Corporate Governance and Bankruptcy Risk

The study sheds light on the impact of the corporate governance on the risk of bankruptcy. For the purpose the study include discussion on the corporate governance and the possibility of bankruptcy due to following wring corporate governance.

Running head: CORPORATE GOVERNANCE AND BANKRUPTCY RISK
Corporate governance and bankruptcy risk
Name of the student
Name of the University
Author’s Note:

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CORPORATE GOVERNANCE AND BANKRUPTCY RISK
Executive summary
The study sheds light on the impact of the corporate governance on the risk of
bankruptcy. For the purpose the study include discussion on the corporate governance and the
possibility of bankruptcy due to following wring corporate governance. The study includes
discussion on the importance of the effective corporate governance in enhancing company’
performance. The report discusses on the reason of the bankruptcy in relation to the corporate
governance along with that the study has also explained the corporate governance related to
the company’s board of director. Finally, the study discusses on the good and bad corporate
governance and identified the influence of corporate governance policies on the company’s
performance.

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CORPORATE GOVERNANCE AND BANKRUPTCY RISK
Table of Contents
Introduction................................................................................................................................3
Corporate Governance and Bankruptcy.................................................................................3
Corporate Governance and Management of Company..........................................................4
Good and Bad corporate governance.....................................................................................6
Conclusion..................................................................................................................................8
Reference....................................................................................................................................8

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Introduction
The corporate governance refers to a set of rule through which a company or the
corporate is controlled and directed. Depending on the corporate governance the corporate
process has been formulated. The corporate governance maintains the interest through
balancing the interest of thee stakeholders of the company. Bankruptcy occurs when a
company faces challenge towards fulfilling their obligation and applies for a relief to the
federal court to recognize its debt or to liquidity its assets. Bankruptcy results in insolvency
or the collapse of the company. Therefore, corporate governance and policies followed by the
company has a direct relation with the risk of bankruptcy. Hence, a company has a
responsibility of identifying and implement a proper corporate governance into their
management. Hence for a deeper view the report focuses on the relation among the corporate
governance and bankruptcy. Further, the impact of corporate governance on the bankruptcy
risk has been identified into the report. In the context of the same it could be reviewed that
alone financial statements are not a useful source of predicting bankruptcy there are other
various non-conventional sources and critical review in the context of operations of the
company that should be undertaken.
Corporate Governance and Bankruptcy
The corporate governance mechanisms are the potential element of bankruptcy risk.
The corporate governance mechanisms are institutional ownership, managerial ownership,
commissioners’ independence, commissioner’s size, audit committee, nomination and
remuneration committee (Gnan, Montemerlo and Huse 2015). The miss management into any
of the mechanism results in bankruptcy risk.
This has been identified that different companies have a different set of corporate
principles where the good and bad governance have been identified. The corporate
governance includes the regulations for the company management, company work flow,

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directors and company commissioners. Hence, the misconduct into management of the
company entities raises chance for realizing bankruptcy in a company. This has been
identified that single owner firms are usually having more risk for having bankruptcy as the
companies run into the interest of a single individual’s interest. Hence, the possibility of not
following proper corporate governance enhances the risk of losing the market place.
This increases the possibility of realising the bankruptcy while on the other side the
complex firm with the broader number of board of directors have a reduced possibility of
realising bankruptcy (Filatotchev, Jackson, and Nakajima 2013). The corporate governance
includes the regulation of representing financial information into financial report. Hence with
the wrong interpretation of the governance characteristics by management results in possible
risk of bankruptcy for the company. Efficient Corporate governance provides operational and
financial sustainability in a company. Hence, achieving a lower sustainability report at the
end of a year creates a possibility of future bankruptcy (Formentini and Taticchi 2016).
Formulating an effective sustainability plan is required for attaining corporate sustainability.
As per the views of Claessens and Yurtoglu (2013), bankruptcy can be a result of ignorance
of the board agenda or the ignorance of the principles of the regulatory body. There the
company’s principles depend on two factors. These are whether the company’s governance
structure contributes towards company’s profitability of financial distress and other one is
whether the firm’s corporate structure allows for achieving efficient resolution of the
financial distress.
Corporate Governance and Management of Company
The board of directors are the primary source of generating influence into formulating
corporate governance as the board of directors are the direct stakeholders of the company.
The board of directors are responsible for taking crucial and important decision of the
company. The management of the company formulates plan for generating sustainability of

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the organization into the market. The probability of the bankruptcy depends on the size of the
board. This refers to the number of board of directors present into the company. This has
been identified that companies with the larger number of board of directors reduces the
possibility of making material misstatement or any other misconduct into the company. This
reduces the possibility of breaking the corporate rules. The larger number of board of
directors also provides a facility to form a suitable corporate regulation through analysing
many way and forming board meetings. According to Ciampi (2015), on the other hand a
single owner organization does not follow exact principle into their company work process as
they work for their own interest. This increase the possibility of mismanagement and
misconduct of corporate principles. This results in enhanced debt for the company as the
single director maximises their own interest instead of corporate interest. Directors have a
responsibility of formulating business plan. This reflects through the corporate business
structure of the company. On the other hand the directors are the responsible for generating
credit into the company (Wheelen et al., 2017). Directors are responsible for maintain ethics
into the company work. Therefore, maintain a good faith into management reduces the
possibility of bankruptcy into the company. Furthermore the conflict among the director’s
interest enhances the risk of corporate bankruptcy (De Maere, Jorissen and Uhlaner 2014).
The director’s independency has been a reason of director’s effectiveness. This has
been recognized that the independent directors are identified as the decision maker of the
company and the monitor of the business. This may generate an adverse effect on the board
cohesiveness, as the effective director acts as single decision maker and it creates conflict of
interest among the directors (Brochet and Srinivasan 2014). With the majority of independent
director into the company enhances the possibility of focusing on own interest rather than
focusing on company’s interest. This may result in bankruptcy of the company. Influenced
from the views of Tao and Hutchinson (2013), this has been identified that the proportion of

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inside directors on the board is inversely associated with the risk of bankruptcy in firms that
require more specialist knowledge and that the reverse is true in technically unsophisticated
firms.
Good and Bad corporate governance
The concept of good and bad corporate governance refers to the effectiveness of the
governance that are formed with in the company (Bobby Banerjee 2014). Good corporate
governance can be identified while the principles are working in favour of company through
effective implementation and resulting in positive growth. While on the other hand, the bad
corporate governance refers to the negative impact on implementation. Bad corporate
governance can create doubt on company’s sustainability, reliability and integrity to the
shareholder. This puts a negative impact on the company’s financial health. Illegal activities
can create scandal into the company which reduces the effectiveness of the corporate
principles into the company. However, instead of having effective corporate governance the
misconduct in the company’s audit process makes the corporate governance ineffective and
brings a likelihood of emergence from bankruptcy. The less entranced management is
directly related to the higher likelihood of emergence from bankruptcy. The integration of the
investors’ policies and the company’s policy that are favourable for maintaining ethics into
the company reduces the risk of losing market position. The corporate governance can
generate a negative implication if the principles of the company are rigged. As a result of
which the company management realises confusion among the management process or the
mismanagement into the company’s work flow gets recognized. This reduces the profit
earning and results in the down turn into the company’s performance. A long term
mismanagement or the doubt into the company’s actual policy generates a risk of bankruptcy
as the company would slowly lose the market (Aier, Chen and Pevzner 2014). The difference
between positive and negative corporate governance has been identified through identifying

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the outcome of the activity. This has been understood that the ineffective corporate
governance can have a strong impact on the company’s management as the management
process has been formulated focusing on maximising the director’s interest only (Castañer
and Kavadis 2013).
Influenced from the views of Gupta, Krishnamurti and Tourani-Rad (2013), the
corporate governance has a direct relation with the financial crisis as the company’s policies
during the financial crisis have been evaluated. As this has been identified that the corporate
governance is a value driver of the company’s performance therefore, a poor corporate
governance results in company’s earning quality (Choi, Lee and Park 2013).
Identifying the bad corporate governance, companies that do not cooperate with the
auditor through maintain the appropriate scale that results in publishing the spurious and no
complete financial result (Abernathy et al., 2014). The corporate governance also reveals the
factor of the company board structure as the poorly formulated board structure raises the risk
of losing shareholders’ position into the company which results in over dependency on the
debt capital. The structure also defines the company capital structure where the company
sustainability has been judged (Chemmanur and Fulghieri 2013). For the distressed firms
there is a more possibility of removing CEOs when the possibility of debt restructure has
been noticed. This increases the proportion of outside directors and increases the possibility
of presence of outside block holders into the board of management.
The bad corporate governance has been generated through the management
deliverability. Hence the application of the management policies are also required while
identifying the company sustainability into the market. On the other hand the good corporate
governance reduces the risk of bankruptcy as efficient corporate governance policies provides
transparency into the rules and the management. This integrates the management and the

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company’s policies through identifying the stakeholder’s interest. The bankruptcy risk can
be reduced through implementing effective rules and controls, in which shareholders
directors and officers have aligned incentives (Verriest, Gaeremynck and Thornton 2013).
However, most of the companies are unable to achieve the high level of corporate
governance into the company’s work process. Result of which shareholders merely focuses
on earning profit at any cost. Hence, this reduces the effectiveness of the corporate
governance through not following the corporate citizenship, CSR and ethical behaviour.
Conclusion
Impact of corporate governance practices and policies do have a high impact on the
company’s performance. Hence company’s principles should be formulated based on
understanding the good and bad effect of the principles over the company stakeholders.
Hence, the project has analysed over the corporate governance and their impact on the
company’s performance. For the better understanding the report has explained the possible
bankruptcy risks associated with the company’s policy. The study has identified the
importance of implementing proper corporate governance at the time of downturn. Lastly, the
study has evaluated the good and bad corporate governance where the impact of effective
corporate governance has been identified. Therefore from understanding the fact of corporate
governance this can be concluded that, as the corporate governance has been the principle of
company’s running policy hence the effectiveness can only be evaluated through
understanding the outcome of the company’s performance.

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