Is "good corporate governance" important and does it add value?

PS 10 On a pre-sessional course

2012

TABLE OF CONTENTS

1. Introduction 1

2. Principles of good corporate governance 2

2.1 Ensuring the basis for an effective corporate governance framework 2

2.2 The rights of the shareholders and key ownership function .4 Inappropriate Format: the numbers are too close to the sub-headings. They 2.3 The equitable treatment of shareholders .4 need to be evenly spaced on the right hand side of the page. 2.4 The role of stakeholders in corporate governance 5

2.5 Disclosure and transparency 5

2.6 The responsibilities of the board 6

3. The objectives of implementing good corporate governance 6

4. To what extent can a firm improve its market value by upgrading

good corporate practices and is this system applicable nowadays? 8

5. Conclusion 9

6. References 1 0

Key The essay below will use the following colours to indicate areas that will be used in the assessment of the PS5 projects.

Appropriacy of Format and Content

Coherence and Structure

Cohesion

Referencing

Accuracy and Range of Language

1. Introduction

Corporate governance has represented a new phenomenon in the business world over the last decades, spreading increasingly throughout the world. The separation of ownerships, financial furores and economic problems that are experienced by companies in every country, brought the need for establishing a new system which would not only solve the economic collapse of these companies but would also help to avoid such situations in the upcoming years as well. This system is the well-known good corporate governance (GCG), a needed tool for every single company. Appropriacy: very analytical: selecting one well known definition with a reference while acknowledging others and broadening the one that is selected. This is also coherent showing a good development within the paragraph.

While a variety of definitions of the term: "corporate governance" have been suggested, this paper will explore several definitions in order to have a clearer understanding. According to Shleifer and Vishny (1997, p.2), "corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment". A broader definition is provided by the Organization for Economic Co-operation and Development (OECD, 2004,p.l1), "corporate governance involves a set of relationships between a company's management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which referencing the objectives of the company are set, and theAppropriate means of attaining those using a mixture of objectives and monitoring the performance are determined." techniques. Corporate governance as defined by OECD ( 2004), focuses on relations between all the company's stakeholders, such as managers, creditors, government, and shareholders, whereas Shleifer and Vishny's (1997) definition of corporate governance emphasizes the relationship between management and investors. Based on the above mentioned sources, it is obvious that corporate governance, is a process of controlling management and of balancing the interests of all internal stakeholders and other parties who can be affected by the corporation's conduct in order to ensure responsible behavior by corporations and to achieve the max level of efficiency and profitability for a corporation ( Plessis et aI., 2005). In order to achieve the above-mentioned purposes, the OECD in 2004, ratified the principles of GCG. These principles became an international benchmark for policy makers, investors, corporation and other stakeholders : highlighting the structure of the worldwide, despite the fact thatCoherence different countries have a variety of legal project letting the reader know what to expect backgrounds (Common Law in the UK and Civil Law in France). and appropriate.

This essay will begin by describing the principles of OECD, which consitute on the basis of achieving the GCG and then, on how the implemention of objectives should take place. Finally, it will discuss, whether the implemention of this mistake Accuracy: spelling system brings satisfactory results and if this system is going to constitute in an ideal system.

2. Principles of good corporate governance

In 1999, after a request of the Council of The Organization for Economic Cooperation and Development to develop good corporate governance standards and guidelines, the OEeD published Principles of Corporate Governance. The principles will assist to governments, both OECD and non OECD, in evaluating and improving the legal, institutional and regulatory frameworks. The principals will also provide guidance and suggestions for investors, corporations, and other parties that have a role in the process of developing GCG. Evidently the OECD is aware of the fact that, a model of corporate governance, applicable to all countries does not exist. Nevertheless, these principles have not only become the main reference in the preparation of codes of good corporate governance in countries around the world but Coherence: they also represent common A good certain summary sentence which characteristics that are fundamental to GCG (OECD, 2004) . naturally concludes the paragraph and connects the ideas before. In 2004 the OECD Principles of Good Corporate Governance were revised through the discussion and consultation with relevant parties and analysis of current developments. There are six principles that will be a matter of discussion for this paper. Below is a brief description of each of them. Coherence: building a connected structure 2.1 Ensuring the basis for an effective corporate governance framework where the next part is introduced. It is crucial to establish a legal, regulatory and institutional foundation in order to ensure an effective corporate governance framework which can be employed as a reference for market participants, in the process of conducting their business activities. These laws and regulations should be established in such way that would be easily implemented by all parties and bring effective results. In order to achieve this objective it is of paramount importance to consult the government, the stakeholders and other regulatory authorities (OECD, 2004). An overreliance on one paraphrase technique; change the position of the reference e.g. .(OECD,2004). The OECD also referred to the fact that (do not repeat the position of the reference; this looks like notes).

Therefore, having a strong legal system would increase transparency, accountability and promote efficient markets. Also, corporate governance, promotes better division of responsibilities among different supervisory, regulatory and enforcement authorities. This is the reason why those relevant authorities should have the power, integrity and resources to perform their duties in a professional manner (OECD, 2004).

2.2 The rights of the shareholders and key ownership function

The task of the corporate governance framework is not only to protect but to facilitate the implementation of shareholders' rights as well. Basically, the rights of the shareholders should consist of:

The right to secure methods of ownership registration

The right to transfer shares

These seem to be a list probably The right to obtain regular and timely corporate information copied word for word from a book. The The right to participate in general meetings of shareholders referencing should have a page number The right to elect the board of commissioners and directors as the list seems to be The right to share proportionately, the profits of the corporation.

The corporation is responsible for facilitating the effort of the above-mentioned rights of the shareholders so that the latter would have the control over their shares (OECD, 2004).

2.3 The equitable treatment of shareholders

In every company, there are two types of shareholders: the majority and the minority. The majority shareholders are those, who control more than half (50%) of a corporation's outstanding shares. Otherwise, the minority are those, who own less than haif of the stock of the company. That's means, that good corporate governance should recognize and protect equally the shareholders' rights regardless of the proportion of their shares. Therefore, every company should provide to each shareholder with legal protection, in order to avoid any abusive actions towards the minority shareholders. In this way, not only will the confidence of the investors increase but also the success of a company will be Accuracy: Spelling encouraged (OECD, 2004). mistake and preposition error. 2.4 The role of stakeholders in corporate governance

The corporate governance framework has the responsibility to recognize the rights of stakeholders, which are protected by law or through mutual agreements. The aim of these rules is to enhance the collaboration between corporations and stakeholders in order to create wealth, job and sustainability. The insurance of the flow of external capital to companies in the form of credit (not only in the form of equity), constitutes an essential aspect of corporate governance. (OECD,2004)

Another crucial task of the stakeholders in firms is to commit optimal economIc investments in firm-specific and physical capital. Likewise, the collaborations between partners and the contribution of investors, employees, creditors and suppliers are key elements for achieving positive results. Corporations should bear in mind as well, that the contributions of stakeholders promote competitive and profitable companies. Therefore, the corporate governance framework should evaluate their role to the long-term success of the corporation (OECD, 2004).

2.5 Disclosure and transparency These are all references placed at the end of the paragraph. More variety is needed; at the beginning or mid-paragraph. These seem like a list of compiled Disclosure and transparency play an important role in the progress of a company as well. The company should ensure any information, which is beneficial to the parties, such as the financial situation, performance, ownership and governance of the company. Providing a good disclosure system means more transparency . All the parties, including majority and minority shareholders, know exactly what their obligations are and how to practice their ownership rights frequently. Also, disclosure and transparency help to attract new investment, helping them to have a general idea of a company's policies and its expectations (OECD, 2004).

Last but not the least, having a strong disclosure and transparency system provides information to the public regarding the structure, the activities of the company and the rule that it follows, respecting the environment and ethical standards (OECD, 2004).

2.6 The responsibilities of the board

The responsibility of the corporate governance framework lies on the insurance of strategic guidance of the company and the efficient supervision of management by the board's liability to the company and shareholders. The board is bound to supervise managerial performances and attain a proper return for shareholders together with guiding corporate strategy. An effective and neutral fulfillment of responsibilities requires to the board to balance clashing demands on the corporation. The board is not liable solely to the company and its shareholders but is responsible on acting in their best interests. One more charge of the board is to take into consideration the interests of a wide range of parties such as: the employees, creditors, customers, suppliers and local communities (OEeD, 2004). The impression of this and the last two pages is that there is too much reliance on one source: OECD, 2004 3. The objectives of implementing good corporate governance

Implementation of good corporate governance has four main objectives. The following paragraph shows the objectives explained and makes clear the fact that objectives can be achieved by implementing good corporate governance.

As Plessis (2005) describes , the awareness of good corporate governance promotes discipline, accountability and fairness. Are these words directly quoted? If so they should be in . Discipline: makes possible that the leaders act a certain way especially when it comes to the management, this includes the awareness and the involvement for the characteristics of good governance.

Accountability: individuals or groups in a company who make decisions and take actions on specific issues need to be accountable for their decisions and

actions. Mechanisms must exist and be effective to allow accountability. These provide investors with the means to query and assess the actions of the board and its committees.

Fairness: the system that exists within the company must be balanced in taking into account all those that have interest in the company and its future. The rights of various groups have to be acknowledged and respected. For example, minority shareowner interests must receive equal consideration to those of the dominant shareowners. Appropriate content: this seems to suggest the student has decided to comment after analysing the information in the previous paragraph. The second objective asserts that implementing good corporate governance can also ensure social responsibility. A well managed company will be aware and respond to social issues, placing a high priority on ethical standards. A good corporate citizen is increasingly seen as one that is non discriminatory, nonexploitative and responsible with regard to environmental and human rights issues. A company is likely to experience indirect economic benefits such as improved productivity and corporate reputation by taking those factors into consideration (Plessis et aI., 2005). Nice summary sentences proving that the issue has been understood and analysed. Also this coherent. Another important element in implementing good corporate governance is the investor's confidence. Before investors decide to invest their funds in a particular business they will want to be as sure as they can be, that the business is financially sound and will continue to be so in the foreseeable future. Investors therefore need to be assured that the business is being well managed and will continue to be profitable. This feature is patticularly important during the decision making of foreign investments (Plessis et aI., cohesive 2005). devices used to Useful build an argument. Last but not the least, the implementation of good corporate governance can create a favorable competitive environment. It has shown that in countries like UK and USA, that claim a developed economy and where the rules of the good corporate governance are properly applied, a climate of competition between companies exists and progress is encouraged (Plessis et aI., 2005).

4. To what extent can a firm improve its market value by upgrading good corporate practices and is this system applicable nowadays?

The importance of corporate governance for the success of a company and the well-being of society is widely recognized. Most of the researchers characterize this system as part of international financial architecture which not only creates a positive climate in the business world but it helps to strengthen countries' economy.

Henry Bosch the former Chairman of the National Companies and Securities Commission made the following remark about the importance of good corporate governance (Bosch, 2002, p.270):

GCG is desirable and important for two reasons: First in a well governed company, the risks of fraud and corporate collapses are reduced and there are mechanisms which reduce the likelihood of company controllers enriching themselves at the expense of investors .... Secondly is important because it can increase the creation of wealth, by improving the performance of honestly managed and financially sound companies.

According to Bosch (2002) good corporate processes helps create a favorable environment towards success. Risks exist in every company and is hard to completely avoid, there does not exist an infallible system that avoid the problems and mistakes encountered during the activity. The usage of the guidelines of the GCG does minimize the mistakes and is able to avoid every kind of ingest action by managers. Furthermore, it will bring an increase in the market valuation of companies. Using this system, helps the improvement of the governance structures and processes which ensure quality decision-making, encourage effective succession planning for senior management and enhance the long-term prosperity of companies. This follows the general specific paragraph structure. Highlighting the general situation in the previous paragraphs to the answer to the title heading here. However, despite the values that this system offers, it is often seen as an ideal system impossible to realize even though the country states are aware of the values that this system offers but, unfortunately the system does not apply in every country nowadays. One of the reasons that hinders this system from functioning are the different policies that the governments apply and the pressure they impose on the companies in order to apply these policies. Many times these principles and rules of good corporate governance remain at the theory levels.

In addition, the judicial system has a very important role in the functioning of good corporate governance and the lack of an independent judicial system, Appropriate content: a concluding sentence which tells us what the project has achieved to clarify its aims with the reader and to

coherent.

many times doesn't offer guarantee legal support to the investors, creating insecurity and by affecting the normal function of the company. As a result of this, the investors are not interested to engage in business and, it also is a source of corruption within the companies. These companies follow the policies against the real rules of GCG in order to benefit, these policies have not been effective so far and have not only caused the companies to fail but also have affected the country's economy.

5. Conclusion

This paper has given an account of the importance and the values that GCG offers in the business world. Good management, transparency and capital growth are some of the main reasons for using this system. This system could bring irreplaceable results and values not only to the companies, but also to the economy in general, if it is applied correctly. But, unfortunately , despite its advantages and the organizations attempts, to implement the objectives of GCG, it is not always possible as the implementation, it is far away from perfect. Companies are failed and the economy crises in almost every country of the world are as a consequence of the wrong policies that these companies have followed. The future is unknown but surely not positive for these companies. Concluding comments about the subject of corporate governance; however it might be useful to have indicated further areas for research 6. References and ways to resolve the issue. BOSCH, H. 2002. The Changing Face of Corporate Governance. University of New Southern Wales Journal, 25.

OECD 2004. The DECD Principles of Corporate Governance, Paris, OECD ,pp.1766.

PLESSIS, 1. J. D., MCCONVILL, J. & BAGARIC, M. 2005. Principles of Contemporary Corporate Governance, New York, Cambridge University Press,pp.7-8.

SHLEIFER, A. & VISHNY, R. W. 1997. A Survey of Corporate Governance. Journal of Finance, 52.