The effective and efficient working of every organization depends on the working culture of the organization and working culture of the organization depends on the rules and regulation formed by the top management and its clear and fair presentation to all the levels down the management. Top management consists of people who are associated with the work of forming rules and defining policies like chairman, directors, managing directors, chief executive officers, etc. Top management is solely responsible for conduct of the business of the organization. Every organization or concern shall have good and proper composition of top management. These requirements brought the concept of corporate governance in the light. The term corporate governance deals with the effective functioning of an organization keeping in view the interest of the shareholders and other stakeholders and also the rules and regulations prescribed under the statutes prevailing in the country (Longstaff, 2013). Through this study the concept of corporate governance has been discussed in detail and the discussions have been made with the past years cases in which the company’s reputation and credibility has been ended up with the lack of effective corporate governance. The past cases include Toshiba scandal, Volkswagen Emission scandal and Hanjin Shipping Corporation bankruptcy declaration. All the three cases has very well described how the scandal has been revealed and what are the major factors that have led to such situation of committing the deceit knowingly the fact of the matter and in turn bringing the disrepute to the organization. Thereafter the lessons from the said cases have been discussed which has highlighted the need of having good corporate governance. With this aim, the study has been made and the report has been prepared detailing all the three questions with the relevant conclusion.
Corporate Governance Essential For Mne
The word governance has been originated from the word ‘gubernate’. Its meaning is to gear up. Governance is associated with the internal values like integrity, transparency and identity of an organization primarily with focus on company’s reputation and its continuing nature. Thus, corporate governance is defined in common parlance as to gear up an organization towards the attainment of organizational objectives.
Corporate Governance is defined as the system by which the organizations are directed and controlled towards the objectives (Dandino, 2004).
The structure of the corporate governance describes the allocation of work to the top management with adequate responsibilities and authorities and also to the stakeholders of an organization. By following this, the company would not only be able to achieve the objectives but also helps in controlling and performance of the work across the organization. Thus, corporate governance plays very important role in the success of every organization. Following are the factors which describe as to the necessity of having good corporate governance in an organization:
- Corporate Performance: With the enhanced policies and processes of governance, the organization will be able to make effective decision, will have efficient plans for succession of key managerial personnel and thus gives the brighter prospects to the company for working and existence in perpetuity. It will also gives rise to increase in profitability and increase in the share price.
- Builds Confidence of the Investors:As per the recent survey made by the Mc Kinsey Company, investors are ready to pay higher premium for investing in shares provided the company in which they are planning to invest have good corporate governance and superior governing practices. It depicts that the investors not only rely on the financial statements of the company but also evaluates the governance practices of the company.
- Geographically Access: With the high reputation in market because of the good corporate governance practices, the company will be able to reach investors located in different parts of the country and also across the world. Thus, the company will have the efficiencies in the capital markets.
- Reduced Risks of Scandals and Crisis: The good corporate governance practices help the company to know the risks pertaining to each and every area before its turning into danger. By knowing the risks the company would be able to perform such actions which will help them to mitigate the risks and effect thereof on the functioning of the company. Like in the case of Toshiba Scandal, the past three Chief Executive Officer of that time knows that the sale is being inflated by the company in order to show high profits to have shareholder maximization model intact. If the company would have good governance practices the booking of increased revenue would not have occurred and also even if it have occurred then it would not have been carried on far the three consecutive years.
Lessons Learnt From The Past Events
Three major events have been occurred in the past years which have been shocking moment for every company prevailing in the market. Each scandal has been occurred mainly due to lack of having good corporate governance practices. Each scandal has laid down learning for each company prevailing in the industry. The lessons have been discussed below scandal wise:
- Hanjin Shipping Bankruptcy: In this case, the company has filed for bankruptcy protection in the month of August of year 2016. The move is not on the spot; its roots have been started from the day when the owner of the company dies in the year 2007. After that the company has appointed the widow of the owner as the Chief Executive Officer of the company who has spent her whole life as house wife and does not know anything about the business. Thereafter, there has been shift to other family members as Chief Executive Officer who does not possess any experience in the field of business (Barden, 2016). The scandal has taught the following lessons:
- There shall be separation between the ownership and the management of the affairs of the organization.
- The Chief Executive Officer of the company shall be educated and well versed with the required knowledge and shall have requisite working experience in the same field. It’s because if the company would have appointed good Chief executive officers then such situation would not have happened.
- The company shall have the procedure of Key Succession Plan. This plan describes in case the key managerial personnel of the company leaves the organization then how the company will function in the same way in his or her absence.
- The composition of the board of directors shall contain the independent persons who can give their views without and bias and take the decisions accordingly but they have to keep the goals of an organization in consideration.
- Toshiba Accounting:In this case, the revenues of the company have been inflated over the past seven years and that too under the control and direction of three different Chief Executive Officers. The scandal has taught the following lessons:
- The company shall have good internal control system in each division of the company mainly finance, auditing and risk management.
- The company shall have good corporate culture where the subordinates have to right to inform the superiors what is right and what is wrong and shall force to do the right thing only.
- The company shall not have any challenges like increase profits, etc. (Nikkie, 2015)
- Volkswagen Emission: In this, the company has developed software in car in order to meet the test guidelines of the country. Whenever test occurs, the car automatically turns to best mode and passes it. The company has worked for short term benefits for battling with Toyota and General Motors. The scandal has taught the following lessons:
- If the company is family owned, the management should be in proper hands.
- The company shall work for long term incentives rather than short term incentives.
- The company shall have system of accountable corporate governance.
- The company should have patience for having growth rather than being greedy for the same. (Armour, 2016 and Armstrong,2017)
Impact Of Financial Market Development
There are two forces which includes the corporate governance practices of the company – Internal forces and External forces. Internal forces include the composition of board of directors and their functioning along with the role and function of the chief executive officer of the company. External forces includes Equity markets, debt markets, auditors, solicitors, professionals and regulatory bodies or authorities the rules and guidelines of which are to be abided by the company. Financial market deals with the equity and debt markets.
Corporate Governance plays very important role in the development of the financial capital market. Good corporate governance reduces the risk of having financial crisis in the invested fund, reduces the cost of transaction and the cost of capital invested. On the other hand, financial markets are regarded as the major source of transparency of working of every company. As a part of good corporate governance, the companies have started listing its securities in the capital markets. This has increased the confidence of the investors (Kikeri, 2016). Due to such reform, the investors have started invested in different companies and also if any investors receive the retirement benefit as pension or gratuity he wishes to invest the same in the companies.
In this way, the financial market is related to and has influence of good corporate governance.
Good corporate governance plays major role in the effective and efficient working of the organization. It lays down the procedures, law, rules and regulation which help the management to take an informed and effective decision keeping in considering the interests of the shareholders and the stakeholders. Shareholder wealth maximization is the goal of every business enterprise but that too should be achieved along with the good corporate governance practices. The report has detailed the factors essential for having good corporate governance and discussed the three events which have created the history in the book of corporate governance. Financial markets are greatly influenced by the good corporate governance practices. In order to conclude, every company shall have good corporate governance practices.
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https://www.worldbank.org/en/topic/financialmarketintegrity/brief/corporate-governance accessed on 30/03/2017.