Influence of Corporate Governance on Corporate Failure

This research examines the influence of corporate governance on corporate failure. The research evaluates whether there is an increase in the probability of corporate failure due to poor corporate governance policies within business entities. The research is highly important for accountants, business managers, regulators and the general public.

Contemporary Accounting Issue
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Introduction
The concept of corporate governance is becoming most important for the sustainable
growth for companies in present business environment. This is because the development of a
corporate governance framework within an organization ensures the presence of effective rules,
procedures and regulations for monitoring and controlling the overall business practices. It
involves balancing the interests of the stakeholders of a company that are shareholders,
management, customers, suppliers, government and the community. The business executives are
responsible for developing the framework of corporate governance to manage and control the
overall business activities. However, despite of the increase in the interest of the corporations in
corporate governance system in the recent years there have been rise in the case of corporate
failures such as Enron and Worldcom. The corporate failures have known to occur due to lack of
presence of an effective governing system to control the nature of business operations. These
corporate failures have lead to establishment of the fact that there exists a need for reforming the
corporate governance policies and corporate failures (Rajagopalan and Zhang, 2009). In this
context, the present research is undertaken to examine the influence of corporate governance on
corporate failure. The research is highly important as it evaluate whether there is an increase in
the probability of corporate failure due to poor corporate governance policies within business
entities. This has been carried out by the use of relevant theoretical basis that examines the
relation between the two concepts with the implementation of appropriate governance theories.
Practical Motivation
The contemporary accounting issue selected for conducting the present research is highly
important for accountants as they have an important role in providing valuable information about
the performance of a company to its stakeholders. As such, it is essential that accountants abide
by the policies of corporate governance to depict true and fair view of the corporation to its
stakeholders by the use of adequate accounting standards and policies. Also, the business
managers need to be aware of the impact of corporate governance on corporate failure as they
hold the important role of strategic decision-making. Thus, it is necessary that they carry out
their responsibilities in an honest manner that intends to maximize the value created for
stakeholders. In addition to this, the research is also highly important for the regulators and
general public. The regulators can gain an insight about the importance of developing the
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relevant corporate governance rules for promoting transparency in business operations. Also, the
general public can gain an understanding that presence of a corporate governance framework
within a business corporation ensures that there is accountability within the business practices.
Theoretical Motivation
The research is also highly important as it will help in developing an insight into the
importance of different accounting theory concepts and their implications on the issue of
corporate governance. The accounting theories concepts will be used for depicting the relation
between the concepts of corporate governance and corporate failure. The occurrence of the
corporate failure of large corporations such as Enron has highlighted the issues related to the
impact of weak corporate governance policies on their failures. As such, there have been various
researches undertaken by the researchers in the context of examining the cause of the failure of
such big corporations for identifying the reasons for the occurrence of such scandals. In this
context, the present research will prove to be highly useful for developing an insight into the
relation between the corporate governance and corporate failures that have been explained by the
previous researches also. It will provide an additional investigation into the issue of corporate
governance and the findings can be utilized by the researches in the future context for
demonstrating a relation between the corporate failure and the governance.
Literature Review
The present research will be useful for depicting a relation between the corporate
governance and the corporate failures that are the two research variables. The relation between
the two research variables can be predicted by the use of corporate governance theories.
According to Valentine and Abdullah (2009) there are multiple corporate theories that discuss
the importance of corporate governance mainly the factors that influence the interests of the
stakeholders. Some of important corporate governance theories are agency theory, stewardship
theory and stakeholder theory. Agency theory provides that managers of organization and
shareholders are two distinct persons where managers act like an agent for the shareholder.
Managers are likely to work for the shareholders in order to fulfill their requirements following
the ethics and corporate governance. The boards of directors are meant to exercise control as per
theory as they put strict control, supervision and monitoring on the performance of agent so to
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protect the interests of principal. Thus, corporate governance provides a set of ethical and moral
guidelines to agent for achieving the requirement of principal in successful manner (Valentine
and Abdullah, 2009).
Fung (2014) in this relation has also explained the importance of corporate governance
theories. Stewardship theory has also stated that the business managers or executives of a
company act as stewards of the owners and them both share common goals. The theory has
suggested that the role of board of a company is to empower the executives for delivering higher
performance. Thus, it is responsibility of the Board for monitoring and controlling the overall
functioning of the business executives so that they act in the direction of maximizing the interest
of the owners. Therefore, as per the theory the Board should develop corporate governance
policies to monitor the functions of the executives and the business managers so that they remain
accountable in carrying out their roles and responsibilities. In addition to this, the theory of
stakeholder has also emphasized that all the stakeholders such as customers, suppliers and
communities other than shareholders have a stake in a company. Therefore, the Board has the
responsibility of protecting the interests of all these stakeholders by ensuring that corporate
practices should be accountable and fair (Fung, 2014).
In this context, Lutui and Ahokovi (2017) have also stated that these accounting theories
have emphasized the relation between the presences of effective corporate governance policies to
the successful growth of an organization. This is because corporate governance can be defined as
the organization system which contains rules, guidelines, processes and various practices through
entity can be directed and controlled. These rules and practices are established by the Board of a
company for ensuring that the business executives carry out their responsibilities in manner so as
to maximize the interests of stakeholders. The purpose of corporate governance is to effective
balance the interests of stakeholders and to provide guidelines to the managers following them
they can take company to the path of success. It has seen in many cases that failure to achieve the
corporate governance within the organization can lead to substantial damage on the part of
organization and even complete failure of the organization (Lutui and Ahokovi, 2017).
This can be illustrated by the examples of the corporate scandals of Enron and
Worldcom. Lakshan and Wijekoon (2012) have stated that the main reason for the corporate
failures of these organizations can be cited to be absence of effective governance policies within
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their workplace. Corporate failure can be defined as inability of a company to generate profit for
meeting up its expenses due to occurrence of inadequate management skills or inability to
compete. The corporate failure of Enron has illustrated the role of board of directors of a
company to oversee the corporate management by establishing proper governance rules for
protecting the interest of shareholders. However, the Enron Board has allowed the CFO to carry
out business by establishing private partnerships. These partnerships have a major impact on the
reported profits of the company by concealing the debts and liabilities Lakshan and Wijekoon,
2012).
Similarly, as per the views of Noor (2012) the corporate scandal of WorldCom has
highlighted the corporate governance problems that can results in the downfall of business
corporations. The scandal has occurred due to improperly recording of capital investments in its
financial statements and as such involves manipulating the financial results for reporting higher
profits. The scandal has highlighted the issues of corporate governance that have occurred due to
lack of adequate rules and policies for controlling the executive functions (Noor, 2012)
As analyzed from the previous researches held in this context, their major strength is that
they have linked the corporate failures to the presence of problems of corporate governance. The
reasons for the occurrence of these scandals have been explained adequately in the past
researches. However, the limitation of the past researches is that they have not placed emphasis
on implementing changes in the corporate governance regulations for preventing the issue of
occurrence of corporate scandals. Thus, the present research will also place emphasis on the
necessity of implementing reforms in the corporate governance policies for protecting the
stakeholder’s interests. Thus, the research will help in providing an insight into the relation
between the corporate failures and the need for implementing reforms in the corporate
governance policies.
Hypothesis
On the basis of overall discussion held in the research report, the following hypothesis
has been developed to be tested that are stated as follows:
Hypothesis 1: There exist a direct relation between the corporate failures and the need for
reforming the corporate governance policies
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Hypothesis 2: There does not exist a direct relation between the corporate failures and the need
for reforming the corporate governance policies
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References
Cuong, N. 2011. Factors causing enron’s collapse: an investigation into corporate governance
and company culture. Corporate Ownership & Control 8(3), pp. 585-593.
Fung, B. 2014. The Demand and Need for Transparency and Disclosure in Corporate
Governance. Universal Journal of Management 2(2), pp. 72-80.
Lakshan, A.M. I. and Wijekoon, W.N. 2012. Corporate governance and corporate failure.
Procedia Economics and Finance 2, pp. 191-198.
Lutui, R. and Ahokovi, T. 2017. Financial fraud risk management and corporate governance.
Australian Information Security Management Conference.
Noor, Z. 2012. Corporate Governance and Corporate Failure: A Survival Analysis. Prosiding
Perkem VII (1), pp. 684 – 695.
Rajagopalan, N. and Zhang, Y. 2009. Recurring failures in corporate governance: A global
disease? Business Horizons 52, pp. 545-552.
Valentine, B. and Abdullah, H. 2009. Fundamental and Ethics Theories of Corporate
Governance. Middle Eastern Finance and Economics 4, pp. 89-96.
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Appendix 1
Author/s Date Title Journal
Type of
Paper
(Theoretica
l or
Empirical)
If empirical,
dependent
&independe
nt variables
Summary of
contribution to
the research
question
Haslinda
Abdullah
and
Benedict
Valentine
2009 Fundamenta
l and Ethics
Theories of
Corporate
Governance
Middle
Eastern
Finance and
Economics
Theoretical NA This journal
article has
provided
various
corporate
governance
theories. Some
of theories that
explained in this
article are
agency theory,
stewardship
theory, resource
based theory,
and
stakeholder’s
theory. The
main purpose of
application of
these theories is
to address the
cause and effect
8

of various like
remuneration of
board members,
audit
committee,
independency of
directors, role
and function of
top management
and lastly
discussion on
regulatory
framework. So
this theory
clearly guides
that corporate
governance is
group of various
accounting
theories that
need to be
followed for
achieving good
corporate
governance.
Raymond
Lutui and
Tauaho
Ahokovi
2017 Financial
fraud risk
management
and
corporate
Australian
Information
Security
Managemen
t
Theoretical NA This journal
article explains
that if company
does not have
good
9

governance understanding
of risk i.e.
management of
conformance
and
performance,
than there is
high risk of
corporate
failure. So it can
be said that risk
management is
very important
to assess the
risk in order to
assess,
understood and
manage
corporate
governance
practices. As
per research
conducted in
this research
article it can be
said that
strategic
planning and
management
decisions are
critically
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important for
successful
management
risk appetite of
the company
and its
stakeholders.
This journal
article help
researcher in
many context
such as
explanation of
poor corporate
governance on
the profit of
company. It has
been provided
that poor
governance
impacts the
customers and
investors which
make the
corporation
uncompetitive
and it is the
reason for
failure of
corporation.
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Zulridah
Mohd
Noor and
Takiah
Mohd
Iskandar
2012
Corporate
Governance
and
Corporate
Failure: A
Survival
Analysis
Prosiding
Persidangan
Kebangsaan
Ekonomi
Malaysia
Theoretical NA
This research
journal article
provides the
weak or
improper
corporate
governance is
the substantial
causes for the
failure of
corporate
organization as
it tend to reduce
the corporate
values. There
was analysis
done many
corporations
that leads to
corporate failure
due to lack of
good corporate
governance.
A.M.I.La
kshan
and
W.M.H.
N.Wijek
oon
2012 Corporate
governance
and
corporate
failure
Procedia
Economics
and Finance
2
Empirical Some of
major
variable are
Outside
director
ratio, CEO
duality,
This research
article critically
examines the
impact of
various
characteristics
of the corporate
12

Board size,
Outside
ownership,
Audit
opinion,
Company
audit
committee,
and
Remuneratio
n of board
members to
profit and
loss
governance
practices on the
failure of
various
corporation
listed on
Srilankan Stock
Exchange. The
reason that
signifies failure
of corporate
entities is lack
of proper
corporate
governance.
Nguyen
Huu
Cuong*
2011 Factors
causing
enron’s
collapse: an
Investigatio
n into
corporate
governance
and
Company
culture
Corporate
Ownership
& Control
Theoretical NA The present
research has
provided an
investigation
into the
weakness of the
structures in the
corporate
governance that
have resulted in
causing the
corporate
scandal of
Enron. The
unethical
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behavior of the
company
executives is
mainly
responsible or
the occurrence
of such a
scandal. The
major reason as
highlighted by
the article for
the scandal is
failure of board
of directors to
meet their
fiduciary duties
towards their
shareholders.
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