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Corporate Governance(2)

Corporate Governance(2)

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Published by AishD

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Published by: AishD on Apr 17, 2009
Copyright:Attribution Non-commercial


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Recently the terms "governance" and "good governance" are beingincreasingly used in development literature. Bad governance is being increasinglyregarded as one of the root causes of all evil within our societies. Major donors andinternational financial institutions are increasingly basing their aid and loans on thecondition that reforms that ensure "good governance" are undertaken.
Definition of corporate governance
:"Corporate Governance is concerned with holding the balance betweeneconomic and social goals and between individual and communal goals. The corporategovernance framework is there to encourage the efficient use of resources and equally torequire accountability for the stewardship of those resources. The aim is to align as nearlyas possible the interests of individuals, corporations and society.""Corporate governance is about promoting corporate fairness, transparency andaccountability" J. Wolfensohn, president of the
Word bank 
, as quoted by an article in
 Financial Times
, June 21, 1999.Corporate governance comprises the systems and processes which ensure theefficient functioning of the firm in a transparent manner for the benefit of all thestakeholders and accountable to them. The focus is on relationship between owners and board in directing and controlling companies as legal entities in perpetuity. A company’sability to create wealth for its owners however, depends on the role and freedom given toit by society.Sir Adrian Cadbury in his preface to the World Bank publication, CorporateGovernance: A Framework for Implementation; states that, “Corporate Governance is…holding the balance between economic and social goals and between individual andcommunity goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of these resources.The aim is to align as nearly as possible the interest of individuals, corporations andsociety. The incentive to corporations is to achieve their corporate aims and to attractinvestment. The incentive for state is to strengthen their economies and discourage fraudand mismanagement.1
The focus on corporate governance arises out of the large dependencies of companies on financial markets as the preeminent source of capital. The quality of corporate governance shapes the future and the growth of the capital market. Strongcorporate governance is indispensable to resilient and vibrant capital market. In thecontext of globalization, capital is likely to flow to markets which are well regulated and practice high standards of transparency, efficiency and integrity.
Good governance leads to congruence of interests of boards, managementincluding owner managers and shareholders.
Good governance provides stability and growth to the company.
Good governance system builds confidence among investors.
Good governance reduces perceived risks, consequently reducing cost of capital.
Well governed companies enthuse employees to acquire and develop companyspecific skills.
Adoption of good corporate governance practices promotes stability and longterm sustenance of stakeholders relationship.
Potential stakeholders aspire to enter into relationships with enterprises whosegovernance credentials are exemplary.
Normative Theory of Corporate Governance:
In the context of globalization of operations of corporations and integration of financial markets, the question whether any universal normative principles can be laiddown has assumed significance since corporate governance provisions and practicesdiffer from country to country. The basis for universal normative standards on corporategovernance is to be found in the German critical theory which elaborated a welldeveloped normative ethical theory.2
Normative CriteriaMorality
 Normative analysis of corporate capitalism uses morality as a tool for establishingminimum standards which would be necessary for corporate capitalism to representcommon good. Morality deals with standards that an individual or group has about whatis right and wrong or good and evil.Morality addresses questions whether corporate practices promote common good.Corporate capitalism represents a common good because competitive capitalist marketsare efficient and work on the basis of shareholder democracy.CompetitionMarket competition has three basic effects that support the view that competitivecapitalism represents common good. These are:
Static efficiency of markets which guarantees Pareto optimality, an equilibriumcondition in which no one can any longer be made better off through an exchangewithout some one else being made worse off.
Dynamic efficiency of the market which establishes consumer sovereignty inwhich consumers determine through their consumption choice what products areto be produced.
Dynamic efficiency also ensures full employment since competition clears allmarkets including labor.However fine tuning of free markets requires oversight. It has to be ensured thatregulations are in place to avoid the production of negative externalities and the role of labor is recognized to protect it from unemployment, hazardous working conditions and below subsistence wages. State intervention is necessary to secure these conditions.
Shareholder Democracy
Private ownership of means of production is a key complement to free markets for the justification of capitalism on efficiency grounds. Private ownership providesmotivation for investment and innovation to actors operating in market economies.Further corporate form of ownership allows pooling of resources. In modern times sinceownership and management are separate, their interests may diverge. The theory of shareholders democracy requires that for corporations to be run efficiently in their interests shareholders should exert influence over management.3

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