CONTEMPORARY CORPORATE GOVERNANCE ISSUES Essay Example | Topics and Well Written Essays - 2500 words

CONTEMPORARY CORPORATE GOVERNANCE ISSUES - Essay Example It is an institutional arrangement for various corporate participants having direct or indirect interests in corporation like shareholders, managers/directors, creditors, customers, suppliers, employees, local communities, general public and government (Figure 1). Figure 1: Corporate Governance Relationships Source: (Letza, Sun & Kirkbride, 2004, p.243) The importance of corporate governance in 21st century has been highlight by series of corporate frauds like Enron, WorldCom and Tyco whose managers engaged in illegal reporting leading to loss of shareholder wealth. As shareholders in many countries are absentee owners and managers have the control and power over the organization’s activities, these managers can place their own interest before the interests of shareholders, therefore generating the principal-agent conflict. There are certain views regarding the convergence of corporate governance systems however such possibility is least likely to happen due to difference in c orporate culture and ownership structures. In recent years many influential proposals have been made in UK regarding corporate governance such as Higgs 2003, Turnbull Committee 1999, Hampel Committee 1998, Greenbury Committee 1995 etc (Letza, Sun & Kirkbride, 2004, p.242). The legislative strategies place importance to the need of a single governance structure for the corporate world. However no single model of corporate governance has worked at all times. Presently there are four main perspectives on corporate governance that are discussed in the following sections. The Principal-Agent Model Considering a sole-proprietorship organization where the owner-manager is considering sale of a part of his interest to outsiders. As the owner-manager’s share will fall the incentive to... According to the research findings the field of corporate governance is relatively new to the theory of organization. Although the issues of corporate frauds, social irresponsibility and abuse of managerial power that have led to corporate governance mechanisms are not new to the corporate world. The corporate fraud case of Enron, WorldCom and Barings bank has made the investors realize the governance issues of ownership and control. However the theories which form the theoretical framework of corporate governance have not been fully developed to provide a uniform solution to address agency problems. Based on the review paper by Letza, Sun and Kirkbride on corporate governance this project has been an attempt to critically analyze the models of corporate governance which have been categorized into two perspectives- Shareholder and Stakeholder. These models have been the much debated due their different approach towards the governing mechanisms and the changing relationship of managem ent and shareholders and/or stakeholders. The principal-agent model has been the theoretical basis of the other three models however due to widely accepted flaw of equating wealth maximization with share price maximization has led economists to look beyond the shareholder wealth maximization objective. The myopic market model is similar to principal-agent model but is oriented more towards the internal mechanisms built on long-term relationship and corporate performance.