Corporate governance has steadily grown from a little known catchphrase echoed in the halls of company executives to a key component in basic management education. Many factors have influenced corporate governance along its way. Before we detail these factors we need to understand what corporate governance is and what it means for companies.
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What Is Corporate Governance?
Corporate governance is a set of rules and principles that guide business leadership and management in how they administer their duties. This is shaped by legislation, rules and regulations, customs and attitudes in the business climate. The term encompasses the internal and external factors that affect the interests of a company’s stakeholders, including shareholders, customers, suppliers, government regulators and management. Corporate governance ensures transparency which ensures strong and balanced economic development. This also ensures that the interest of all shareholders (majority as well as minority shareholder) are safeguarded. Corporate governance affects the operational risk and, hence, the sustainability of a corporation
One of the biggest factors influencing corporate governance is globalisation so we should start with it. Due to advances in travel, information sharing and exposure to the outside world many societies have broadened their scope and horizons. People on one end of the globe have access to information from other parts of the globe and that influences culture and practices. Corporate governance, in particular, has seen more and more businesses adopting best practices from around the world or moving towards it because the markets are globalised. Diamond buyers in Europe must be cognisant of the issues to do with conflict diamonds in Africa for example. Customers and communities are becoming more and more similar in their needs and expectations.
Technology is another factor influencing corporate governance. We’ve already observed that advances in technology make sharing information much easier across borders. The same effect can be observed within organisations. Also, the storage, analysis and manipulation of data have become much easier. Due to this organisations are working at much bigger and remote scales. The increased scale of operation comes with a bigger downside. A manufacturer who sells products internationally has a lot more to worry about if things go wrong. The 2016 fallout with the exploding Samsung Galaxy Note 7 phones is a testament to this.
Population Growth And Density
Populations have steadily increased over the decades. Population growth and density is another major factor influencing corporate governance. Population growth means that markets have grown, businesses are serving bigger markets and have a lot more people to please. Population density increase means more people in a given geographical region. Manufacturers who have been proven to damage environments and their inhabitants are responsible to many more people than in the past.
Free Market Economics
It has been a gradual process but free-market economics are becoming more and more popular all over the world. The key to a free market is transparency and this makes it a factor influencing corporate governance. With business practices shying away from monopoly, oligopolies and cartel type behaviours, free-market economics have played a heavy roll in influencing corporate governance. This is evidenced in both businesses being more transparent in their operations and stakeholders being more demanding to businesses about their policies and operations.
Management culture is another major factor influencing corporate governance. Management culture is a collection of leadership norms and practices that emerge from a firm’s history and leadership. It is a sub-component of organizational culture that describes management realities beyond official policy and procedure. By this definition, we can see that management may have a persuasion to being more transparent or less than depending on their norms, practices, history and leadership mindset. Management culture is also a factor influencing corporate governance in a broader sense as it is influenced by the state of leading minds in industries and economies. Economies which experience large emigration will likely have a reduced pool of bright minds to choose from.
Professionalism And Collaboration
Professionalism is the conduct, behaviour and attitude of someone in a work or business environment. A person doesn’t have to work in a specific profession to demonstrate the important qualities and characteristics of a professional. The standard of professionalism that exists within an organisation particularly in those charged with governance will be the factor influencing corporate governance. Internal control is an important function in corporate governance. If an organisation has an internal control function that lacks professionalism it is highly unlikely this organisation will do well in an audit. Collaboration between the various professionals in an organisation from accounting, sales, internal control, external audit and other departments will determine the effectiveness of corporate governance measures. It’s not enough to have professionals within the team they must also work well together.
Objectives Of Management
Generally, the objectives of the management of a company should always be to increase the return to shareholders. This can be done through profit maximisation and wealth maximisation strategies. To achieve this management will pursue policies that grow the companies revenue through growing their market share. With the aforementioned widened access to information providing a good product is rarely enough in the modern world. Customers and communities want a company that is more involved with the community. A company which directly and indirectly benefits the communities they operate in. This has seen a boom in the importance of Corporate Social Investment activities and initiatives. This factor influencing corporate governance raises the bar by which companies are adjudged to be beneficial community members.
The financial reporting environment companies find themself in is an additional factor influencing corporate governance. As domestic accounting rules across the world move closer to convergence with International Financial Reporting Standards (IFRS) rules there is greater pressure on those charged with governance to comply with international best practice in corporate governance. Companies are required to comply with the accounting standards which often involves being more open and also reflects on how things are represented. Complicated transactions are being simplified to a manner users of financial statements can make true sense of the substance of relationships and not just their legal form. Furthermore, financial statements have widened their scope to include qualitative information that adds depth to the quantitative information traditionally contained in them. As one of the most important communication channels for management with stakeholders financial reporting is certainly among the factors influencing financial reporting.
In conclusion, there is a wide range of factors influencing corporate governance. Globalisation and changes in financial reporting are at the forefront of this change. Changes and advances in technology is another factor influencing corporate governance. Cultural factors and population factors have a great bearing on this field as well. All these are tied together and expressed through the degree of professional collaboration and state of management.