External Institutions of Corporate Governance

There are corporate governance institutions which play a role in aligning the interests
of managers and shareholders, controlling shareholders and minor shareholders and
the society and the firm. These institutions are known as the institutions of corporate
governance.

Regulators and governments

They consist of government and some other institutions that ultimately articulate
accurately the communitys voice concerning power relationships, responsibility, and
accountability. Specifically, government agencies regulate corporate governance
through formulation and implementation of rules and regulations on the operations of
corporate institutions within of its jurisdiction. For instance, the Corporation Code of
the Philippines (Batas Pambansa Bilang 68) is where all other laws and interpretations
are derived concerning a corporation and corporate governance.

In addition to company law and listing rules, some companies and industrial sectors
are subject to further external control by government-appointed regulators or by
governments themselves. This usually applies to companies or sectors involved in
areas considered strategically or politically important by governments; these include
the control of monopolies or the supply of utilities (such as water or energy).

In some countries, this also applies to military equipment and medical supplies. When
this is the case, regulation typically applies to pricing and supply contracts. In some
countries, many large companies are owned, directly or indirectly, wholly or partially,
by the host government. Nationalized companies are part of the economic fabric of
many developing countries but tend to feature less prominently in more developed
countries. It is generally believed that the profit motive, created by the agency
relationship in a conventional shareholderdirector arrangement, creates and
stimulates greater economic efficiency than in nationalized companies.

Governments control corporate governance through the imposition of legislation and

the enforcement (through a judiciary) of common and statute laws. Although
governments usually have a range of political and social objectives in mind when
controlling business, they also rely heavily on tax revenues levied on company profits
and, where relevant, sales and other transaction taxes. One reason for the
deregulation of much economic activity is the need to increase tax revenues and create
employment by gaining the economic efficiencies offered by competition and executive
reward packages that are aligned to added shareholder value.

Auditor

The most obvious role of audit in corporate governance is to report to shareholders

that, having audited the companys accounts, the accounts are accurate (a true and
fair view is the term used in some countries). Audit is also a legal requirement in
compliance with company law as a condition of company registration and the granting
of limited liability.
Some independent auditors and public accountants specialize in forensic accounting
investigating and interpreting white-collar crimes such as securities and fraud and
embezzlement, bankruptcies and contract disputes, and other complex and possibly
criminal financial transactions, including money laundering by organized criminals.

Users of the entitys financial information such as investors, government agencies, and
the general public, rely on external auditors to present an unbiased and retain
transparency among the internal and external users of financial information who want
their interest on the company be protected from inside misjudgment and
misinformation. They are the silent reminders to any company that there are eyes
looking on them that to ensure that interest of others are protected and enables the
company to act consciously, with proper diligence, and conscientiously. In effect, this
effect of being watched can lead the company to formulate strategies, policies, and
corporate governance practice in ensuring transparency and reliability is observed at
all times.

Markets

Markets are the most important of all corporate governance institutions. There are
three types of markets namely product markets, capital markets and managerial labor
markets. Each of these markets and their role as institutions of corporate governance
is dealt with in detail as follows:

Product Markets. Product market competition should provide adequate incentive for
firms to adopt the most effective corporate governance mechanisms. If a firm is unable
to successfully market its product it will cease to exist. For this reason, product
markets tend to discipline managers. That is to say markets for a firms product have
an effect on the performance of managers. Managers have to strive to market the
firms products successfully and thereby earn profits for the shareholders. However,
an exception to the principle of markets disciplining managers is seen in firms that
enjoy a monopoly for their products. In such markets the customers are forced to buy
products from the firm as there is no competition and no other firms supply the
product.

Capital Markets. Firms need funds to develop new projects and to expand business.
For this reason they need to access capital markets. In the case of debt markets, the
debt has to be serviced by making periodical interest payments. The funds necessary
for servicing of interest payments and capital re payments have to be generated by the
operations of the firm. Firms that do not service interest and capital re payments will
find it hard to return to capital markets again to raise capital. Even if they do return to
the capital, the cost of capital can be expected to be greater than was previously. The
capital market, if it is well regulated, transparent and accountable, can serve to either
reward or punish firms for the corporate governance practices that they adopt. The
rewards may take the form of ability to raise low cost capital from markets. The
punishment may take the form of having to pay a premium over normal market rates
to raise capital. Better corporate governance reduces agency costs and increases
investor optimism in the future cash flows and growth prospects. This has the effect of
reducing the cost of capital to the firm.
Managerial Labor Markets. If the firm cannot recruit and retain good managers it
cannot continue in business. In companies where there is a controlling shareholder,
the managers are controlled by the controlling shareholder and there is no agency
problem. However in cases where the share ownership is dispersed there is an agency
problem between the shareholders and the managers. This is because when ownership
and management are separated it confers a vast degree of power on managers.

General Public

The general public, who is the ultimate institution, with ultimate responsibility that
our rights as citizens are protected, the responsibility to protect the environment and
our interest, the responsibility to oversee corporate governance, to ensure that their
policies include us, and the responsibility to guarantee that our rights to live, to self-
preservation, and to the pursuit of happiness is not impede by corporations and their
policies, and the external institutions of corporate governance.