Influence of Corporate Governance on Corporate Failure

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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