Corporate governance as a serious and urgent research issue has become established over the last ten years since 1997, especially after the public spectacle of failures of once-esteemed public firms during the first four years of the new century. Increasing number of codes of best practice have been developed by leading international bodies such as the OECD, the Commonwealth and CalPERS, and the reforms put in the stock exchanges, securities commissions, accounting professions have now become global.
The increasing integration of financial markets, the growth in multinational corporations and regional economic developments all argue and motivate market players to adopt good corporate governance practices in the face of recent spate of large corporate collapses in Western countries such as the cases of HIH Insurance in Australia, Parmalat in Europe, Enron and WorldCom in the United States (U.S.) as well as non-Western economies.
The issue of corporate governance is even more important in transitional economies. Attention to corporate governance is largely motivated by public interest in the economic health of corporations and society in general. Studies in Finance indicate that firms adopting good governance practices appear to earn a premium over the returns to investors from those firms that do not adopt good governance code of practices.
No sooner has the world learned fresh lessons about good governance rules to prevent the repeat of failures of institutions to safeguard investors, new cases have emerged that cast doubt that the lessons of previous years have been learned. A number of new cases have emerged – Parmalat, Societe General, in Europe and an investment house in Japan in 2006 that draw public attention to the international nature of governance. While new laws and regulations as well as oversight institutions have been established to improve governance, what about investor protection? There is a vast store of information churned relating to the 143,000 public firms on the stock markets to study this phenomenon. Are these data any use in governance prediction?
Though the topic ‘Corporate Governance’ gained worldwide prominence, as yet it is variously-defined, and consequently blurred at the edges. It is evident undoubtedly that corporate governance is relevant as a subject, as an objective, or as a regime to be followed for the good of shareholders, employees, customers, bankers and indeed for the reputation and standing of a nation and its economy. Whatever corporate governance arrangement a public company chooses, they have to rest on a sound platform. They have to be well understood and accepted by those who provide the firm with key resources, namely, capital. Anything less will not only hurt the firm, it will also hurt the entire capital market and eventually the economy’s prospects for prosperity.
It can be argued from the above discussion that every company operates under its own specific conditions though, and in order to operate efficiently, firms need to adapt their governance system to these circumstances as it has become very challenging for organisations to create value and gain shareholders’ confidence for broadening the investment base both in domestic and international markets in a turbulent world, ex post the collapses of big corporate bodies, Enron, WorldCom, OneTel, Ansett, HIH, Parmalat and so on. It is also evident that globalisation may have initiated the adoption of a few common corporate governance standards across regimes but there is little evidence to show that these standards have or will be implemented widely. As the Chairman of SEC: (Australian Securities & Investments Commission, July 2002, p. 12) mentioned:
“It is a time for serious commitment to enhancing and embracing international accounting standards; for sensibly redressing conflicts of interest which have beset corporate managers, auditors, analysts and other intermediaries and professional service providers; for examining ways to motivate and empower shareholders – including institutions and fund managers – to accept greater responsibility for enforcing corporate accountability; and for examining methodologies by which Boards might better secure high governance standards.”
Therefore the design and development of corporate governance systems should aim at protecting the vulnerable from exploitation by those who manage and control corporation while making it punitive for the professionals managing the accounts from falsifying the books. Though the evidence of a strong positive link between governance and firm performance is limited, there does seem to be a link between active boards and performance. However, corporate governance – viewed not as merely a legal ritual to manage directors’ liabilities, but as a living economic dynamic, integrated into the business – can help build a solid foundation to create wealth and protect shareholder interests. Corporations should strive to achieve a culture of governance and resist the temptation to give formal, rather than substantive compliance to the principles of good governance (ASEC, July 2002).
Professionals monitoring and certifying a firm to be a safe entity should engage the more recently developed models that use information to warn of impending failures just as much as the society’s role in safeguarding the stakeholders’ welfare must be enhanced by letting the larger society have a say in this issue beyond the corporations.
Source: Article by Prof. Janek Ratnatunga
