Corporate Governance Principles
Since corporate governance can be highly influential for firm performance, firms must know what are the corporate governance principles and how it will improve strategy to apply these principles. In practice there are four principles of good corporate governance, which are:
All these principles are related with the firm's corporate social responsibility. Corporate governance principles therefore are important for a firm but the real issue is concerned with what corporate governance actually is.
Management can be interpreted as managing a firm for the purpose of creating and maintaining value for shareholders. Corporate governance procedures determine every aspect of the role for management of the firm and try to keep in balance and to develop control mechanisms in order to increase both shareholder value and the satisfaction of other stakeholders. In other words corporate governance is concerned with creating a balance between the economic and social goals of a company including such aspects as the efficient use of resources, accountability in the use of its power, and the behaviour of the corporation in its social environment.
The definition and measurement of good corporate governance is still subject to debate. However, good corporate governance will address all these main points:
o Creating sustainable value
o Ways of achieving the firm's goals
o Increasing shareholders' satisfaction
o Efficient and effective management
o Increasing credibility
o Ensuring efficient risk management
o Providing an early warning system against all risk
o Ensuring a responsive and accountable corporation
o Describing the role of a firm's units
o Developing control and internal auditing
o Keeping a balance between economic and social benefit
o Ensuring efficient use of resources
o Controlling performance
o Distributing responsibility fairly
o Producing all necessary information for stakeholders
o Keeping the board independent from management
o Facilitating sustainable performance
As can be seen, all of these issues have many ramifications and ensuring their compliance must be thought of as a long term procedure. However firms naturally expect some tangible benefit from good governance. So good governance offers some long term benefit for firms, such as:
o Increasing the firm's market value
o Increasing the firm's rating
o Increasing competitive power
o Attracting new investors, shareholders and more equity
o More or higher credibility
o Enhancing flexible borrowing condition/facilities from financial institutions
o Decreasing credit interest rate and cost of capital
o New investment opportunities
o Attracting Better personnel / employees
o Reaching new markets
o Enhanced company image
o Enhanced staff morale
Good Governance and Sustainability
It is clear that all these long term benefits are also directly related to the sustainability of a firm and that firm's success. We can evaluate corporate governance from different perspectives, such as that of the general economy; the company itself; private and institutional investors; or banking and other financial institutions. Some research results show that the quality of the corporate governance system of an economy may be an important determinant of its competitive conditions (Fulghieri and Suominen, 2005). Authors suggest the existence of a relationship between corporate governance and competitiveness and also examined the role of competition in the production of good corporate governance.
Van de Berghe and Levrau (2003) on the other hand investigated good governance from the perspective of companies, investors and banks. From the company's perspective, it can no longer ignore the pressure for good corporate governance from the investor community. Installing proper governance mechanisms may provide a company with a competitive advantage in attracting investors who are prepared to pay a premium for well-governed companies. From an investor's perspective, corporate governance has become a important factor in investment decisions as it is recognised to have an impact on the financial risks of their portfolios. Institutional investors put issues of corporate governance on a par with financial indicators when evaluating investment decisions. From the creditor's perspective, there is a plea for increased attention for corporate governance in a bank's risk measurement methods: a plea which is supported by the new requirements put in place by Basel II and subsequently Basel III.
Bohren, and 0degaard (2004) also showed that corporate governance matters for economic performance; insider ownership matters the most while outside ownership concentration destroys market value; direct ownership is superior to indirect; and that performance decreases with increasing board size, leverage, dividend payout, and the fraction of non-voting shares. Black et al (2005) investigated the relationship between governance and firm value. They found evidence that better governed firms pay higher dividends, but no evidence that they report higher accounting profits.
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Fulghieri, Paolo and Matti Suominen (2005), "Does Bad Corporate Governance Lead to too Little Competition? Corporate Governance, Capital Structure and Industry Concentration", ECGI Working Paper Series in Finance, No.74.
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Van den Berghe L.A.A. and Abigail Levrau (2003), "Measuring the Quality of Corporate Governance: In Search of a Tailormade Approach?, Journal of General Management Vol. 28 No. 3 Spring.