Research Paper on Evaluate the Principles of Corporate Governance Citing Their Applicability to Contemporary Organizations
CHAPTER ONE
Introduction
Corporate governance importance arises in modern corporations due to the separation of management and ownership control in the organizations. The interests of shareholders are conflicting with the interests of managers. The principal agent problem is reflected in the management and direction related problems due to the differential interests of firm’s stakeholders. There is not a single definition of corporate governance rather it might be viewed from different angles. Berle and Means (1932) and the even earlier Smith (1776). Zingales (1998) defines corporate governance as “allocation of ownership, capital structure, managerial incentive schemes, takeovers, board of directors, pressure from institutional investors, product market competition, labour market competition, organizational structure, etc., can all be thought of as institutions that affect the process through which quasi-rents are distributed (p. 4)”. Garvey and Swan (1994) assert that “governance determines how the firm’s top decision makers (executives) actually administer such contracts (p. 139)”.
PRINCIPLE OF CORPORATE GOVERNANCE
Over the last several years, the external environment in which public companies operate has become increasingly complex for companies and shareholders alike. The increased regulatory burdens imposed on public companies in recent years have added to the costs and complexity of overseeing and managing a corporation’s business and bring new challenges from operational, regulatory and compliance perspectives. In addition, many public companies have a global profile; they interact with investors, suppliers, customers and government regulators around the world and do so in an era in which instant communication is the norm.
The current environment has also been shaped by fundamental changes in shareholder engagement, which has become a central and essential topic for public companies and their boards, managers and investors in the early 21st century. Public companies have undertaken unprecedented levels of proactive engagement with their major shareholders in recent years. Many institutional investors have also increased their engagement efforts, dedicating significant resources to governance issues, company outreach, the development of voting policies and the analysis of the proposals on the ballots of their portfolio companies. In addition, overall levels of shareholder activism remain at record highs, imposing significant pressures on targeted companies and their boards.
Further, many of today’s shareholders and not only those typically viewed as “activists” have higher expectations relating to engagement with the board and management than shareholders of years past. These investors seek a greater voice in the company’s strategic decision making, capital allocation and overall corporate social responsibility, areas that traditionally were the sole purview of the board and management. Moreover, some shareholder-driven campaigns to change corporate strategies (through spin-offs, for example) or capital allocation strategies (through share repurchase programs) suggest that in some cases, at least, shareholder input on these matters has been heard in the boardroom. Some commentators view this rise in shareholder empowerment as appropriate, arguing that shareholders are the ultimate owners of the company. Others question, however, whether activists’ goals are overly focused on short-term uses of corporate capital, such as share repurchases or special dividends. Capital allocation strategies focusing on short-term value may be entirely appropriate for a shareholder, regardless of the length of its investment horizon. The board, however, has a very different role when considering the appropriate use of capital for the company and all of its shareholders. Specifically, the board must constantly weigh both long-term and short term uses of capital (for example, organic or inorganic reinvestment, returns to shareholders, etc.) and then determine the appropriate allocation of that capital in keeping with the company’s business strategy and the goal of long-term value creation.
Legal Framework
With the adoption of the Code of the Nigerian Banks, reliable guidance on the introduction of high standards of corporate governance was achieved, taking into account the specifics of the Nigerian legislation and the current practices in the Nigerian market of the relationship between shareholders, managers and other stakeholders involved in the economic activity of Joint-stock Banks. It formed a group of Nigerian Banks, which began to be used in the process of building the Code of its corporate governance practices, as an important source for the development of its internal documents that define standards of corporate governance. Code offered to shareholders and investors clearly defined approaches to what should be required of the Banks and contributed to an increase in activity of shareholders and investors. As a result, the Code largely contributed to a substantial improvement in the overall situation in the area of corporate governance and the implementation of the best standards adopted in international markets, improve its image and investment attractiveness of Nigerian Banks
Conclusion
From the review, corporate governance has become an essential problem in both developing and developed countries (Kelton and Yang, 2008). Corporate governance is linked with the management relationship and between other stakeholders and board of directors. This emphasizes the need for a holistic review and understanding of the concept. The factors of corporate governance could be examined in Nigerian banks in the form of existence of non-executive directors, family members of the board, audit committee and the family member’s proportion on board, and ill appropriation of loans
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