Corporate Governance and its Development

by William Taylor for, November 27th, 2010.

There is no doubt that interest in corporate governance has substantially increased in recent years. Not only have separate states adopted their own corporate codes but also changes in corporate governance are directed at a global level. For developing economies, corporate governance helps to achieve stable economic growth by means of effective management of corporations and, to some extent, governments (Bushman and Smith 2001).

Countries which already possess advanced corporate governance standards strive to strengthen adherence to them. It goes without saying that the catalyst of the process was the corporate and financial collapse of Enron. The crash of this company illustrated that even a company with good financial results might go bankrupt if it lacked solid corporate governance mechanisms guaranteeing trustworthy work of non-executive directors, auditors and the board of directors. Following the scandal, the regulators all over the world developed a number of policies to prevent further failures (, 2006). Among the most influential documents are the Sarbanes-Oxley Act of 2002 and the Higgs Report of 2003.

So what is corporate governance? There exist numerous definitions of corporate governance, though most of them can be divided into the so called “narrow” and “broad” views (Shankman 1999). The former emphasizes the role of corporate governance in improvement of the relationship between an enterprise and its shareholders. In other words, the main stress here is on resolving the agency problem. On the other hand, the latter and more modern approach states that corporate governance facilitates relationships not only between a company and its shareholders, but also between different stakeholders in the company, including employees, customers, suppliers, bondholders and the government. Therefore, corporate governance becomes important for the society as a whole (, 2006). There is growing evidence that recent changes in corporate governance make its practical realization conforming to the second view. (continue reading… )



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