Question

Discuss why the concepts and ideas of corporate governance started been used in the 1980s and, then, became more important at the beginning of the 21st century.

Book is Corporate Governance ISBN:(0198702752)

Answer 1

Corporate Governance : The majority of the definitions articulated in the codes relate corporate governance to “control” – of the company, of corporate management, or of company conduct or managerial conduct. Perhaps the simplest and most common definition of this sort is that provided by the Cadbury Report (U.K.), which is frequently quoted or paraphrased: “CorpCorporate governance is the system by which businesses are directed and controlled.”

The framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company's relationship with its all stakeholders (financiers, customers, management, employees, government, and the community).

The corporate governance framework consists of

(1) explicit and implicit contracts between the company and the stakeholders for distribution of responsibilities, rights, and rewards,

(2) procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles, and

(3) procedures for proper supervision, control, and information-flows to serve as a system of checks-and-balances.

The main five reasons why corporate governance became so prominent in the past two decades:

i) the world-wide privatisation wave,: Privatisation has been an important phenomenon not only in Western Europe and Asia but especially in the former communist countries, some of which joined the EU recently. The US are an exception as state ownership of companies has always been very small. This privatisation wave has its origin in the UK which was, for example, responsible for 90% of EU privatisation proceeds in 1991. Since 1995 Australia, Italy, France, Japan and Spain alone have generated 60% of total privatisation revenues worldwide. The privatisation wave raised the question of ownership and control of the former state companies. In the countries of Continental Europe great care was given to ensure the transfer of control to large shareholders. The UK, on contrary, created a form of “shareholder democracy”. Privatisation boosted the development of the stock markets as most OECD sales have been conducted via public offerings.

ii) pension fund reform and growth of private savings,: The private provision for one’s old age is common in the US and due to the demographic development in Europe as well. That made pension funds and other institutional investors into large and powerful institutions which can influence corporate governance. Institutional investors in the US alone command more than 60% of total equity investment in the OECD, raising to 76% when UK institutions are added. A significant proportion is held by pension funds (approx 40% for the US and UK and 15% for Germany). These investors therefore play an increasingly active role in global corporate governance.

iii) the takeover wave of the 80s: The hostile takeover wave in the US in the 1980s and in Europe in the 1990s in addition to the recent merger wave (eg AOL-Time Warner, DaimlerChrysler, or Acelor-Mittal Steel recently) has influenced the public debate on corporate governance. The 200 billion dollar cross-boarder hostile bid of Vodafone for Mannesmann in 2000 was the largest ever to take place in Europe. This takeover together with the recent hostile takeovers in Italy (Olivetti for Telecom Italia) and in France (BNP-Paribas) have changed the corporate world in Continental Europe. Since these events takeover regulations are political agendas of the European Union (EU).

iv) deregulation and integration of capital markets: The greater integration of world capital markets through the introduction of the Euro and mergers of stock markets (Euronext and the endless merger rumours for London Stock Exchange) and the growth in equity capital throughout the 1990s increased the interest in corporate governance in the last few years. In addition, increasingly fast growing corporations in Europe have been raising capital from different sources by cross listing on multiple exchanges.

v) crises. The East Asia crises 1998 highlighted the weak corporate governance practices in emerging countries and led to a reassessment of the Asian model characterised by centralised and hierarchical industrial groups. There has been similar reassessment of mass insider privatisation and weak shareholder protection in other transition economies as well.

Corporate governance is the way a corporation polices itself. In short, it is a method of governing the company like a sovereign state, instating its own customs, policies and laws to its employees from the highest to the lowest levels. Corporate governance is intended to increase the accountability of the company and to avoid massive disasters before they occur. Failed energy giant Enron, and its bankrupt employees and shareholders, is a prime argument for the importance of solid corporate governance. Well-executed corporate governance should be similar to a police department's internal affairs unit, weeding out and eliminating problems with extreme prejudice. A company can also hold meetings with internal members, such as shareholders and debtholders - as well as suppliers, customers and community leaders, to address the request and needs of the affected parties.Corporate governance is the way a corporation polices itself. In short, it is a method of governing the company like a sovereign state, instating its own customs, policies and laws to its employees from the highest to the lowest levels.