Checks and Balances of Good Corporate Governance

This study presents an overview of various checks and balances that can strengthen the entire corporate governance system. It examines the reasons behind their failure and elucidates various ways in which corporate regulation deals with the issues by adoption of a wide range of mechanisms that can be illustrated as a specific scheme of checks and balances.

Running head: ACCOUNTING THEORY
Accounting Theory
University Name
Student Name
Authors’ Note

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Executive Summary
Good corporate governance has the need of wide range of checks and balances. the current
study at hand presents an overview of various checks and balances that can in turn strengthen
the entire corporate governance system. The primary purpose of the study is to deliver an
overview of diverse mechanisms for explicating various functions of checks and balances in
corporate governance and examining the reasons behind their failure.

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Table of Contents
Introduction and purpose............................................................................................................3
Dimensions of checks and balances...........................................................................................4
Conclusion................................................................................................................................10
References................................................................................................................................12

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Selected Research Article: The Checks and Balances of Good Corporate Governance penned
by John Lessing
Introduction and purpose
Good corporate governance has the need for wide a range of regulatory checks as well as
balances – or in other words mechanisms in order to be effectual. In case if a specific
mechanism does not work out, the entire system is said to fail just like a chain of operations
having a weak link. The current study at hand intends to deliver an overview regarding the
primary checks as well as balances that is necessary for a nation to have fitting corporate
governance (Tricker and Tricker 2015). In this connection it can also be noted that current
corporate collapse as well as failures have raised several questions.
It can be said that development of financial market can be said to be one of the most
significant determinants of growth of an economy. Nevertheless, financiers require
confidence and assurance in the market in order to carry out investments. The worldwide
financial crisis also shattered the confidence of the investors to a great extent. This has
reflected towards poor corporate governance of nations. The current study therefore intends
to examine the way corporate law can handle potential conflicts of diverse interests between
different stakeholders involved in business concerns (Dimopoulos and Wagner 2016). In
addition to this, the current study also has the purpose to evaluate the way corporate law can
promote effectual management of firms and at the same time instil confidence in particularly
the securities market. In this regard, the current study at hand has the intention/purpose to
elucidate illustratively various ways in which corporate regulation deals with the issues by
adoption of a wide range of mechanisms that again can be illustrated as a specific scheme of
checks and balances (Armstrong et al. 2015).

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Corporate governance can be considered to wide notions that explicate the way in which
business enterprises can be handled and at the same time controlled. The article titled “The
Checks and Balances of Good Corporate Governance penned by John Lessing hereby present
in the study various checks as well as balances that are necessary for institution as well as
maintenance of good corporate governance. In essence it can be hereby mentioned that
supporting principles of corporate governance can be considered to be
critical to the survival of business enterprises (Du Plessis et al. 2018). There
are past evidences that reflect the fact that boards of directors of
business entities that have necessarily failed to sustain a method of
checks and balances have endured damage to reputation and went
through considerable decrease in fortunes, resulting in losses to their
shareholders. Thus, it is important to understand various dimensions of
checks and balances that are imperative for maintenance of good
corporate governance.
Dimensions of checks and balances
Specific Duties of Company Directors
As per the given article at hand, the regulatory laws for good corporate governance impose
certain important duties as well as accountabilities on company directors. As mentioned in
the given article, these duties mainly take in fiduciary duties (that is to say, liability to act
fairly, truthfully and honestly). However, the issue lie in the enforcement of this regulation
especially where offenders control the firm (Breitbarth et al. 2015).
Mautner (2016) says that directors form an important part of the business concern and have
important roles to play in the process of framing important decisions. Essentially, the actions
of the directors can direct the success or else the failure of the corporation. Therefore, in this

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connection it can be said that there is need for thorough training of the directors for honest
practices are necessary for attainment of organizational objectives. Thus, proper corporate
governance can encourage both honest as well as transparent system of monitoring of all the
activities of the directors. Comer (2017) suggests that appropriate execution of directors’
duties require proper training as well as development of the directors of the firm. This in turn
can help them to perform well in the process of decision making.
Remedies of the shareholders
As indicated in the current article under deliberation, shareholder remedies can also provide
protection from different wrong doings of company directors otherwise managers. This study
therefore stresses on the need for enhancing activism of shareholders of business enterprises.
In case shareholders find out a way of shielding their own investments, then it rationally
follows that their level of confidence also enhances (Hamilton and Micklethwait 2016). Thus,
it can be hereby mentioned that remedies of the shareholders can help in good corporate
governance that in turn can help in protecting and enhancing different rights of financiers as
well as other participants of the market.
Disclosure Requirements
Another regulatory determinant that can help in developing good corporate governance
includes mandatory disclosures. As mentioned in the current article under study, mandatory
disclosures provides shareholders added level of confidence as they have the requisite
information and knowledge to undertake an investment decision (Levi-Faur 2017). In
addition to this, the yearly audits by various independent auditors along with other reporting
obligations might perhaps have a material impact on the prices of the shares of the company
too.

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Regulations of firm’s auditors
Auditors necessarily function as firm’s gatekeepers. In essence, they deliver independent
substantiation of financial position of the business enterprise. Nevertheless, current collapses
namely Enron have revealed that assessors do not always function with adequate level of
independence as the current article suggests there is also lack of professional accountability
(Zagorchev and Gao 2015). Thus, these failures lead to greater regulation of the assessors (for
instance, implementation of the system of compulsory rotation of assessors, limits on the
level of consultation and many others).
Appointment of independent directors’
Wanyama et al. (2017) suggest that independent directors are nowadays critical mechanism
for development of good corporate governance. In essence their primary role includes
independent monitoring of the entire management as well as to take care of the company’s
shareholders. In this connection it can be said that there are calls for true independence along
with provisions in diverse nations to exclude the ones who even accept indirect advantage
from the corporation over and above the fees of the directors. As highlighted in the article
under consideration, there is need for independence of chairman and that the specific roles as
well as responsibilities of the chairman of firms as well as chief executive officers need to be
separated. In addition to this, there is also requirement higher diversity on the composition of
the board of the business concerns (Bhasin 2015).

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Securities Regulations
As mentioned in the present article under consideration, securities regulations and directives
essentially facilitates agreements between different entrepreneurs, various shareholders as
well as shareholders along with financial intermediaries. In essence, directives help in
delivering a standard set of rights along with obligations. In this case, the advantage is to
lessen various transaction costs, however, they might perhaps also limit diverse legal terms or
else contracts. In essence, these regulations also crack down on insider trading (Chen et al.
2017). This means that the securities regulations are against use of specific information for
personal benefit particularly at the time when the information is not available to diverse
participants of the market. However, there are certain disadvantages of these regulations as
well.
Share Options
As rightly indicated by Wang (2016), share options necessarily provide the directors the
authority to purchase shares in the upcoming period at a fixed price. In essence, they can
inspire various directors to act and function in the interests of the shareholders by acting in a
way that ca enhance the value of the business concern and hence the shares. The article under
consideration also reflects that there are directors who manipulate the prices of share and
backdate the options. Criticisms are levelled against this wrong doing of the directors. Also,
the use of options are also criticised as they can direct the way towards cost cutting in the
short term period and in turn make the company less prepared for the upcoming period. This
kind of conduct might lead of violation of duties. However, banning the usage of options can
be regarded as an overreaction. Thus, according to Dabor et al. (2015), the preferred
approach would be to acquire options that are accounted and presented as costs in the
financial assertions of business concerns and are validated by the shareholders.

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Research Analysts at investment banks
Misleading advices by research analysts in the investment banks have misdirected investors
in the past. In essence, analysts at these banks have sometimes advised to purchase shares of
the companies that they knew beforehand were not performing well for earning high fees
from the same companies. Many of these banks have disbursed huge amount of compensation
for this unlawful act (Chang et al. 2015). Therefore, stricter review of the analysts in the
upcoming period is required for checking these unethical practices. Implementation of these
checks can help in enhancing the level of confidence of the shareholders.
Regulation of credit rating agencies
In past times it has been observed that credit rating agencies have engaged in various
unscrupulous acts in the recent financial crisis (Bhasin 2015). Therefore, there is need for
introduction of various different stringent regulations for the credit rating agencies for
maintenance of proper governance.
Obligations of lawyers
It can be widely observed that law practitioners assist in the process of concealment of truth
that in turn present misleading information to shareholders. Therefore, for the purpose of
maintenance of proper good corporate governance it is imperative on the part of the lawyers
to have certain obligations and commitment towards the shareholders of the corporations for
which they essentially work for (Levi-Faur 2017).
Roles of the regulators
As rightly put forward by Levi-Faur (2017), regulators do play a significant role in the
process of administration as well as enforcement of various corporation regulations.
Fundamentally, the regulators namely the Australian Securities and Investment Commission,

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Australian Prudential Regulatory Authority and Australian Stock Exchange among many
other are significant regulators that can implement check and balance and be liable for good
corporate governance. However, these authoritative bodies are heavily criticized for not being
dynamic enough during the worldwide financial crisis and collapses (Dimopoulos and
Wagner 2016). Analysis of the actions of the regulators reveals that there is need for higher
level of enforcement for detection of misconduct and maintenance of good corporate
governance.
Effectual insolvency processes
The scheme of monitoring can be considered to be an effective check and balance procedure.
As mentioned by Du Plessis et al. (2018), in case if the directives and regulations can help
the liquidators to carry out extensive analysis of the reasons behind the collapses of the firm,
the in that case, this process can help in unearthing various wrongdoing and the ensuing
liability.
Market for undertaking corporate control
As mentioned in the given article, it is imperative for the legal authorities to deliver a
specified procedure that can permit different takeovers and can also make sure that the
shareholders of the corporation in the target corporation are well shielded (Tricker and
Tricker 2015). Hostile takeover threats also act as a check and balance process and inspire
management of firms to act effectively and fairly.
Conclusion
The above mentioned study helps in gaining comprehensive understanding regarding
different checks as well as balances that in turn can facilitate the process of maintenance of
good corporate governance. This helps in gaining insight regarding the humongous amount of

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power that is necessarily concentrated in the hands of business concerns that in turn calls for
the needs of implementation of good corporate governance. It can be hereby mentioned that
implementation of the checks and balances can aid good corporate governance that in turn
can make certain careful management of a business entity. This is because there are various
important decisions that can prove to be beneficial for any actor namely shareholders,
community welfare and directors among many others. In the end it can be said that in order to
aver recurrence of any further failure in corporate governance it is important to implement
checks as well as balances of different dimensions as discussion above in the study.

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References
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governance, incentives, and tax avoidance. Journal of Accounting and Economics, 60(1),
pp.1-17.
Bhasin, M.L., 2015. Corporate Governance and Forensic Accountants' Role: Global
Regulatory Action Scenario.
Breitbarth, T., Walzel, S., Anagnostopoulos, C. and van Eekeren, F., 2015. Corporate social
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Chang, C.S., Yu, S.W. and Hung, C.H., 2015. Firm risk and performance: the role of
corporate governance. Review of Managerial Science, 9(1), pp.141-173.
Chen, R., El Ghoul, S., Guedhami, O. and Nash, R., 2017. State ownership and corporate
cash holdings.
Comer, M.J., 2017. Corporate fraud. Routledge.
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Dimopoulos, T. and Wagner, H.F., 2016. Corporate Governance and CEO Turnover
Decisions.
Du Plessis, J.J., Hargovan, A. and Harris, J., 2018. Principles of contemporary corporate
governance. Cambridge University Press.

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Hamilton, S. and Micklethwait, A., 2016. Greed and corporate failure: The lessons from
recent disasters. Springer.
Levi-Faur, D., 2017. Regulatory capitalism. Regulatory Theory, p.289.
Mautner, G., 2016. Checks and balances: How corpus linguistics can contribute to
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