CORPORATE FINANCE AND GOVERNANCE

Corporate finance and governance

Corporate finance and governance

Corporate governance has evolved into an important institute within recent years because of the highly visible corrupt and unethical practices of large and global companies such as Enron, WorldCom and Parmalat, the Italian dairy conglomerate. These unethical practices had left stakeholders and governments in a confused condition (Brian 1997 p616).

It has constantly attracted attention because of its extreme significance for the economic health of organizations and of the entire society as well (Cochran, & Wartick, 1988 p100). The concept is not properly defined as it potentially covers a lot of different economic trends. Due to which, diverse definitions that reflects people's exceptional interests in the field in question have risen (Ahmed 2008 p23).

Mathiesen (2002) states that corporate governance explores how to safeguard and motivate effectual administration of corporations by the utilization of incentive method, like contracts, designs of organization and legislation, to make an improvement in financial performance. Corporate scandals and failures as well as broader economic concerns have driven OECD countries to devote increased attention to corporate governance which is now recognised as a vital factor in economic growth and financial stability (www.nccg.ru/file.xp/050049055051051049051054124049/2004)The Organization for Economic Cooperation and Development's (OECD) 1999 definition is similar to the Cadbury's (1992) definition, he states that corporate governance is a system through which business organizations are given guidance as well as controlled. The structure identifies the allotment of rights and responsibilities clearly among different members of the organization like board of directors, shareholders, employees, bankers, and other stakeholders and defines regulations for decision making regarding corporate dealings (Jensen 2000 p43). Due to this, a method is formulated by which the objectives of the company are decided, and methods of gaining those set objectives and the criteria for monitoring performance is also set by these rules (Paredes 2004 p536 & Eadie 2001 p13).

The process of corporate governance does not exist in isolation but draws upon basic principles and values which are expected to permeate all human dealings, including business dealings principles such as utmost good faith, trust, competency, professionalism, transparency and accountability, and the list can go on Corporate governance builds upon these basic assumptions and demands from human dealings and adopts and refines them to the complex web of relationships and interests which make up a corporation (www.secp.gov.pk/divisions/Portal_CS/PDF/manual-CG.)The importance of improved corporate governance may be better appreciated by looking at the key corporate actors. It will be useful to know about the composition, role, organization, operation and evaluation of the Board of Directors, Chief Executive Officer and Management (Istemi 2005 p54). Their performance have a direct relationship to the stockholders, investors, employees, communities and governments in terms of costs and benefits, and changing the rules of corporate governance will have varying impacts on these various groups (George 2004 p20).

Theories Relevant To Corporate GovernanceSimple Finance ModelIn the finance view, the basic role of corporate governance is to make rules and incentives to successfully modify the behaviour of managers ...