Corporate Governance on Organizational Performance Corporate Governance Essay

  • Length: 8 pages
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  • Subject: Business - Management
  • Type: Essay
  • Paper: #48388499

Excerpt from Essay :

Corporate Governance on Organizational Performance

Corporate governance implies to decisions made by the management in organizations, which influence the overall performance of the firm. Corporate governance focuses on organization's governance and the performance of duties within firms. Management of firms develops specific strategies or set of mechanisms that influence their decision-making. These decisions are crucial in firms where there is a clear difference in ownership and control. Some of the strategies the management team might use are employing the participation of the board of directors in decision-making, encouraging shareholders in the management of organizations or decisions made on market operations (Aguilera, Filatotchev, Gospel & Jackson, 2008). Decisions instituted by members of these teams directly influence the performance of the firm. Moreover, decisions tasks undertaken by the management and the shareholders contradict, but are very crucial to the overall performance of the organization.

Corporate governance is a highly powerful aspect to any organization. Its contributions cut across all field including finance, accounting, management and in strategic management. Corporate governance is a system where organizations functions monitoring take place. The structure of corporate governance defines details that constitute the rights and responsibilities of different stakeholders in an organization. The system also specifies rules and procedures to use when making decisions. One can say that corporate governance provides the structure, which organizations use to reach at their goals while at the same time, incorporating influences from the society, regulatory bodies and the market environment. The strategy also reflects on the interest of various stakeholders.

Organizations control focuses at the external and internal structure of governance. Manager's actions and those of board members need monitoring for better governance. These monitoring procedures prevent the company from losses by mitigating the effects of agency risk that may stem from actions of the firm's staff. Internal stakeholders of an organization include the management, board of directors, department heads or other employees. External stakeholders include the shareholders, debt holders, credit holders, customers or the government (Larcker, Richardson & Tuna, 2007).

The main objective of corporate governance is to prevent the effect of conflict of interest between managers and the firm. Conflicts of interest mitigation comes by, laws, procedures and there are some institutions especially government ones, who control the functions of a company. The outcome of a well-governed organization is efficiency on the use of resources and better emphasis done on the interests of shareholders. In large firms where there is separation of powers of ownership and control, organization may suffer losses. Management or the agent might have different stake on the organization and may lead to the collapse of the company. Since management is considerable, more informed on the operation of the corporation, it is easy to formulate corrupt practices that affect the firm economic status. The board of directors chosen to oversee functions of the management may become complacent and together with the management team destroy the firm (Aoki, Jackson & Miyajima, 2008).

Corporate Ownership and Control

Legal documents of laws relating to limited liability companies have separated control of a corporation from ownership. These separation focal points are the real investors of the firm and those employed to oversee the operations of the firms (Larcker, Richardson & Tuna, 2007). Like at Emirates Airline Corporation, company's management task is to guard the interest of the owner. Nevertheless, divergence of interest of management and their tendency to engage in wasteful practices only affects the value of the corporation. Over the years, unethical management practices of executives have necessitated the creation of a monitoring body in organizations that are the board of directors. Boards of directors are very significant in overseeing the operation of managers to minimize corruption within firms operations (Adams, Almeida, & Ferreira, 2005).

"Best practice" contemporary issue

Board of directors

The effectiveness of a board of directors in corporations has become a great concern. Failure in the fulfillment of corporation goal, incidences of corruption, and increase in shareholder lawsuits has greatly put credibility of the board of directors to question. Boards of directors have made a questionable decision over years leading to corporate collapses. To mitigate over this influence of the board of director and the management, various legislations and rules developed to solve this problem. Several countries have developed codes of practice that measure "best practice" of which the management team and board of directors needs to follow. Good corporate governance means higher returns for shareholders. In the case of Emirates Airline, codes of practice promote financial returns for the company and shareholders, the community; it provides salaries for employees and to the government in the form of tax (Karamanou & Vafeas, 2005).

According to Karamanou and Vafeas (2005), best practices include codes of conduct that separate the role of C.E.O and that of the chairperson, the qualifications of board members and the chairperson. Modes of communication within the corporation consideration are crucial and the best possible ways of appointing board members. Development of Codes of best practices promotes the investor's goal of making board of directors' independent within a corporation. Previous studies on the influence of "best practice" in corporate governance suggest that best practices of the board of directors that does not reflect the level of performance.

Best practices of the board of directors do not mean high performance of the firm. There are other factors other than codes of conduct of the board of directors. A study on an Airline organization like Emirates Airlines, will show that the level of the firm's performance not only depend on the best practices they usually use in transactions. The studies main measure is to explore the monetary value of the corporation. In the study board members who are independence in decision making, have no link with the management team and those who do not hold high level of stocks in the firm is selected. The board members selected also respond to stakeholders needs. Investors who perceive an organization as well managed will pay a high premium, but performance is dependent on multiple factors (Larcker, Richardson, & Tuna, 2007). The state of the economy, the size of firms, the social aspects of the organization and the quality of the management team affects performance of a corporation. Abrupt decisions made by the owners, shareholders, suppliers, creditors, government policies affect the overall outcome of an organization.

Good governance by the board of directors does not guarantee good performance. To solve the problem, the company might initiate and implement financial strategies. These strategies may include hiring for consultancy services or training board members. The current performance of the organization is at a downward slope, and the organization needs to meet its goal of profit. The company faces immense competition, which affects returns, and the company has to pay for lawsuits filed by shareholders. The corporation might apply the strategy for "best practice" in solving the problem (Adams, Hermalin, & Weisbach, 2008). Training of employees, board of directors and involvement of the organization on corporate social responsibilities may increase on the performance of the organization. Consultant's advice and motivation of employees has a direct impact on performance of organizations. Training of the board of directors on their skills has a positive performance on performance of an organization.


Best practices on the practices of managers in a corporation affect performance. Management who relate to best practices remains profitable and effective. However, like in the case of the influence of board members, best practices in management in corporate governance do not ensure profitability. The board of directors constantly monitors the management team duties. Management's task is to look after the interest of owners of a corporation. Management teams draw salaries out of corporation profits. Their functions are decision-making, management of employees, and planning for future actions of the firm. Management of a corporation governs operations using theories they acquired in school reflecting at the government policies and laws.

It is not obvious that management best practices will yield better performance for the corporation. One thing one must consider is that, management teams of corporation consists of human being. Even though human beings are factors of productions in an organization, they have complex personal characteristics. It is not easy to generalize performance of human beings since they have different opinions and perception about the world. Different people react differently to situations; in the case of Emirates Airline, the performance of the marketing department should not equate to the performance of the accounting department. Different personality differences influence performance of managers or the way one manager reacts to situations may make it different to equate their performance. The organization may be undergoing losses, and from analysis of this situation, the planning team institutes a financial strategy (Bebchuk, Cohen & Ferrell, 2009).

Employees of the organization remuneration done according to regulations and the management team trained on ethical practices. Application of best practices acquired in this program helps management improve performance. Results from this strategy improve on the efficiency of task within the organization and at the same time improves on…

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