Corporate Governance: Approaches, Principles, Benefits, and Evaluation

This report provides a detailed examination of corporate governance, covering its definition, importance, and the need for its implementation within organizations. It explores two primary approaches: rule-based and principle-based, highlighting their respective advantages and disadvantages. The report delves into the core principles of corporate governance, including fairness, accountability, responsibility, and transparency, and discusses the tangible benefits these principles bring to businesses, such as improved employee morale, better business opportunities, and minimized capital costs. Furthermore, the report evaluates different aspects of corporate governance, offering a comprehensive understanding of how effective governance structures contribute to an organization's long-term success and sustainability, as well as the impact of corporate governance on the stakeholders.

Contents
Abstract...............................................................................................................................................2
Introduction.........................................................................................................................................3
Need for corporate governance..........................................................................................................3
Approaches to corporate governance................................................................................................4
Principles of corporate governance....................................................................................................5
Fairness..........................................................................................................................................5
Accountability..................................................................................................................................5
Responsibility..................................................................................................................................6
Transparency..................................................................................................................................6
Benefits of corporate governance......................................................................................................6
Avoid penalties from breaching regulations....................................................................................6
Improves employees Morale...........................................................................................................6
Improves business opportunities....................................................................................................7
Minimise the capital cost.................................................................................................................7
It improves decision making of the top management.....................................................................7
Helps to generate better strategic planning....................................................................................7
Critical Evaluation of different aspects of corporate governance.......................................................7
Conclusion..........................................................................................................................................8
References.........................................................................................................................................9
Figure 1 Principals of corporate governance(Trade brain, 2019) ....................................................4
BOD Board of Director
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Abstract
This paper reviews about the details of corporate governance, benefits and contemporary
developments to an organisation. Corporate governance provides a well-defined structure for a
company to achieve the objectives distinguished from the day to day operations in regards with
the interests of every stakeholder. It ensures that a business has effective decision-making
processes and controls in place which balances individual and societal goals, interests of
stakeholders as well as economic and social goals. Corporate governance ensures the
transparency which helps to safeguard the interests of all stakeholders creating a strong and well-
balanced economic development for an organisation.
The two approaches to corporate governance are rule based approach and principle-based
approach. The principle-based approach or the comply or explain is opposite of rule-based
approach which is based on the view that a specific set of rules is inappropriate for each
organisation. Further, this report includes the four core principles of corporate governance. That is
Fairness, accountability, responsibility and transparency. Additionally, an evaluation of different
aspects on corporate governance are being discussed.
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Introduction
Corporate governance is the technique or the approach used by an organisation to administer and
operate a business globally. James Chen (2020), described corporate governance as a system of
rules, practices and processes by which an organisation is directed and controlled. It provides a
well-defined structure for a company to achieve the objectives distinguished from the day to day
operations in regards with the interests of every stakeholder. It ensures that a business has
effective decision-making processes and controls in place which balances individual and societal
goals, interests of stakeholders as well as economic and social goals.
Corporate governance is conducted by the Board of Directors of a company. Hence, it is about
what the BOD does and how it sets the values aligning with the business conducts and objectives.
It outlines the action plans, performance measurement, disclosure practices, executive
compensation decisions, dividend policies, reconciling conflicts of interest procedures and explicit
and implicit agreements between the stakeholders and an organisation (Chen, 2020).
According to the Organisation for economic co-operation and development (2015), the purpose of
corporate governance is “to help to build an environment of trust, transparency and accountability
necessary for fostering long term investment, financial stability and business integrity thereby
supporting longer growth and more inclusive society”. A good corporate governance in place
ensures financial stability for the company and return on return on investment for the stakeholders.
Alternatively, a bad governance effects the company reputation, reliability, integrity and financial
health (Chen, 2020).
Need for corporate governance
Corporate governance ensures the transparency which helps to safeguard the interests of all
stakeholders creating a strong and well-balanced economic development for an organisation
(Amlan, 2018). It is needed when preparing financial reporting and accountability by the BOD and
management to comply with the ethical standards to mitigate the financial risks. A bad governance
policies results in fallout of business losing their integrity and reputation.
Companies like Enrol corporation fallout is the perfect example of the result of ineffective
corporate governance and corrupt practices in the organisation (Amlan, 2018). The poor corporate
governance resulted in failing to achieve the stated goals and collapsing of the company with
significant financial losses for the stakeholders. Therefore, good corporate governance is needed
to create a distinction between the power and influence of the management and BOD. This will
develop a clear framework to achieve the objectives by separating the management
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responsibilities of managing the company affairs and BOD responsibility of monitoring, coaching
and directing.
An effective and strong corporate governance can nurture the integrity of any organisation. It helps
to maintain the overall performance of the organisation resulting sustainability and create long
term values effectively (SpriggHR, 2020). Moreover, it creates a reputation towards the company
in the market, that everything is well managed and the interests of external stakeholders are being
taken care of ensuring a strong competitive advantage in the market. An organisation can
consider different approaches of corporate governance to their convenience for the betterment of
the organisation and the stakeholders.
Approaches to corporate governance
In most countries where there is a stock exchange, corporate governance codes have been
developed. The primary reason for good corporate governance codes is to assist and protect the
investors (CA, 2017). Countries have developed corporate governance codes and practices
because they want to attract and retain investment capital, particularly from foreign investors.
Since, venture capitals allow the country’s economy to grow and its business to succeed. Other
business will usually determine what kind of corporate governance structure they want. There is
no requirement to comply with any specified standard or law. Hence, the two approaches to
corporate governance used are the rules based and principles-based approaches.
A rule-based approach is based on the view that business must be bound by regulation to comply
with the proven principles of good corporate governance (Tariq & Abbas, 2013). The rules apply to
the companies on the stock market. However, these organisations must comply with the rules and
few (if any) exceptions to these rules are permitted. The rule-based approach will help any
organisation to improve and strengthen their corporate governance. The existence of moral values
and the culture of “honesty” contributes to better overall performance of the company. It helps to
develop disciplined staffs and an implicit framework for the company as whole. Moreover, the
investors have faith and trust in these companies as it is mandatory to comply with the corporate
government code. However, the same rules may not be relevant for each organisation since, the
requirements of each company are different. Also, some aspects of corporate governance are not
easy to be regulated such as negotiating the wags of the directors, determining the most
acceptable set of qualification of the and expertise of directors and evaluating the performance of
the BOD (Carney, 2005).
The principle-based approach or the comply or explain approach is based on the view that a
specific set of rules is inappropriate for each organisation (CA, 2017). The situation of every
organisation varies from one another. Also, the circumstances of an organisation may change
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overnight. Therefore, it believes that the most suitable governance practices vary from company to
company and the applied code of governance should consist of principles instead of rules.
Comply or explain approach allows the organisation to claim that they have complied with the
provisions of the code and to clarify why they have been not able to in their annual reports. This
will encourage the stakeholders to draw their conclusions on the governance of the company.
The principle-based approach is helpful where laws cannot be implemented easily. For example, it
is easy to develop rules for the internal control system but not for the areas such as corporate
culture and the managing the relationship with the stakeholders. This approach is also easier and
cheaper to implement. The drawback of this approach is the effectiveness depends on an
organisation’s drive to comply with it, whether on the basis of corporate law, regulatory authorities
or listing requirements (Jamali, 2008). Also, high degree of transparency is required to hold the
board accountable.
Principles of corporate governance
A business that applies the core principles of good corporate governance, such as fairness,
responsibility, accountability and transparency, will surpass other businesses in terms of financial
advancement.
Figure 1 Principals of corporate governance(Trade brain, 2019)
Fairness
Fairness has to do with the equal treatment of all shareholders in relation to shareholdings. The
fairer the organization looks to them, the more likely the company can survive in the league.
Moreover, there also should be fairness when treating the stakeholders such as employees,
community etc. The fairer the entity appears to the stakeholders, the more likely it is to withstand
the pressure of the stakeholders.
Accountability
Corporate accountability refers to the duty and responsibility to provide a justification or reasoning
for the actions and behaviour of the business. The code provides for the responsibility of the Board
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of Directors of the Company to all shareholders in compliance with applicable law and provides
instructions to the Board of Directors in the decision-making and oversight of the activities of the
executive bodies.
Responsibility
The Board of Directors shall be empowered to act on behalf of the corporation. They should also
take full responsibility for the powers bestowed on them and for the authority which they exercise.
The Board of Directors shall be responsible for overseeing the management of the corporation, the
affairs of the company, appointing the Chief Executive Officer and monitoring the performance of
the company. In doing so it is important to behave in the best interests of the company.
Transparency
In reference to an article published at Harvard law school forum (2016), Transparency means
disclosure, a willingness offers necessary information to shareholders and other stakeholders. For
instant, a company should provide disclosure of financial results that are real and correct to
shareholders. Transparency means that stakeholders will have trust in the company's decision-
making and management processes (governance, 2016).
Benefits of corporate governance
Good corporate governance retains trust among investors, whose support may help fund further
growth. Companies that apply the concepts of good corporate governance to the working
environment will ensure market success and economic development. They are the basis on which
businesses are able to expand.
Avoid penalties from breaching regulations
As it is clear that complying with the regulations are compulsory, which drives companies to obey
them preventing from fines or penalties as well as from things that could harm the reputation of the
company (PearseTrust, 2016). Advancing enforcement and governance systems and models will
potentially help companies move quicker and more confidently, while also reducing bureaucratic
costs.
Improves employees Morale
In addition to organizational benefits, well-established enforcement and governance systems may
also have underestimated beneficial effects on employee morale, as the image of the Organization
have a direct influence on employee attitudes (PearseTrust, 2016). Organisations that gives much
importance on their ecorporate and governance criteria based on reputational and cultural
consequences also benefit by attracting high-quality and expertise employees and often generate
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improved efficiency due to high employee morale, which can also contribute to reduced attrition
rates.
Improves business opportunities
Well maintained reputation through every aspects of the business and proven reliability on them
through the good corporate governance can help bring new investment into the company.
Minimise the capital cost
Implementing good governance practices will lead to a reduction in the cost of capital for a
business in today's rapidly changing environment. As an enterprise that is considered stable,
trustworthy and capable of managing potential risks will borrow funds at a lower rate than those
with poor corporate governance.
It improves decision making of the top management
There is a clear and demonstrable correlation between the decision-making and governance of a
company related to improved performance. In reference to a report posted by Harvard law school
forum “a number of performance failures are directly linked to poor governance” (2016). There is
no question that good governance ensures quick access to information and good cooperation
between stakeholders, leading to better outcomes. It helps the company to decide most important
actions needed for the company at that moment. This can prove crucial in helping the organization
to survive difficult economic storms and supports the organisation's sustainability.
Helps to generate better strategic planning
With quicker access to information and effective coordination with management, boards are in a
position to develop more efficient strategies. This involves a more effective distribution of
resources and capital (Rathod, 2018). The framework will help the company’s board to understand
the regulatory environment governing the business through technology from production,
distribution and communication point of view. Therefore, will help identifying the needs of all
stakeholders which are essential when developing a master strategic plan for a company.
Critical Evaluation of different aspects of corporate governance
In a market economy, organisations generate capital from investors and by combining these funds
with other inputs, such as labour and property to conduct business operations to increase profit. In
order to attract investors, a company will have to prove to the market that they can be trustworthy
and have the potential to mitigate risks. Hence, a good corporate governance approaches and
principles are needed for the smooth run of the operations and performance for sustainability.
Organisations cannot work effectively without proper, implementable governance rules and
structures to enforce them and without implementing proper principles to promote and establish a
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culture of corporate governance between managers, shareholders and stakeholders. The
governance code of rules is as importance as the principles to run a business successfully.
With the rapid change in the economy organisations are forced to make changes into their
governance policies. They have put increased effort in dedicating resources to government issues
in regards to the four principles of corporate governance. Hence, there will be more transparency,
accountability, fairness and responsibilities. New rules to voting policies and deep analysis of
proposals are changes that will take place in the future for a better governance of the company.
Also, the activism of shareholders is very high in the market which influence the board to be more
responsible and accountable when making decisions in regards to the performance.
Conclusion
This review consists of collections of information of research about corporate governance. The aim
is to understand and find out about the need for the corporate governance in today’s economy. It
highlights the guidelines for approaches needed to implement a good corporate governance for
various business perspectives. The implementation of the four principles when governing a
company will provide unlimited benefits to any organisation for sustainability. The finding shows
that corporate governance is an internal structure that involves policies, people and processes that
represent the interests of shareholders and other stakeholders by regulating and directing good
business, objectivity and honesty management practices. Corporate governance is characterized
as a collection of policies, regulations and rules that are intended to safeguard the values of the
interests of corporate shareholders. It is necessary to ensure that responsibility and transparency
are integrated into each and every aspect of the business or organization.
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References
Amlan, A. (2018, October 10). Need for the corporate governance. Retrieved from MYADVO:
https://www.myadvo.in/blog/need-for-corporate-governance/
CA. (2017). Code of best practice on Corporate governance 2017. Colombo: Institute of chartered
accountants in Sri lanka.
Carney, M. (2005). Corporate governance and competitive advantage in Family contolled firm.
Entrepreneurship theory and Practice, 249-265.
Chen, J. (2020, April 12). Corporate Governance Definition . Retrieved from Investopedia:
https://www.investopedia.com/terms/c/corporategovernance.asp
governance, H. l. (2016). Principles of corporate governance. cambridge: Business Roundtable.
OECD. (2015). G20/OECD Principles of corporate governance. Paris: OECD Publishing.
PearseTrust. (2016, September 26). Benefits of effective governance and compliences . Retrieved
from Pearse Trust: https://www.pearse-trust.ie/blog/the-cost-saving-benefits-of-effective-
governance-and-compliance
Rathod, L. (2018, July 25). 6 ways boards benefits from good corporate governance. Retrieved
from Diligent: https://diligent.com/en-gb/blog/6-ways-boards-benefit-from-good-corporate-
governance/
SpriggHR. (2020, June 4). The importance of corporate governance. Retrieved from SpriggHR:
https://sprigghr.com/blog/board-management/the-importance-of-corporate-governance/
Tariq, Y. B., & Abbas, Z. (2013). Complience and multidimentional firm performance: Evaluating
the efficacy of rule based code of corporate governance. ELSEVIER, 565-575.
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