Introduction:
“Corporate governance is the way in which boards oversee the running of a company by its managers and how board members are in turn accountable to shareholders and the company.”Corporate governance plays very important role for raising the finance from the investors. Investors always want to invest their equity in a firm which has a good corporate governance structure. According to a survey conducted by McKinsey and Company (2002), 14% of the investors in the U.s say they are willing to pay a premium for well governed company. This study shows that a company need a good corporate governance to attract the investments.
“The central problem of corporate governance was a ‘principal-agent’ problem: how to get corporate managers to act as loyal and committed “agents” for the shareholders or ‘owners’ of corporations.”(Jensen and Meckling, 1976; Fama and Jensen, 1983.)
According to Core et al. (1999) “the firms with weaker governance structures have greater agency problems. And the problem occurs in a company when there is a detachment between the ownership and management. ‘In most large corporations, there is a separation between those who control and those who own the residual claims’ (Fama, 1980; Demsetz and Lehn, 1985).And some people argue that the managers show interest in ‘increasing the wealth of the shareholders’, when they have majority of the shares in the firm. Mehran (1995) finds that firm performance is positively related to the percentage of equity held by managers and to the percentage of compensation that is equity based.
Another issue of corporate governance is that the ethics of corporate governance is compared between the stakeholders and shareholders.In ‘shareholder oriented’ corporate governance regimes, corporations are governed primarily to benefit the interests of shareholders. Managers of corporations are considered as the agents of shareholders and are thus expected to serve the best interests of their principals (cf. Monks and Minow, 2004, p. 111).
Some majority of the shareholders argue that, the company performance is depends up on the serving the best interests of the shareholders, which indirectly benefits all other stakeholders of the company. The companies must attend the interests of its key stake holders such as employees, customers
“A company cannot maximize shareholder value through systematic exploitation of its stakeholders. It is not shareholder value that has let down management; it is management that has let down shareholder value. It is time for executives to go back to the basics: build value by properly allocating capital, align incentive compensation with key value drivers, and communicate honestly and judiciously with the financial community.”
Corporate governance issues arise in an organization due to the separation of ownership and management.
“Effective corporate governance structures help to prevent agency conflicts by acting as a monitoring device designed to align management’s goals with those of the shareholder.”
The above diagram shows the corporate structure of the company. There are two types of governance system exist in a firm. One is internal and other one is external governance system. In the internal governance system, the management is act as the ‘agents’ of the shareholders and they decide how and where to use the investments of the investors. In a company the ‘board of directors’ are at the peak of the corporate governance structure. According to (Jensen, 1993), “the Board of Directors, at the apex of internal control systems, is charged with advising and monitoring management and has the responsibility to hire, fire, and compensate the senior management team.”
The external governance system is very important for the company to raise the capital. Generally, in a public limited companies the