Corporate Governance: Principles, Theories and Importance

Running Head: CORPORATE GOVERNANCE
0
Corporate
Governance
Business Strategy and Change
Student Name:
Student University:

CORPORATE GOVERNANCE 1
Corporate Governance
Corporate governance has a wide scope including institutional and social aspects. It is
the system helps companies in managing and directing. It impacts objectives set and achieved
for the company and the monitoring and assessment of risk, and performance optimization.
Corporate Governance is the system of principles, procedures, policies and appropriately
defined responsibilities and accountabilities used by stakeholders to overcome the conflicts of
interest essential in the corporate form (Tricker & Tricker, 2015). It shows the interaction
between various members consists of shareholder, company management and Board of
Director in shaping company’s performance and the way it is proceeding towards. It deals
with determining ways to take effective strategic decisions and developed added value to the
stakeholder. Corporate Governance ensures transparency to make sure strong and balance
economic development (Rodriguez-Fernandez, 2016). It also makes sure that the interests of
all shareholders are secured. Corporate Governance affects the operational risk and, hence,
sustainability of a company.
The quality of a company’s corporate governance affects the risks and value of the
company and effective, strong corporate governance is essential for the efficient functioning
of markets. It intended to increase the accountability of the company and avoid substantial
disasters before they occur. Well-executed Corporate Governance should be similar to a
police department’s internal affairs unit, weeding out and eliminating problems with extreme
prejudice (Price, 2017). The importance of Corporate Governance for business organization
is:
 Changing Ownership Structure: In today’s time, the ownership structure of
companies has changed a lot. Public financial institutions, mutual funds, etc. are the
single largest shareholder in most of the large companies. They force the
management to use corporate governance. That is, they put pressure on the
management to become more efficient, transparent, accountable, etc. They also ask
the management to make consumer-friendly policies, to protect all social groups and
to protect the environment (Lozano, Martínez, & Pindado, 2016). So, the changing
ownership structure has resulted in corporate governance.
 Importance of Social Responsibility: Currently, social responsibility is given a lot
of importance. The Board of Directors has to protect the rights of the customers,

CORPORATE GOVERNANCE 2
employees, shareholders, suppliers, local communities, etc. This is possible only if
they use corporate governance.
 Growing number of scams: In today’s time, many scams, frauds and corrupt
practices have taken place. Misuse and misappropriation of public money are
happening everyday globally. It is happening in the stock market, banks, financial
institutions, companies and government offices. In order to avoid these scams and
financial irregularities, many companies have started corporate governance.
 Indifference on the part of Shareholders: In general, shareholders are inactive in
the management of their companies. They only attend the Annual general meeting.
Postal ballot is still absent in India (Sarbah & Xiao, 2015). Proxies are not allowed to
speak in the meetings. Shareholders associations are not strong. Therefore, directors
misuse their power for their own benefits. So, there is a need for corporate
governance to protect all the stakeholders of the company.
 Globalization: Today most big companies are selling their goods in the global
market. So, they have to attract foreign investor and foreign customers. They also
have to follow foreign rules and regulations. All this requires corporate governance.
Without Corporate governance, it is impossible to enter, survive and succeed the
global market.
 Takeovers and Mergers: Today, there are many takeovers and mergers in the
business world. Corporate governance is required to protect the interest of all the
parties during takeovers and mergers (Amanah, Dhiana, & Fathoni, 2018).
 SEBI: SEBI has made corporate governance compulsory for certain companies. This
is done to protect the interest of the investors and other stakeholders.
Theoretical Framework of Corporate Governance
The directors of such [joint-stock] companies, however, being the managers rather of
other people’s money than of their own, it cannot well be expected, that they should watch
over it with the same anxious vigilance with which the partners in a private co-partner
frequently watch over their own. Like the stewards of a rich man, they are apt to consider
attention to small matters as not for their master’s honour, and very easily give themselves a
dispensation from having it (Hussain, Rigoni, & Orij, 2018). Negligence and profusion,
therefore, must always prevail, more or less, in the management of the affairs of such a
company. The three theoretical basis of corporate governance are agency theory of