The Rise of Corporate Governance

Over the last few years Corporate Governance became a very important consideration for any business around the world. After corporate scandals such as Enron and Worldcom in the USA and Independent Insurance Co in the UK, investors and governments demanded better corporate governance practices by the businesses.

Various measures were taken by governments to prevent further corporate scandals. For example, US introduced the Sarbanes-Oxley Act 2002, to comply with which placed a significant financial burden on businesses.

Ehlers and Lazenby define corporate governance in the narrow sense as the formal system of accountability of the board of directors to shareholders and in the broad sense as an informal and formal relationship between the corporate sector and its stakeholders and the impact of the corporate sector on society.

To succeed in contemporary environment, companies need to have reputation of having a strong corporate governance. Triple bottom line principle (“people, planet, profit” or “the three pillars”) became prominent. It refers to the principle according to which enterprises measured by and must report on it’s economic, social and environmental performances. This is in contrast with the past when only reporting on economic performances (single bottom line) were required.

Corporate governance is beneficial to the firm in many respects. What is most important is that it increases long-term performance on the enterprise-wide basis. Therefore, it increases shareholder’s wealth, which is the main objective of the business.

Proper corporate governance also benefits society and country as a whole. For example, if country’s businesses are known for maintaining proper corporate governance, foreign capital will flow into the country as foreign investors will be interested in investing in the country’s businesses.

Within the country, resources also will be used more efficiently due to good corporate governance. In such environment investors will be investing into companies with biggest potential to deliver value to customers and inefficient management will be replaced in underperforming businesses.

Further, society and communities will benefit in various ways. For example, enterprises with proper corporate governance comply with laws and regulations, such as requirements with respect to pollution. Overall, good corporate governance benefits all stakeholders of the enterprise and is a prerequisite for success of any business.

 

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