Corporate directors have an important job of representing interests of stakeholders ranging from profit maximization in interest of shareholders, to a broader set of stakeholder interests such as creditors, employees and customers. These are governance systems with competing interests because you cannot focus on profit maximization for shareholders whilst keeping in mind stakeholders needs for employment and stability. The answer perhaps is found in “enlightened shareholder value” approach that provides a more comprehensive analysis on the issue by compromising interests of both parties. The shareholder theory states that directors have delegation for decision making authority to manage the company with the exclusive purpose of maximizing shareholders return on investments. “In the traditional view of the firm, the shareholder view, the shareholders are the owners of the company, and the firm has a binding fiduciary duty to put their needs first, to increase value for them.” (Miles, 2011) Therefore, actin in company’s interests is to conduct the business in the way that promotes shareholder interest and value.
For example, to avoid fraud or misrepresenting of the company’s data, the institutional investor needs to monitor the internal control system to be efficient and effective in delivering the best corporate governance practices in the company. Moreover, the institutional investor had invested large sum of money in the company which in return they will gained benefit in term of dividend which depends on the company’s performance during the year. According to Grossman and Hart, 1980, large shareholders may have a greater incentive to monitors managers than members of the board of directors, who may have little or no wealth invested in the firm. These events occurred when the large shareholders have the ability, materials, opportunity and can influence how manager operates the company. The hypothesis have been made by several researcher claimed that corporate monitoring by institutional investor can push the managers to focus on the best interest of the corporate performance rather than opportunistic or self-serving behaviour.
This theory is the alternative view to the Agency theory as certain mechanisms are used to reduce agency loss. • The Stakeholder Theory- this theory addresses morals and values in managing businesses, stating management has a duty of care, not just in creating value for shareholders. Most corporate governance codes are set on principles, based on a number of reports that firms disclose (Media, 2013, p. 72): • Aiding operative management by achieving targets • To reduce r... ... middle of paper ... ...ation can be obtained from stakeholders on external events or market conditions and firms are advised by King to build and maintain stakeholder trust using transparent communication (Specialists, Chapter 8 Stakeholder Relationships, 2012) In order to avoid conflict and settle disputes, King III introduces a new principle called Alternate Dispute Resolution (Young, 2009, p. 10), an alternative to formal legal proceedings, whereby parties are mediated and attendance is compulsory. The corporate governance framework of a company should also license performance-enhancing mechanisms which help inspire employees such as representation on the board of directors or profit-sharing provisions for creditors (Media, 2013, p. 101). In other words, corporate governance involves building, monitoring and sustaining all aspects of an organisation, internal as well as external.
Excessive Business Risk Taking and Lack of Risk Control To taking higher business risk, investors are expected higher rewards to compensate. Sometimes the director of companies might take decision planned. Profits and dividends should be expected to go up if company makes decision that increases the scale of the risk it faces. Ethical Issues and Corporate Governance Corporate governance only can provide a system or guidelines that is seen to be ethical, true and fair to shareholders. Important company to be aware of the need to maintain a culture of good corporate ethics and the perception of ethical issues by external pressure groups can affect the reputation of the company.
One of their main goals should be that they want to be good corporate citizens. In order for a company to be a good corporate citizen they should be doing a range of different activities within their organisation taking into consideration the 3 pillars of sustainability which are Profit which is part of the economic and financial aspect, People looks at the social part, and Planet which is to do with the environment. As mentioned in (Shah and Ramamoorthly, 2014), that from a company’s perspective of corporate citizenship, it is to make sure that the impact is positive and they try to reduce the negative effect on society and the environment, making sure that they still receive a good enough return from the investors. For a company within the accounting and finance sector, one of the main elements of being a good corporate citizen is to ensure that they comply with the reporting and disclosure requirements. This is very important because when they have to prepare their accounts and financial statements it is vital that they follow the strict guidelines that have been stated by the IFRS.
It has been shown that there are many different areas in which a company may choose to focus its corporate social responsibility. The top area of focus in corporate social responsibility is on environment. Other areas that should be considered in the development of corporate social responsibility programs are education, health, nutrition and employment. “Social responsibility investment combines investors’ financial goals with their obligation and dedication to factors that ensure the well being of society such as environmental friendly practices, economic growth and justice in society” (Anderson 9). These elements not only epic corporate social responsibility, but also represent ethical standards of a company.
From the corporation’s outlook, the developing system’s general agreement is that the purpose of corporate governance is to increase the firm’s value, subject to meeting the corporation’s financial and other legal obligation. They believe that the extensive meaning stresses the need for boards of directors to balance the interest of capital providers with those of stakeholders in order to achieve long term maintained commercial success. While on the other hand, the public believe the purpose of corporate governance is to nature the spirit of the company while ensuring accountability for the exercise of power and special privileges by the firm. The role of the public policy is to provide firms with the incentives and discipline to minimize the difference between private and social returns, and to protect the interest of stakeholders. Corporate governance has become an issue of worldwide importance.
A very recent issue within this area is also including towards the end of the course work. Why corporate governance Empirical evidences show that good corporate governance promotes effective monitoring of corporate assets; effective risk management and greater transparency. It also helps to achieve and maintain public trust and confidence in how companies are run. I.e. it is a means to keeping companies profitable.
In other words, directors need to act in good faith in the best interest of the company. However, once shareholders delegated their power to directors there was another issues, whether directors should act in the best interests of shareholders only, or focus on the interests of other stakeholders? So, whose interests should be promoted by the directors? Some scholars believe that the focus should be made on stakeholders, as they are under the risk of the firms` actions; they contribute to the company ‘some form of capital, human or financial, something of value, in a firm’. So, corporations should be responsible toward stakeholders.
Furthermore, he believed that any corporation assuming a more socially responsible attitude would be met with economic limitations, rendering them less competitive in the market area (Friedman, 1970). R.E. Freeman’s ‘Stakeholder theory’ is often seen as a better alternative to Friedman’s ‘Shareholder primacy theory’. Both the Stakeholder theory and Shareholder theory are normative theories explaining what a corporations social responsibilities ought to be and both adopt a similar stance on management’s accountability (Smith, 2003). However, the Stakeholder theory states that a manager’s duty is not only to focus on shareholder’s interests, but also to balance them against the interests of the company’s other stakeholders.