Corporate Governance
Organisation for Economic Cooperation and Development (OECD) defines corporate
governance as:
“Procedures and processes according to which an organisation is directed and
controlled. The corporate governance structure specifies the distribution of
rights and responsibilities among the different participants in the organisation
– such as the board, managers, shareholders and other stakeholders – and lays
down the rules and procedures for decision-making.”
Corporate governance has been a dominant characteristic of a well run company
(Wilkes, 2004). Cadbury compliance is evident among larger firms (Laing & Weir,
1999). Enforcing corporate governance is an interactive process that is more
comprehensive than legal rules (Mertzanis, 2011). Role of external regulators
and auditors should make sure good governance practices (Schachler, Juleff, &
Paton, 2007). Many authors have studied the impact of corporate governance
practices on ownership structure (Abor & Biekpe, 2007), transparency (Haat,
Rahman, & Mahenthiran, 2008), cross listing strategy (Jian, Tingting, &
Shengchao, 2011), and corporate performance (Abor & Biekpe, 2007; Haat, Rahman,
& Mahenthiran, 2008; Haspeslagh, 2010; Jian, Tingting, & Schengchao, 2011).
(Parker, Peters, & Turetsky, 2002) think survival of a firm is directly related
to large level of block holder and insider ownership. (Abor & Biekpe, 2007) also
noted that corporate governance can serve SME sector by creating opportunities
for growth.
Religious Actors
Besides other factors, influence of religion actors in adopting mechanism and in
performance has been tested by (Ibrahim, Fatima, & Htay, 2006). Results showed
no significant difference between the performances of Shari’ah approved
companies with majority Muslim directors and non-Shari’ah approved companies
with non-Muslim directors. However first group was relatively better in some
aspects (Ibrahim, Fatima, & Htay, 2006). Like this, (Choudhury & Hoque, 2006)
have argued that theory of Islamic corporate governance possesses a discursive
process, transparency and institutional participation which may reduce
transaction costs and will result in increased profits.
Going Global
In the era of global economy, less open countries have not a strong corporate
mechanism (Talamao, 2011). In this context understanding the governance models
will become a requirement to adopt global corporate governance (Bhasa, 2004).
Firms failing to do so would face difficulties while having a global entry.
Corporate Performance
Firm’s profitability has been associated with many of the corporate governance
characteristics. For example board size, board composition, management skill
level, CEO duality, inside owner and family business (Abor & Biekpe, 2007),
remuneration committees (Laing & Weir, 1999; Reddy, Locke, & Mahenthiran, 2008),
audit committees (Laing & Weir, 1999), debt monitoring (Haat, Rahman, &
Mahenthiran, 2008), and foreign ownership (Abor & Biekpe, 2007).
On the other hand
There are studies which do not confirm our basic assumption that good corporate
governance practices imply corporate performance and growth. For example (Aboagye
& Otieku, 2010) combined together corporate governance, outreach to clients,
reduced dependence on subsidies and use of modern technology to apply on the
performance of microfinance institutions but failed to find a significant
relationship. Similarly (Ghazali, 2010) did not get any evidence that corporate
governance variables are statistically correlated with corporate performance. (Ghazali,
2010) commented that a regulatory process may take some years before showing
desirable results. In the similar fashion it has been stressed for the need of
new set of principles and laws to focus the real issues of corporate governance
(Lazarides, 2011), consideration of corporate governance broader institutional
influences (Mertzanis, 2011), and stronger governance control within the
entrenchment range of stock ownership (Pergola & Joseph, 2011).
Implication for Developing Countries
In 1980, Guth predicted that corporate growth will remain a core objective for
managers of corporations in the next decade. This still holds true for
organizations to survive. Effective corporate governance is important for firms
in developing countries (like Pakistan) which will help them raising capital and
appealing foreign investment (Okpara, 2011).
Statistics
This is why ACCA Pakistan conducted a survey in 2007 to know the perceived
benefits of implementing corporate governance, by collecting data from 56 local
listed and large local non listed companies and 55 financial sector institutions
of Pakistan. Results obtained for 12 corporate governance variables are as
follows: Compliance with legal and regulatory requirements (overall 83% firms
consider this an important corporate governance characteristic), protect share
holders’ rights (66% overall), building the company’s bank’s reputation and
trust among stakeholders (59% overall), improved operational efficiency (52%
overall), improved strategic decision making (50% of financial institutes),
mitigation of risk (48% of financial institutes), sustainability over time (31%
of financial institutes), prevent/resolve corporate conflicts (31% of financial
institutes), comply with bank requirements (17% of financial institutes), access
with external capital (15% of financial institutes), lower cost of debt (11% of
companies), and lower cost of equity (7% of companies).
Last Words
Above results lead us to the result that, implementing good corporate governance
practices is a key for corporate success, winning trust of share holders and
getting local as well as foreign investment. Corporate governance will remain an
important mean of corporate performance.
Rashid Saleem Sheikh
Lecturer in Management Sciences
University of Education, Lahore
[email protected]