CORPORATE GOVERNANCE

Corporate Governance

Corporate Governance

Corporate governance has evolved into an important institute within recent years because of the highly visible corrupt and unethical practices of large and global companies such as Enron, WorldCom and Parmalat, the Italian dairy conglomerate. These scandals had left stakeholders and authorities in a disorientated state.

It has always attracted attention due to its apparent importance for the economic health of corporations and society in general. The concept is poorly defined as it potentially covers a large number of distinct economic phenomenons. As a result, different definitions that reflect people's special interest in their fields have emerged.

Mathiesen (2002) posits that corporate governance is a field in economics that investigates how to secure/motivate effective management of corporations by the use of incentive mechanisms, such as contracts, organizational designs and legislation, to improve financial performance.

The Organization for Economic Cooperation and Development's (OECD) 1999 definition is consistent with the one presented by Cadbury (1992) who stated that corporate governance is the system by which business corporations are directed and controlled. The structure specifies the distribution of rights and responsibilities transparently among different participants in the corporation, such as the board, managers, shareholders, employees, bankers, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it furthermore presents the structure through which the company's objectives are set, and the means of attaining those objectives and supervising performance.

The significance of advanced corporate governance may be better appreciated by looking at the key business actors. It will be useful to know about the composition, role, organization, operation and evaluation of the Board of Directors, Chief Executive Officer and Management. Their performance have a direct relationship to the stockholders, investors, employees, communities and governments in terms of costs and benefits, and changing the rules of corporate governance will have varying impacts on these various groups. The United States has the best corporate governance of financial reporting and securities market systems in the world. (Business Roundtable 2002). These systems work because of the adoption of best practice by public companies within a framework of laws and regulations and the converse also holds true.

The accelerated nature of change, innovation and progress in the United States and global markets requires improvement in the guiding principles of corporate governance.

The paramount duty of the board of directors is the selection and overseeing the CEO and other senior management in the competent and ethical operation of the company on a day-to-day basis. (Thomas and Manuel 2003). Management is responsible for functioning the corporation in an effective and ethical kind to make worth to stakeholders. Senior management is expected to know how the corporation earns its income and what risks are undertaken. Parallel to that, personal interests or conflict of interests are not to be practiced.

Under the oversight of the board and its audit committee, statements that fairly present the financial condition of the company are to be produced on a timely manner. This disclosure can aid investors in assessing the business soundness and ...