Corporate Governance and Organisational Performance

The Impact of Board Structure

Naeem Tabassum,Satwinder Singh

• Verlag: Palgrave Macmillan
• Jahr: 2020
• ISBN:
  9783030485276
• Thema: Negocios y empresa
• Thema: Estrategia empresarial

Establishing a corporate governance strategy that promotes the efficient use of organisational resources is instrumental in the economic growth of a country, as well as the successful management of firms.
This book reviews existing literature and identifies board structural features as key variables of an effective corporate governance system, establishing a multi-theoretical model that links Board structural characteristics with firm performance. It then, using a comprehensive empirical study of 265 companies listed on the Karachi Stock exchange, tests this conceptual model. This research serves as a significant milestone, reflecting the socio-economic setting of emerging economies, and highlighting the need for the corporate sector in emerging markets to move away from a 'tick-box' culture. It argues that the sector needs to implement corporate governance as a tool to mitigate business risks; appoint and empower non-executive directors to achieve an effectivemonitoring of management; and establish their own ethical and governance principles, applicable to the Board of Directors.
Based on an extensive data base, collected painstakingly over five years, this book offers new insights and conceptual framework for further research in this area. Given the breadth and width of the research, it is a useful source of future reference for students, researchers and policy makers.

© The Author(s) 2020

N. Tabassum, S. SinghCorporate Governance and Organisational Performancehttps://doi.org/10.1007/978-3-030-48527-6_1

Begin Abstract

1. Corporate Governance

Naeem Tabassum¹ and Satwinder Singh²

(1)

London, UK

(2)

Dubai Business School, University of Dubai, Dubai, United Arab Emirates

Naeem Tabassum (Corresponding author)

Email: [email protected]

Satwinder Singh

Email: [email protected]

End Abstract

This objective of this chapter is to introduce the concept of Corporate Governance and define the concept in its narrow and broader outlook. The chapter also explain the importance of CG and the rationale behind this work. The discussion is organized under the following headings.

• Introduction
• Concept of Corporate Governance
• Definition of Corporate Governance
• Importance of Corporate Governance
• Rationale for This Study
• Motivation for This Study.

Introduction

We are living in an era of unprecedented globalisation that is transforming the face of the world economy. A gradual lifting of trade barriers, revolution in telecommunications, data processing and transportation facilities have accelerated the pace of global inter-dependence turning the world into an increasingly level playing field. Whereas there is no denying the positive impact of globalisation, its overall benefits remain unevenly distributed across developed and emerging economies. Inadequate development of Corporate Governance (CG) principles, particularly in emerging economies, is seemingly an important factor that contributes to this disparity. CG ‘is the whole system of controls, both financial and otherwise, by which a company is directed and controlled’ (Cadbury, 1992). It involves a set of rules and relationships between the internal and external stakeholders of a company, aimed at creating an environment in which the company can achieve its business objectives. CG is a widely accepted tool in keeping businesses under control and checks so as to prevent management from abusing their power and corporate resources for personal benefit.

Evidence suggests that the degree to which companies comply with good CG practices is an important factor in investors’ decision in choice of companies. In 1996, McKinsey surveyed a large number of US investors, with the majority of respondents confirming they were willing to pay a higher price for shares in companies that were well-governed, responsive and proactive when it came to protecting the interests of shareholders. In June 2002, McKinsey conducted a similar survey in other parts of the world, including Asia, Europe and Latin America, with respondents registering the same opinion as their American counterparts in terms of being willing to pay premium for the shares and securities of well-governed and transparent companies. Investors—both individual and institutional—are therefore recognised as being more likely to risk their financial resources by making investments in companies with a good record of CG achievements (Bushee, Carter, & Gerakos, 2014), less information asymmetry and exploitation of the rights of minority shareholders (Choe, Kho, & Stulz, 2005).

Corporate Governance practices have the potential to become a powerful development tool for emerging economies seeking to achieve national objectives. The importance of CG, for the commercial success and ultimately (given the global hold of private enterprises) for the social welfare of the world cannot be overstated. In the next section, we further clarify the concept of CG.

Corporate Governance (CG)

The term ‘governance’ has its origin in Latin word gubernare, meaning ‘to steer’, and has commonly been applied in the context of the steering of a ship (Solomon, 2010). Corporate Governance,¹ as a term, is used as a proxy for authority and control in the context of public companies (Luo, 2007). Figure 1.1 portrays the essence of CG in business environment; the left-hand side of the diagram depicts the elements of a company’s internal CG whilst the right-hand side displays the external elements of CG on the company. The management of the company is shown as acting on behalf of the company’s shareholders to decide where to direct the company’s financial and other operating resources. The Board of Directors, as the most important component of internal mechanism of CG, has the responsibility of advising and monitoring management, hiring and firing, and senior management teams (Jensen, 1993). The model highlights the separation between providers and users of financial resources in a publicly traded firm, with this separation creating the need for suitable governance structures.

Fig. 1.1

A model of corporate governance

(Source Corporate governance and the balance sheet model of the firm—adapted from Ross et al. [2005])

Defining Corporate Governance

The concept of CG, and the understanding of such, varies from firm to firm, country to country, and even from scholar to scholar. Different authors have defined the term CG in different ways and done so notably in line with their own understanding, experience and interest in the subject. Some authors have defined the term in its narrow sense, whereas others explain it in relation to its broader meanings (Abdullah & Page, 2009). Despite the fact that CG has become a buzzword, its precise definition remains blurred (Gillan, 2006). A survey of literature revealed an absence of consensus as to what constitutes CG (Solomon, 2010). Following section presents some of the commonly cited definitions in their narrow and broad perspectives.

Narrow View of CG

In its narrowest sense, CG is defined as a system of relationships amongst the internal actors of a firm, namely its Board of Directors, management and shareholders. When defined in its narrow sense, the definition suggests that both the directors and management of the company are only accountable to its shareholders (Cadbury, 1992; La Porta, Lopez-de-Silanes, & Shleifer, 1999; Shleifer & Vishny, 1997). Sir Adrian Cadbury, in his famous and widely recognised report The Financial Aspects of Corporate Governance, defined CG as follows:

Corporate Governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the directors include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The Board’s actions are subject to laws, regulations and shareholders in general meeting. (Cadbury, 1992: 14)

Similarly, Shleifer and Vishny (1997) define CG as “the ways in which suppliers of finance to corporations assure themselves of getting return on their investment”. CG has also been defined as “a set of mechanisms through which outside investors (owners) protect themselves against expropriations by the insiders (managers)”. According to La Porta et al. (1999), CG may be inferred as “a set of mechanisms through which outside investors (owners) protect themselves against expropriations by the insiders (managers)”.

The narrow view of CG is all about protecting the interest of those who have supplied financial resources to the company.

Broader View of CG

The wider view of CG suggests taking a look beyond the interests of investors and the company’s internal responsibilities. This view of CG suggests that companies have a set of economic and social responsibilities as well, towards other stakeholders in the company, including, for example, employees, suppliers and the community. OECD has outlined this perspective as follows:

Corporate Governance involves a set of relationships between a company’s management, its Board, its shareholders and other stakeholders. Corporate Governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. (OECD, 2004: 11)

CG with a broader view has also been defined as:

The system of checks and balances, both i...

Inhaltsverzeichnis

• Cover
• Front Matter
• 1. Corporate Governance
• 2. Theories, Models and Mechanisms
• 3. Predictions of Corporate Governance Models
• 4. Research Design and Statistical Method
• 5. Empirical Results and Discussion
• 6. Summary and Implications of the Study
• Back Matter