Effective corporate governance is essential if a

business wants to set and meet its strategic goals. A

corporate governance structure combines controls,
policies and guidelines that drive the organization
toward its objectives while also satisfying
stakeholders' needs. A corporate governance
structure is often a combination of various
mechanisms.
External Mechanism

External control mechanisms are controlled by those outside an

organization and serve the objectives of entities such as
regulators, governments, trade unions and financial institutions.

Methods that ensure that managerial actions lead to shareholder

value maximization and do not harm other stakeholder groups
and that are outside the control of the corporate governance
system.
External Mechanism
Market for
Corporate Control

Auditors

Banks and Analysis

Regulatory Bodies

Media and Public

Activists
Market for corporate control

An external control mechanisms in which shareholders

dissatisfied with a firms management sell their shares.

External governance comes into the picture when the

internal governance fails. An effective performance by the
market for corporate control assures that those managers
who were ineffective or act opportunistically are being
controlled and monitored in an effective manner.
An external governance mechanism that becomes active
when a firm’s internal controls fail. “court of last resort” .
The 1980s saw active market for corporate control, largely as a result of available
pools of capital (junk bonds).

Many firms began to operate more efficiently as a result of the “threat” of

takeover, even though the actual incidence of hostile takeovers was relatively
small.

Changes in regulations have made hostile takeovers difficult.

 Managers tend to behave opportunistically.

Opportunistic Behavior
• Shirking- managers fail to exert themselves fully, as is required of them.
• On the Job Consumption- consumptions by managers that does not in
any way increase shareholder value.
• Excessive Product-Market Diversification- serves to reduce only the
employment risk of the managers rather than the financial risk of the
shareholders.
Auditors

One of the most important institution in external governance.

Conduct auditing task to the firms. Detect irregularities or

financial misstatement.

Provide opinion accordingly, adhering standards of reporting

for public purposes, and taxes paid properly and on time.
Financial analyst /Banks and Analysis

Commercial and investment banks have lent money to corporations and

therefore have to ensure that the borrowing firm’s finances are in order and
that the loan covenants are being followed.

Examine the prospect of the business and provide recommendation whether to

hold/buy/sell the firms' shares in the stock market.
Regulatory Bodies

All corporations are subject to some regulations by the government. The extent o
regulation is often a function of the type of industry.

Government regulations are the most effective external controls on the

governance of a company. Companies are required to comply with these or face
penalties for violations.
Media and Public Activists

Media scrutiny of the workings and processes of a company ensures, to a certain

degree, the proper governance in an organization. Whistleblowers often expose
wrongdoing within a company to the government and media organizations.

Public perceptions about a company’s financial prospects and the quality of its
management are greatly influenced by the media.
 Advantages and Disadvantages of External
Governance Mechanism
A DVA N TA G E D I S A DVA N TA G E

Although these mandatory rules do not allow

companies to differentiate themselves in the
They are imposed on all listed
market. All listed companies must comply with
companies and a not subject to
CG rules, thus no one company can claim to their
control by directors in terms of
shareholders/ the market that they are better at
whether they will comply or not.
governance than any other company- not in
terms of strictly external mechanisms.