by which organizations are directed , controlled and held accountable .
Governance therefore entails authority , accountability , stewardship , leadership , direction and control exercised in corporations . It reflects the interaction among those persons and groups , which provide resources to the company and contribute to its performance such as shareholders , employees , creditors , longterm suppliers and subcontractors .
Good corporate governance shields a firm from vulnerability to future financial distress . The argument has been advanced repeatedly that the governance structure of any corporate entity affects the firm ' s ability to respond to external factors that have some bearing on its financial performance . It is believed that good governance generates investor goodwill and confidence . Again , poorly governed firms are expected to be less profitable and also posit that better corporate framework benefits firms through greater access to financing , lower cost of capital , better financial performance and more favorable treatment of all stakeholders .
Corporate governance contributes in developing the relationship between the organization , its general environment , the social and political systems in which it operates . It interlinks with the organizations ’ economic performance and further determines the conditions for access to capital markets and investor confidence . Governance is the set of processes , customs , policies , laws and institutions affecting the way a corporation is directed , administered or controlled .
Corporate governance therefore includes the relationships among the many players involved ( the stakeholders ) and the goals for which the institutions are governed . The principal players are the shareholders ( members ), management and the board of directors . Other stakeholders include employees , suppliers , customers , bankers and other lenders , regulators , the environment and the community at large .
Many problems in different cooperative societies across Europe like mismanagement , financial scandals and failure of democracy lead to the questioning of the quality of corporate governance . Therefore , concerns like these have led to renewed professional and academic interest in corporate governance . Improvements in the management and administration of many organizations
From the agency perspective , corporate governance enhances the firm ’ s performance through resolution of agency problems by monitoring the management activities , controlling management behaviors as well as inspection of financial reporting process on a continuous basis .
are essential if the global efforts to halt corruption and other types of irregularity are to achieve desired results .
An appropriate legal framework is necessary to define the roles of governing bodies , chief executives and the related framework of authorities and responsibilities of each level of corporate governance . It should be noted before and after the Asian financial crisis in 1997 , firms that were practicing good corporate governance faired much better and provided higher protection to the shareholders .
The major dimensions of corporate governance include an effective board of directors , reasonable board size , CEO duality , efficient market , board diversity , government and regulatory authority . Part-time directors have been more resourceful in monitoring the firm ’ s managers as well as in ensuring protection of shareholders ’ interests .
The size of the board also influences its ability to oversee corporate governance . A small board is assumed to be more effective as compared to larger boards in carrying out governance and oversight related responsibilities . Duality is a situation where the CEO doubles up as the Chair of the board ( COB ).
Board independence specifies that all members of audit committee board must be outsiders , that is , those directors who are not involved in the daily operational activities of the firm . Board diversity refers to mixture of people based on gender , age brackets , race or ethnical groups .
Corporate governance allows the firm to come up with a structure in which it can set up its objectives , implement them , and monitor , all at the same time . The corporate governance theory suggests a connection between business performance and company governance . Thus , the promotion of good corporate governance attracts more investors who bring more capital to the firm as well as reducing the operational risks to improve performance . From the agency perspective , corporate governance enhances the firm ’ s performance through resolution of agency problems by monitoring the management activities , controlling management behaviors as well as inspection of financial reporting process on a continuous basis .
Corporate governance takes place within the firm and mostly depends on the firm ’ s shareholders , the board of management and the company executives for its successful realization .
The structure of corporate governance normally encompasses components of business practices , voluntary commitments , regulation and legislation that are the outcome of a nation ’ s specific situations , tradition and history . Thus , the effective voluntary standards , selfregulation , legislation as well as regulation vary from one nation to the other .
Many mechanisms of governance have been advanced comprising supervision by regulatory entities , executive compensation , proper market compensation as well as market for corporate regulation . However , developing an optimal corporate governance mechanism remains a major concern .
Joe Nyutu is a marketing and strategy consultant who teaches marketing on part-time basis at a local leading university and can be reached via : Josephnyutu @ gmail . com .