Importance of Corporate Governance

OECD Principles describe corporate governance in terms of relationship between management of company, its shareholders, its board and other stakeholders. It is a system which is used for the purpose of controlling and directing the companies. Corporate governance is not a new concept but it has got popularity in the last few decades due to various crises such as: East Asian crisis of the late 1990s and various other fraudulent activities in the corporate world. Now every country recognizes that the good corporate governance is essential for the efficiency and growth of domestic economy. Globalization has increased the volume as well as the complexity of business trade due to which the external control is becoming more difficult and thus the concept of corporate governance is getting popularity. Although many people are aware about the corporate governance but few really understand the concept of “Good Corporate Governance” which is essential for the progress and prosperity of any organization. Good corporate governance is actually a balance of power among managers, shareholders, and boards. It ensures that the transparency standards are inline with international requirements, shareholders are treated equally, and that the board and auditors are independent. It is empirically proved that good governance is essential for good business which is the need of every organization. Good corporate governance helps in achieving greater fairness and transparency and also discourages fraud Lipman and Lipman (2006). It protects the rights of shareholders along with protecting the long term strategic objectives of the organization. The importance of good corporate governance in the modern state and society could be elaborated in the discussion given below.

Careful Management

Corporate governance ensures the careful management of an organization because there are various important decisions which could benefit any actor such as: shareholder, directors, social welfare etc. Basically, there are two views regarding the maximization of economic interests. One is the Anglo-American view which is directed towards the improvement of owner’s economic interest. Other is Non Anglo-American view which encourages the social welfare of society. Therefore, care must be taken to protect the multiple goals rather than protecting the self interests of board of directors or shareholders Wei (2003), Brealey et al. (2007). Such practices will ultimately lead to transparent management, lower corruption opportunities and improve risk assessment. Similarly, organizations also face the issue of distrust in the integrity of executives and management due to popular scandals such as: Enron, Solomon (2005). People perceive integrity of the organization in different ways. Corporate governance can be used to encourage, measure and project the integrity.

Stability of Stock Prices

Stability of stock prices is one of the important factors for the investors to predict the future performance of a company or organization. Corporate governance has great impact on the efficiency of stock markets. For example, in the Asian crisis in 1997, poor corporate governance influenced the stock markets efficiency to the large extent Sabri (2007). This stability is only possible with the help of good corporate governance. Investors are always attracted towards well governed companies because such companies adopt transparent governance policies and have better financial accountability and higher profit margins. There is a worldwide effort to improve the corporate governance and insure greater shareholder accountability and corporate transparency, Solomon (2005). Therefore, those organizations which are seeking new funds for businesses must ensure good corporate governance in place. Stock prices stability shows the level of risk for investment. Investors will only invest if they undertake appropriate risk for their investment.

Training of Directors

It is very difficult for the organizations to find the right people for the jobs, and train them once they are selected. When the directors are selected they come up with different experiences, expertise and qualifications. It is therefore important to train the directors so that they adhere to the good corporate governance practices du Plessis et al. (2005). Directors are the major integral part of an organization. They have major role in the decision making process and thus the success or failure of an organization is largely dependent upon them. If the directors are incompetent, careless or selfish then the chances of success are dark. On the other hand competent, loyal, careful and honest directors are essential for achieving the long term objectives of the organization. Therefore, proper governance, monitoring and training of directors is very important. Corporate governance encourages the honest and transparent monitoring of each and every activity. It also assists the training and development of directors so that they can perform well in decision making process.

Involvement of Stakeholder

Every organization has various stakeholders such as: directors, employees, shareholders, customers, suppliers etc. These stakeholders are important for the productivity and efficiency of the organizations. Therefore, they deserve proper attention from the organizations. But unfortunately there is lack of major stakeholders (e.g. shareholders) involvement and contribution. Davies A. (2006). One way to build relationship with the stakeholders of the organization is to involve them in the process of business activities. This could be done by providing important information to the stakeholders from time to time. Similarly, stakeholders could be involved in the process of decision making. Such practices will improve the public image of organization and will build a relationship between the organization and its stakeholders which is very crucial for the success.  But the sharing of information with stakeholders is only possible through good corporate governance.

Improved Shareholder Communication

Shareholders communication refers to the investors’ ability to vote their shares. It is the process by which individual investors could communicate with the companies in which they invest. Corporate governance could be used as a tool for improving the shareholders communication. Now days more focus is given to the enhancement of shareholders communication. For example, Canada Business Corporation Act (CBCA) introduced new provisions related to corporate governance in 2001 in order to enhance shareholders involvement in decision making and improve shareholders communication Sarra (2003). Investors usually do not have any idea about their rights. Corporate governance could protect and enhance the rights of individual investors and other market participants.

Talented Workforce

Talented workforce is a human capital and is considered as competitive advantage by the organizations. The ability of a company to attract and hold good people is imperative for its success Malik. F. (2006). It’s a common misconception that more capital and improved technology leads to the successful organization. Although they are important for the progress of organization but the most important factor which makes a difference is the human capital. People with different skills, knowledge, values and beliefs etc are vital for the long life of an organization. Corporate governance helps in attracting such talented workforce by creating good brand image. Similarly human skills could be developed through various training and development programs.

Checks and Balances

Corporate governance ensures the system of checks and balances in the organization. The three important disciplines of checks and balances are: self discipline, market discipline and regulatory discipline Fleisher, B. (2008).The management of an organization including board of directors is in a strong position to exploit the resources of the organization for their self interest. They can charge high bonuses and remuneration for their work. Due to lack of check and balance, the directors of the organization can take excessive risks. The current financial crisis is the result of high risk and irresponsible lending by some of the world’s biggest lenders. Corporate governance is an important tool to check and monitor the risk level of the organization. If the management is involved in taking high risk projects then all the stakeholders could be informed with the help of corporate governance. In this way management will try to take risk with in the limits because information will be available to the stakeholders.

Goodwill and Market Reputation

Many organizations spend huge sums of money to build their brand image because it is imperative for the long term success of organization. Goodwill and the reputation can be improved through various tactics such as: marketing, corporate social responsibility, strong relationship with the stakeholders etc.  Corporate Governance also develops the goodwill of company over a period of time Lipman and Lipman (2006).  With the help of good corporate governance, organizations build strong customer relationship which leads to the development of brand loyalty. Those organization which have good corporate governance, enjoys good market reputation. In the absence of corporate governance, the goodwill of an organization is at stake because any fraudulent activity will spoil the image of company. Scandals of Enron and WorldCom are the important examples in this regard which collapsed due to lack of proper governance.


Brealey et al. (2007), Principles of Corporate Finance, 8th Edition, p.27, New York, Tata McGraw Hill

Davies A. (2006). Best Practice in Corporate Governance; Building Reputation and Sustainable Success, p.7, England, Gower Publishing Company.

du Plessis et al. (2005), Principles of contemporary corporate governance, 2nd Edition, p.122 New York, Cambridge University Press.

Fleisher, B. (Eds.). (2008). Policy Reform and Chinese Markets: progress and challenges, UK, Edward Elgar Publishing.

Lipman, Frederic D., and L. Keith Lipman (2006). Corporate Governance Best Practices: Strategies for Public, Private, and Not-for-Profit Organizations, p.3, New Jersey, John Wiley & Sons, Inc.

Malik. F. (2006) (Effective Top Management: beyond the failure of corporate governance and shareholder value, Weinheim, Wiley.VCH

Sabri, Nidal Rashid (2007). Stability of the International Stock Markets, New York, Nova Science Publishers.

Sarra, J. (Eds.). (2003). Corporate Governance in Global Capital Markets, Canada, UBC Press

Solomon (2005). Corporate Governance and Accountability, Second Edition, p.8, England, John Wiley & Sons, Ltd.

Wei (2003). Comparative Corporate Governance: A Chinese Perspective, p.6, Netherland, Kluwer Law International.

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23 responses to Importance of Corporate Governance

i knew id not be wrong when i opened this site. Time spent on this site z well spent. God bless u for this infor u share freely

very useful and important, but what is your comment on companies that prevent the financial statements from giving a true and fair view of the company’s financial position and perfomance

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