Corporate governance is essential in promoting trade and competition to further develop the world economy. Globalization has indeed linked more countries through the introduction of faster communication lines, in a simple click of a button, messages are transmitted from one point of the earth to another. True enough, the nations of the world somehow lose their borders; lose their identity as citizens of a single nation. Because of this, competition among corporations is tighter than ever as these companies become transnational.
Corporations now realize the value of managing their employees as they tend to outsource to other countries that provide cheaper labour. Thus, the current trends that the global market is experiencing promised increases of different trade possibilities together with the exchanges of information between the developing and developed countries. One disadvantage that globalization brings about is the decline of the so-called formal power of nation-states in addition to the erosion of sovereignty. As mentioned, more and more countries are now being linked to each other because of the advancements made in technology, especially in communications.
Together with this, the globalization era brought about the rise of new superpowers that are equally rich economically and economically. The United Kingdom of Great Britain and the People’s Republic of China are two of the superpowers that are currently on the world’s centre stage. UK has been one of the most industrialized countries of the world ever since the Industrial Revolution took place (Pedersen and Thomsen, 1999) while China, considered to be one of the greatest ancient civilizations only regained its influence and importance in the world in the first seven years of the twenty-first century.
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The deterioration of the traditional ways of governance comes along with the shift of power from the nation-states to the transnational corporations themselves. This would mean that politics and governance are now placed on a wider scale, as relations go beyond the traditional boundaries of the different countries all over the world. Corporate governance then becomes of vital importance to those who study international relations. First, the scale and scope of different businesses is very large to the point that the governance practices of multinational corporations have had significant impacts on the international economy.
Second, national governments, major international institutions and the different private sector agents are all exerting efforts to be able to meet the worldwide standard of corporate governance. In doing this, they are somehow constructing something that could be a very strong candidate for a distributive governance model. Lastly, corporate governance is an area where distribution of governance authority between the state and non-state actors is often flexible (Detomasi, 2003).
Corporate governance is defined as the process of aligning the interests of the shareholders on one side and the executive management team on the other hand (Bicksler, 1996). In short, corporate governance is concerned with the separation of ownership from management (Niu, n. d. ). This particular concept has been defined by Berle and Means’. According to these authors, managers do not have the same interest and the motivation as the owners to make the most out of the corporate assets and use them effectively. As a result, the owners should introduce mechanisms that could help in aligning the interests of owners and managers.
According to the Berle and Means theory, different studies suggested that shareholders can exercise three dominant corporate control mechanisms: the market for corporate control, internal monitoring, and shareholder litigation that control directors to prevent abuse of powers. These are the mechanisms that make the Anglo-American corporate governance system (1933). Corporate governance, thus, is not only important for a particular corporation but to the stakeholders, shareholders and management of a certain company as a whole.
It must be ensured that corporate governance is managed in such away that it would respond properly to the needs of the corporation, the shareholders and stakeholders for it to be considered as an added market value for the corporation. As mentioned in the previous paragraphs of this chapter, corporate governance is becoming more and more essential to countries that would want to be famous and trusted in the world stage. Several studies looked into the effect of corporate governance systems on the international economy as well the domestic policies of the different nation-states (Detomasi, 2003).
However, corporate governance is more concerned, and is actually directed towards the internal workings of a certain company and is actually directed toward the internal workings of the company, thus balancing once again, ownership and management from decision making (Detomasi, 2003). A popular theory of corporate governance, the communitarian theory views the corporation as a separate entity, which is not capable of either doing harm or good. Because of this, corporations have social responsibilities not only to the shareholders but to the other stakeholders, and the society as well (Fort & Schipani, 2000).
Within this paradigm, non-shareholders receive legislative protections. Difficulty happens when conflict happens and self-interests take hold of individuals. It is also very hard for the management to consider the needs of each and every stakeholder. In addition, it becomes hard for the managements to attend to the needs of stakeholders as there is clear definition that exits in the social, political, or economic realms that could help management in making choices. In the communitarian paradigm, lifetime employment is one of the positive features.
This gives employees the drive to develop and supply the firms with human capital. In addition to this, it encourages stronger loyalty among the employees (Fort & Schipani, 2000). This particular attitude of employees could be advantageous to the management in times of a financial crisis. In those times, the employees would be more willing to work hand in hand with other team members in making concessions, thus making the corporation survive the financial distress. However, disadvantages often come along with these advantages.
Corporate governance systems operated in the communitarian theory may experience bias against start-ups, research and development, and human-capital-intensive industries in their systems. In the same manner, the natures of business that operate within the communitarian theory are bank-centred in nature. Thus, banks tend to have a bias against risk that is a risk itself that affects start-ups. Usually, banks tend to focus more on assets that can be collaterized rather than research and development which are considered to be intangible investments. Therefore, this could lead to excessive investment in insurance (Fort & Schipani, 2000).
Systems operating within the communitarian theory are also often characterized by a number of areas that are usually inflexible (Fort & Schipani, 2000). This includes sourcing strategies, labour markets and the restructuring of corporations. Because of this, communitarian companies are said to be less likely to meet competitive challengers in the global arena. Globalization strategies would therefore face vertical chain of relationships as a hindrance. The inflexibility of communitarian-based corporate governance systems is also affected by their labour markets.
In the 1990s, inflexible labour markets caused the high employment rates in the European continent (Fort & Schipani, 2000). Simply put, communitarianism is facing a lot of difficulties in a world where capital flows beyond the borders of the state and human-capital-intensive technologies become the norm and organizational boundaries become more important. These particular difficulties arise from the nature of corporate strategies that the communitarian theory puts forward such as excessive risk avoidance, the absence of external controls, and insufficient attention to shareholder wealth creation (Fort & Schipani, 2000).
Conversely, contractarianism puts forward the belief that the firm’s shareholders are the primary constituency of management. Those who are guided by the contractarian theory believe that corporations work through their contacts (Fort & Schipani, 2000). Thus, their tendency is to rely on voluntary contracting and market forces in aligning the interests of the managers together with the shareholders. In corporate governance systems that run under the principles of contractarianism, stakeholders are believed to have the knowledge, the expertise, and the means to bargain with the management branch of the corporations.
Integrated into this approach are the different market forces that include the capital market, the product market, the managerial labour market and, most importantly, the market for corporate control. This particular type of market shall be the one responsible in disciplining the management that they may act according to the interest of the shareholders, the so-called residual claimants (Fort & Schipani, 2000). In addition, this type of market shall give penalties for those who engage in ineffective contracting.
Vital parts of this particular practice are public policy regimes and a legal regime that shall provide freedom of contract (Fort & Schipani, 2000). The lack of perfect market conditions is inevitable (Fort & Schipani, 2000). Hence, this is where the problem of the conrtactarian approach lies. There would be times when the corporate environment shall be plagued by conflicts and disputes that often arise due to barriers caused by language, unforeseen circumstances, information asymmetries, transaction costs and even fraud (Fort & Schipani, 2000).
Because of this, greater problems arise when contracts are drafted for the global environment where different legal regimes are making contracting inefficient and property rights, unenforceable. The Importance of Corporate Governance As mentioned, corporate governance is said to be an important factor for the stability and progress for the international economy in the era of globalization. The transparency of management of enterprises remains to be the primary objective of corporate governance in efforts to maximize the participation of that particular enterprise in the financial markets to achieve efficient behaviour.
Based on this particular framework, corporate governance would not only benefit the corporation but the shareholders, stakeholders, employees, customers, banks, suppliers and creditors. In addition, corporate governance benefits the society and a particular country by providing employment to a country in which a particular corporation is based. Providing employment for the population of a certain country would mean that corporations would support domestic production, commerce, trade and the production of exports. In the same manner, corporate governance supports environmental concern that could attract foreign investors.
By doing all these, corporate governance provides healthy, friendly competition among corporations in the market place through the different policies created responsibly in such a way that it could attract local and foreign investors. Through these policies, corporations could ensure their investors of their transparency (Palacio & Johnson, 2006) The influx of goods and services in the markets from different economies all over the world clamor for high quality products – products that could really dominate the world market.
In order to do so, corporate governance, is again the key to successfully dominate the market, ensuring not just the competence of the product but to also gain the trust of their consumers all over the world (Heidrick & Struggles, 2007). Corporate governance would also offer a proactive-reactive approach to corporate failures which could often lead to scandals caused by the lack of transparency among the stakeholders and the shareholders. According to Rayton and Cheng (2004), Nike encountered such scandals when their sweatshops offer unfair labour practices that would often be characterized by unfair and abusive labour practices.
Corporate governance ensures that irresponsible and inhuman incidents happen between corporations, its stake holders and its shareholders. However, a corporation holding a good name is more recognized by consumers, thus giving them more profits. Still according to Reyton and Cheng, (2004) one corporation is said to have a good corporate governance system when it has been able to minimize agency costs, improve meritocracy in the corporate boards, reduce the risks of fraud due to its corporate transparency and the safeguarding of the wealth of its stakeholders, taking their security in consideration.
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