CORPORATE GOVERNANCE

Corporate Governance

Corporate Governance

Introduction

Isaksson and Kirkpatrick (2009) argue that the continuously rising share prices are not necessarily the indicators of good corporate governance; it may actually be the opposite also. During the 1990s free market regime was winning around the world because it was the decade of unparalleled economic growth. This decade witnessed unprecedented rise and diffusion in share ownership and increase in shareholder activism across the economies. It also witnessed the growing importance and role of corporate governance (Holly, 2003). But at the end of this decade and beginning of 2000s there have been several corporate failures all over the world. These failures shook the investors' confidence in the modus operandi of the corporations; in other words, they started questioning the efficiency of corporate governance in the corporations. There may be other reasons also, like macroeconomic factors, for the debacle of the companies, but in this paper, the center of focus is the relation between the corporate governance failures of the failed companies and the financial shocks that followed.

To understand more about the impact of corporate governance failures on financial shocks, we need to first define corporate governance. According to Liew (2007), corporate governance is the process and the structure used to run the affairs of a company for increasing prosperity of the business and also accountability of the management with the objective of achieving shareholder value in the long run, while taking into account the interests of the other stakeholders in the business of the company. The basic aim of corporate governance is to monitor the activities of the firm to protect the interests of the investors. Poor corporate governance can lead to agency problems which act as catalysts in stock market crash and consequently leading to the depreciation in currency. Agency problems arise when there is ownership concentration. In Asia, tiger economies of East Asia were severely struck with the Asian financial crisis which broke out in Thailand in June 1997. It quickly spread to Philippines, Indonesia, Malaysia, Singapore, Taiwan, Hong Kong and South Korea. At that time Japan too was facing crisis in its financial institutions. The irony was that, just before the crisis, these tiger economies were praised by several World Bank reports from 1993 to 1996. Till 1997, in these countries, a majority of the businesses were family-owned, ownership of the company being concentrated in a few hands. This led to the exploitation of the interests of the minority shareholders by the large shareholders.

The problems related to the exploitation of the shareholders were not only related to Asian emerging markets, but were also present in other parts of the globe in different forms. The research works indicate that the corporate governance system of the US is more robust because it has the deepest and most fluid capital markets, a much dispersed shareholding base and widely accepted laws and regulatory institutions. Most importantly, the US corporations are very self-regulated corporate entities supported by law around basic principles. As long as the economy is doing well and ...