Corporate Governance A Review of Literature What Essay

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Corporate Governance: A review of Literature

What is Corporate Governance?

Principles of Corporate Governance

Theoretical foundations of corporate governance

Agency theory

Stewardship theory

Stakeholder theory

Post-Enron theories

Corporate Governance: The changing trends

Recent developments on regulatory front and research

Corporate Governance: Relationship with market indicators

Venture Capital Model: Impact on Corporate Governance

Appendix I- Examples of Corporate Governing bodies

This paper is a review of pertinent literature on corporate governance. Corporate governance addresses the control issues created due to the separation of ownership and management of a corporation.It is generally considered as the means by which shareholders control the board of directors.Corporate governance maintains relationships between board of director, stakeholders and shareholders. Every relationship has high significance and multi-faceted aspects. OECD considers corporate governance as a framework dealing with the problems resulting from the separation of ownership and control of a corporation. Precisely stating, Du Plessis, et al. (2010) defines corporate governance as the system of regulating and overseeing corporate conduct and of balancing the interests of all internal stakeholders and other parties (external stakeholders, governments, and local communities) who can be affected by the corporation's conduct. This literature review paper adopts a throughput investigative approach whereby literature has been reviewed that describes different facets and elements of corporate governance. After reviewing academic literature on background and principles of corporate governance, literature pertaining to the theoretical foundation of CG has been reviewed. Agency theory, stewardship theory, and stakeholder theory have been identified as theoretical foundations of CG whereas contemporary theories of CG have emerged after the corporate scandal of Enron and WorldCom. Contemporary trends in the conduct and structuring of CG have also been reviewed. Venture Capital (VC) model of financing has been found to have significant positive influence on start-up companies in the U.S. CEO, Board of Directors (BOA), and shareholders are identified as the main actors of corporate governance structures. Sarbanes-Oxley (SOX) Act 2002 required significant changes in management, board structure, accounting practices, financial reporting standards, and audit protocols for large sized private and public firms.

Corporate Governance: A review of Literature

I- Introduction

In the backdrop of global financial crisis (GFC) in 2008, the debate on structure and formation of corporate governance has intensified. Corporate governance is a relatively new term that emerged during 1980s and 1990s but now it has developed into a well-known idea mainly because of two factors i.e. curious happening in corporate world and global mobile capital flows (Joshi, 2004). Since its emergence, the term corporate governance has been defined differently under different perspectives. In this regard, a simple way to describe the meaning of term is "putting morality into capitalism"(Martin, 2006).In this regard, corporate governance is perceived as an anti-greed regulatory framework. However, it is generally considered as the means by which shareholders control the board of directors (Lenoble, 2003). This perspective follows the classic principal-agent theoretical foundations. In a more clear way, it addresses the control issues created due to the separation of ownership and management of a corporation.

This research paper is divided into six broad sections, each dealing with particular but coherent aspect of corporate governance literature. Section I introduce the topic of the study and describe the composition of report. Part II includes background and principles of corporate governance as a scholarly subject. Part III will review literature on theoretical foundations of corporate governance. Part IV reviews pertinent literature on the topic of changing trends observed in corporate governance of firms. Part V and VI highlight the relationship of corporate governance with market indicators of a firm's performance and impact of venture capitalist financing model on firm's corporate governance. At the end, part VII of the paper concludes the paper by describing most consistent themes found in the literature review.

II- Background

Researchers try to investigate the real cause of 2008 like bust in financial markets. Some term it sheer negligence and risk taking propensity of financial institutions whereas other have pointed towards deep cultural and organizational issues responsible for creating such crisis. The role of management and Chief executive Office from firm's side and the role of financial regulating agencies from government's perspective have gained much importance. To review pertinent literature on the nature and role of corporate governance, following is the broad structure of this paper.Many other factors influence the corporate governance in firms. These factors include employees, customers, suppliers, creditor and community where the firm is located. Corporate governance maintains relationships between board of director, stakeholders and shareholders. Every relationship has high significance and multi-faceted aspects. Therefore, companies need to improve corporate governance in order to achieve and survive long-term growth.In this regard, academic literature considers it as a framework dealing with the problems resulting from the separation of ownership and control (OECD, 2004). Fernando (2009) explains this perspective as limited and stated that it should cover the areas of organizational structure, rules regarding board of directors, independence of audit committees, rules for disclosure of information to shareholders and creditors and control of the management. The Organization for Economic Co-operation and Development (2005) defines it as a structure that specifies the distribution of rights and responsibilities among the different participants in the organization and lays down the rules and procedures for decision-making. Moreover, different definitions of corporate governance can be put on a narrow to broad continuum. At a narrow end, it can be defined as a simple relationship between shareholders and the management while corporate governance, at the broad end of continuum, becomes a network of various relationships of stakeholders including shareholders, board of directors, employees, customers, suppliers, and bondholders at large (Solomon, 2010).

The Association of Chartered Certified Accountants (2008) provides two complimentary purposes of corporate governance. First, it should ensure that the board protects resources and allocates them to make planned progress toward the organizational defined goals. Second, those governing and managing anorganization account appropriately to its stakeholders. However, the literature review on the corporate governance suggests that there is no consensus on a single or universal definition of corporate governance. This means that the subject is in its evolutionary process and it would need time to synthesize different perspectives in a universal definition. Corporate governance has emerged as a major issue in late 20th century and early 21st century. It is denoted as the rules and regulations applicable for the business entities. It is essentially the mechanism comprising of rules and practices that define the governance of the business. It has a strategic level implementation meaning there by that corporate governance defines that how the business will be governed at corporate level. The relationship of board members with their stakeholders including shareholders, employees, and vendors is also a notable activity concerning corporate governance. The business concepts have evolved over the years. The activities performed at the corporate level are also defined under the corporate governance (Tricker, 2012). The corporate board members exert their power to influence the executive management of a corporate entity. These relationships ensure that the corporation is heading in the desired direction for present as well as future course. The auditors, legitimate stakeholders, and regulators are also covered through corporate governance functions.

What is Corporate Governance?

To start with, following is an often quoted definition of corporate governance that states it as "the system of regulating and overseeing corporate conduct and of balancing the interests of all internal stakeholders and other parties (external stakeholders, governments, and local communities) who can be affected by the corporation's conduct, in order to ensure responsible behavior along with achievement of maximum level of efficiency and profitability" (Du Plessis, Jacques, Hargovan & Bagaric, 2010; p. 10). Thus, the definition implies that governance at the corporate level is more concerned with oversight of firm's actions, policies, and practices rather than day-to-day operations. Broadly stating, there are some main responsibility areas being identified for the corporate governors, namely:

1- Running a system of oversight and regulation in context of firm's conduct

2- Safeguarding and promotion interests of internal stakeholders of the company

3- While displaying responsibility, the corporate governance is aimed at maximizing firms' efficiency and profitability.

Some researchers used to describe 'corporate governance' as the process but lately, large number of researchers have agreed upon that rather than being a process, corporate governance is a system that incorporates several other processes. The domain of corporate governance has therefore assumed much wider influence, specifically after the GFC in 2008. Some researchers have also defined corporate governance by outlining the main actors involved in the performance of governance at the corporate level (Gompers, Ishii, and Metrick, 2003). These have been identified as the:

Chief Executive Officer (CEO)

Board of Directors (BOD)


The notion of corporate governance got entered the academia and the practitioner's guidelines when in late nineties and early 2000s; Japan underwent recession along with other major Asian markets of that time. Some called it the 'governance recession' as well as the leaders and CEO was not highly responsive to the looming threat of loss of job and employment opportunities as well (Gompers, et…[continue]

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