Corporate governance is defined by the OECD principles as the relationship between management of a company, its shareholders, its board and other stakeholders. It is a system which is used for the purpose of controlling and directing the companies. Corporate governance is not a new concept but it has got popularity in the last few decades due to various crises such as: East Asian crisis of the late 1990s and various other fraudulent activities in the corporate world. Amongst the major reasons for the increasing interest in corporate governance are the following needs;
Need for Stability of Stock Prices
Stability of stock prices is one of the important factors for the investors to predict the future performance of a company or organization. Corporate governance has great impact on the efficiency of stock markets. For example, in the Asian crisis in 1997, poor corporate governance influenced the stock markets efficiency to the large extent Sabri (2007). This stability is only possible with the help of good corporate governance. Investors are always attracted towards well governed companies because such companies adopt transparent governance policies and have better financial accountability and higher profit margins. There is a worldwide effort to improve the corporate governance and insure greater shareholder accountability and corporate transparency, Solomon (2005). Therefore, those organizations which are seeking new funds for businesses must ensure good corporate governance in place. Stock prices stability shows the level of risk for investment. Investors will only invest if they undertake appropriate risk for their investment.
Need to Attract a Talented Workforce
Talented workforce is a human capital and is considered as competitive advantage by the organizations. The ability of a company to attract and hold good people is imperative for its success Malik. F. (2006). It’s a common misconception that more capital and improved technology leads to the successful organization. Although they are important for the progress of organization but the most important factor which makes a difference is the human capital. People with different skills, knowledge, values and beliefs etc are vital for the long life of an organization. Corporate governance helps in attracting such talented workforce by creating good brand image. Similarly human skills could be developed through various training and development programs. Need for Careful Management
Corporate governance ensures the careful management of an organization because there are various important decisions which could benefit any actor such as: shareholder, directors, social welfare etc. Basically, there are two views regarding the maximization of economic interests. One is the Anglo-American view which is directed towards the improvement of owner’s economic interest. Other is Non Anglo-American view which encourages the social welfare of society. Therefore, care must be taken to protect the multiple goals rather than protecting the self interests of board of directors or shareholders Wei (2003), Brealey et al. (2007). Such practices will ultimately lead to transparent management, lower corruption opportunities and improve risk assessment. Similarly, organizations also face the issue of distrust in the integrity of executives and management due to popular scandals such as: Enron, Solomon (2005). People perceive integrity of the organization in different ways. Corporate governance can be used to encourage, measure and project the integrity. Need for Training of Directors
It is very difficult for the organizations to find the right people for the jobs, and train them once they are selected. When the directors are selected they come up with different experiences, expertise and qualifications. It is therefore important to train the directors so...