Drivers of Corporate Governance Codes

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DRIVERS OF CORPORATE GOVERNANCE CODES 7

Driversof Corporate Governance Codes

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Driversof corporate governance code

Corporategovernance is the systems, procedures, as well as conducts throughwhich a company becomes directed and controlled. Corporate governancecode comprises of broad principles as well as more specificprovisions, which corporations need to comply with in running theiroperations. Historically, in the developed economies, key aspectshave been adopted to provide good corporate governance. In currentglobal economy, good corporate governance is becoming highlyrecognized as the key factor towards the success of businesses. Theworld economy is creating opportunities as well as competitivethreats, in which it is instituting good corporate governancepractices that would eventually develop a strategy for a company toprosper. Well improved corporate governance has the capacity ofattracting vast investments at a lower cost, strengthening thecorporate plan and its implementations, offering clarified accounts,enhancing protection desired by the shareholders, and assisting inthe attraction and maintenance of quality employees.

Opportunitiesas well as competitive threats developed by the global economy makethe institution of good corporate governance practices important indeveloping a strategy that can make an organization prosper. Thecontingent replica of regulation applies to financial reporting: thenotion that equilibrium in law exists, but is broken by someintrusive event, mostly the financial problems. This result in direneed for revising the rules, and a new equilibrium is worked outproviding the pattern, which has been operating in driving change incorporate governance. The following paragraphs will discuss keydrivers to the corporate governance codes.

Oneof the key drivers to corporate governance is the government. Theconception of corporate regulation is usually linked with failures ofthe corporations and that of their management thus they have to actin a way that the community expects them to act. With this said,corporate governance does not escape this trend especially withaccounting. Countries may find themselves undergoing the sameproblems at times. Using an example of British codes of bestpractice, which was started by the Cadbury Committee, may beassociated with governance scandals likeColorollin the early 1990s. Besides, the flourish of business scandalsfrequently in the USA, have been increasing in number and this hasbeen noted to have an adverse impact on the investors` confidence andmarket values across the globe. Consequently, the United States ofAmericawasforced to take a strong action and this led to the establishment ofthe Sarbanes-Oxley Act in 2002 to stop the rapid wearing down of theinvestors` confidence. This was a good show of how government failurecan be used in the formation of new corporate governance codes.Initially, the US government had not taken action of going againstbusinesses that did not have good governance, but after realizingthat there were extreme cases of business misconducts that resultedin decreased investors’ confidence the government intervened andensured the establishment of the SOX Act, which brought transparencyin businesses. It was due to the problems and scandals that continuedto manifest in the businesses that led to the creation of strictregulatory responses.

Theuse of dubious accounting and disclosure practices especially inEnron Company, which was a good example of where fraudulent deedswere acceptable, the approval of such actions by the board and theircertification by the auditors arose from a variety of forces. Theseeffects included pressure to meet quarterly earnings projections andmaintain stock prices after the expansion of the 1990s. There werealso executive compensation practices, obsolete and rules that werebased on accounting standards complex corporate financialarrangements that were meant to minimize taxes and conceal the truenature of the companies, and the compromised autonomy of publicaccounting firms.

Mostgovernments are of immense importance in trying to support a healthyeconomy as a result, their efforts should lead to an enhancedquality of life for all its citizens. Unavoidably, when a moderatelymeager number of individuals cause the economy to suffer, thegovernment has no option but to intervene. Many initiatives in thisarea can be presented as a wish to make unequivocal theresponsibilities that society looks upon different actors to execute,and come up with a framework for penalizing them in case they fail todo as expected. In addition, such initiatives may also serve as asign of change in social expectations or general inflation in whichthe view of acceptable behavior is acceptable. The regulatory bodiesalso change, come together and bring a transformation in the ethicaland moral environment that favors corporate governance.

Anotherkey driver of corporate governance codes is the capital markets. Capital markets describe financial markets, which support the saleand purchase of equity-backed securities or long-term debtsecurities. Excellent corporate governance is critical in the capitalmarkets because it helps in enhancing the shareholder value. It isapparent that businesses that have excellent corporate governancewould attract a high number of investors and mitigate their cost ofcapital this emerges as their primary source of inspiration toventure into business. Corporate governance and investment decisionsare two items that cannot be separated because one influences theother. When making investment decisions, investors have to be worriedby the status of the corporate governance. In case the corporategovernance of a business is bad, then an investor will have nothingto do with the business. This is because poor corporate governancewould imply that the investor is likely to lose his/her investment byconsidering his/her investments in the business. It is clear thatinvestors put corporate governance on equivalence with financialindicators, when evaluating and assessing their investment decisions.

Capitalmarkets are exceedingly critical in influencing the corporategovernance codes because they are usually involved in establishingwhich businesses can engage in the markets and the ones that cannotbe involved in the markets. For instance, in case a given business isconsidered to have poor corporate governance, capital markets do notallow such a business to participate in trading in the markets.However, in case a business has excellent corporate governance, itwill be welcomed to participate in different capital markets.Besides, capital markets are also involved in coming up withregulations that support good corporate governance.

Shareholderactivism is another key driver of corporate governance codes.Shareholder or investor activism can also put into effect bettercorporate governance. Historically, it is known that individualshareholders, who may be private individuals or institutions, couldnot, or held a minimal opportunity of persuading the board ormanagement because of their part of ownership. However, todayshareholders have the power of influencing a given aspect affectingthe management of a business. For example, in case investors feelthat the management is not driving the business in the rightdirection, and feel that it is one of the management leaders that ispreventing the business from adopting ethical principles, they canair their views and change the leader. Investors are usually involvedin making an organization follow good corporate governancetherefore, investors have an influence in driving the rules that abusiness would follow. It can be difficult for a single shareholderto change the rules or code of conduct that a given business followssince shareholders have to work collectively since an organization iscollectively owned. However, when a majority of shareholders cometogether and support a certain aspect that they desire changed, anorganization or business does not have an alternative other than tochange the way the organization is run. Nevertheless, the issues todo with the corporate governance presented have to be examined anddiscussed in order to come up with the desired governance.

Inaddition, directors of corporations may also have an influencetowards the development and adoption of corporate governance codes.In businesses, not all leaders are corrupt or fail to follow therequired laws especially in the management of finances. Thedirection that a given corporation may take will be highly influencedby the directors of the corporation. Following of ethical principlesis an important aspect that every business leader needs to focus onthis is because when ethics are not followed, there is a likelihoodof the management or other parties in the business engaging incorrupt deals or mismanagement of business resources. Thus, theperson that has to keep the business on toes is the director becausehe is the leader and the others follow his/her authority. In case adirector of a business follows ethics, which he/she must do, heshould be in a position to point areas where a business is not goingwell without fear or favor. A director can influence business tofollow the acceptable corporate governance however, it is alwaysimportant for the director to present his/her case to the rightchannels. In this case, the board of directors will have theinfluence of making a business follow the required regulations forbetter corporate governance.

Conclusion

Corporategovernance is very important to the business as well as to thestakeholders. There is no stakeholder to a business who would denythat good corporate governance is beneficial. The manner in whichbusinesses are run is very critical in influencing the existence ofthe businesses in the future therefore, corporate governance codesare very crucial in ensuring that businesses continue to exist asgoing concerns. There are varied drivers that have an influence tothe corporate governance codes. One of the key drivers of thecorporate governance codes is the government. The government has aninterest in the manner in which corporations are run becauseeventually the running of the corporations affects the economy of acountry. Therefore, the government has to ensure that there areproper rules put in place to guide the operations of corporations.Other key drivers of corporate governance codes include investors,capital markets, and board of directors. These play a vital role inensuring that corporations are headed in the right direction.

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