Internal And External Factors Of Corporate Governance

1.0 Introduction

This report analyses the internal and external factors that hinder future development of effective corporate governance. The analysis will utilize relevant theories and models such as shareholder theory, stewardship theory, PESTEL and the German model to elaborate of the topic. I will begin by evaluating effective corporate governance and this will be followed by internal and external factors that influence its development. The findings will applied on Volkswagen company, which has experienced poor corporate governance in recent past. The application will focus on its corporate structure, corporate policies and corporate behaviour. Lastly, a recommendation will be provided on how to improve corporate governance at the Volkswagen.

164). The laws and rules of a company are meant to protect the firm from outcomes of poor governance such as embezzlement of funds or corruption that create scandals. Siemens experienced a bribery scandal (O’Reilly & Matussek 2008), while Enron was involved in embezzlement of funds that was disguised through misrepresentation of earnings (Petrick & Scherer 2003, p. 37). Both companies struggled with poor reputation and loss of revenues at the height of the scandal. While the reasons for company lapses are varied some as result of greed among owners or the need to maximize shareholder revenues, poor corporate governance is usually at the heart of the problem. One of the reasons is because corporate governance entails harmonizing the interests of the corporation and those of the stakeholders some of whom include shareholders, management, customers, suppliers, community, financial institutions, and the government (Eweje & Perry 2011, p. 226). Due to poor corporate governance, some companies engage in unethical means to achieve those

If there are no proper internal controls then stakeholders linked to the firm are likely to undermine good governance because there are no structures to prevent them or to punish those who are liable for misconduct. According to Solomon (2007), internal control in corporate governance entails having appraisal system that evaluates performance, a risk identification and estimation system, a management oversight, control measures, and isolation of duties (p. 161). Yet, while internal control promotes acceptable practices, the onus is still with the individual entrusted to follow the practices. The stewardship theory supports this notion by arguing that managers have a moral and ethical obligation to act in a transparent and responsible manner as stewards of resources they manage (Fernando 2009, p. 49). This reflects back on the character of individuals elected to the BOD. It might seem subtle but members of the BOD control major decisions and may be susceptible to misuse it. For instance, when the higher ownership of an individual eclipses a certain threshold, this may cause the issue of tunneling and inefficiency. It also reflects back on the shareholders who elect them, thus, divulging the overall perspective, attitude and approach of all the internal