long term impact on the reputation and success of an organization.
What are the mechanisms for corporate governance? Lets take a look.
--- Ownership Concentration: Large stockholders take interest in the operations of the firm and hence, closely supervise the working of the management.
--- Board of Directors: The board of directors includes the insiders (CEO and other top level managers), related outsiders (individuals not involved in the daily running of the business but related to the firm) and outsiders (individuals related to the firm but not involved in its daily operations). The diversified backgrounds, interests and involvement in the company allow for better supervision of the company.
--- Executive Compensation: The focus is to make an incentive scheme that would eliminate conflict of interest between the owner and the managers giving them a reward scheme proportionate to their effort to maximize returns from the firm.
--- Multi-divisional organizational structure: The hierarchical structure controls managerial opportunism by creating a board and a corporate office to monitor strategic decisions and create a vested interest in wealth maximization for the managers. However, a diversified company with wider levels of management with various laterally spread managerial controls would lead to problems in supervision.
--- Market for corporate control: An incompetent firm, due to ineffieient managers. creates chances of a takeover, acting as a cure for managerial incompetence.
Ultimately, better governed organizations lead to better products and services for the public.
Cheers!!!
Signing Off
Shauvik.
Corporate governance is a relationship between the stakeholders that gives a sense of purpose and direction to the firm. It controls the strategic direction and performance of the firm and allows for effective implementation of the strategy in the firm. In simple terms, corporate governance establishes an order between the top management of the firm and its stake and shareholders. However, scams and treasury are rampant in any firm as the interests of the top management may come into conflict with the values of the organization. The principal-agent conflict captures the essence of the companies that flout the norms of the corporate governance.
Most big corporations have a clear demarcation between ownership and management control. Company ownership is divided between among its many shareholders while the operations of the firm are carried out by a different set of people who comprise the top management. The shareholders, who hold the stock of the company become residual claimants and reduce their risks with diversified portfolios. The professional management carries out the decision making roles in the organization. Although, this division leads to an efficient specialization of tasks, it leaves the risk of entrepreneurship to the owner for profits, while the strategic development and decision making choice is with managers for a salary sans the risk. This segmentation of tasks and benefits leads to conflict of interest between the two.
The OECD defines corporate governance as "involving a set of relationships between a company's management, its board, its shareholders and stakeholders". Corporate governance also provides the structure through which the companies are set, the means for gaining these objectives and monitoring performance. Good corporate governance should provide proper incentives for the board and the management to pursue objectives that are in the interest of the company and its shareholders and should facilitate effective monitoring.
Below is what is stated in OECD's Principle of Corporate Governance. Corporate governance is only a part of the larger economic context in which firms operate, that includes, for eg. the macroeconomic policies and the degree of competition in product and factor markets. The corporate governance framework also depends on the legal, regulatory and institutional environment. In addition, factors such as business ethics and corporate social interests of the communities in which a company operates, can also have a long term impact on the reputation and success of an organization.
What are the mechanisms for corporate governance? Lets take a look.
--- Ownership Concentration: Large stockholders take interest in the operations of the firm and hence, closely supervise the working of the management.
--- Board of Directors: The board of directors includes the insiders (CEO and other top level managers), related outsiders (individuals not involved in the daily running of the business but related to the firm) and outsiders (individuals related to the firm but not involved in its daily operations). The diversified backgrounds, interests and involvement in the company allow for better supervision of the company.
--- Executive Compensation: The focus is to make an incentive scheme that would eliminate conflict of interest between the owner and the managers giving them a reward scheme proportionate to their effort to maximize returns from the firm.
--- Multi-divisional organizational structure: The hierarchical structure controls managerial opportunism by creating a board and a corporate office to monitor strategic decisions and create a vested interest in wealth maximization for the managers. However, a diversified company with wider levels of management with various laterally spread managerial controls would lead to problems in supervision.
--- Market for corporate control: An incompetent firm, due to ineffieient managers. creates chances of a takeover, acting as a cure for managerial incompetence.
Ultimately, better governed organizations lead to better products and services for the public.
Cheers!!!
Signing Off
Shauvik.
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