Corporate Governance
General

Importance of Corporate Governance

Corporate governance can be defined as the system which companies are directed and controlled. In today’s world the corporate governance has become one of the paramount topics.  There was an increment of rules and regulations that are related to the corporate governance within the major corporate collapses such as Enron and WorldCom in the United States of America.

EX – Sarbanes Oxley act, OECD report on corporate governance, Cadbury report.

Within that, this has influenced some developing countries such as India, Sri Lanka, and Bangladesh to develop local corporate governance standards by considering the international standards. By considering all the facts, institute of chartered accountants of Sri Lanka and security exchange commission of Sri Lanka has developed code of conduct for corporate governance for Sri Lankan listed companies.

When consider about the listed company. Any error in the financial performance and financial position suddenly reflect at the share market via share price. Hence it is important to have proper corporate governance mechanisms to protect market share of the company.

In public listed company, the governance parties can be mainly categorized into main 3 categories such as shareholders, board of directors and Management team.  Shareholders provide wealth to the company and expect return for that. Further, they need to obtain the proper result on financial position and financial performance of the company to be aware about how their funds have invested by company on different portfolios in efficient and effective manner.

But there are issues called as agency conflicts which may compromise the transparency of the results. That means managers are less focus on shareholders or company’s interests and Instead of that managers are more tend to focus on their own interest by manipulating the financial statements and other procedures of the organizations. Within that, management somewhat try to obtain illegal and unethical gains from shareholders funds. Finally, of course this may increase short term management gains. But in the long term this may create more catastrophic situation for the company and may have possibility of corporate collapse.

Board of directors has more responsibility and account ability to protect the good governance within their company. Since Sri Lanka has recognized that there should be proper balance of board within executive and non executive directors which solve the 50% of the issues. Further, there should be duality between chairman and chief executive officer of the company and need to evaluate the Independence of the non executive directors at least once in annually.

Finally, this may lead to have proper Audit committees,remuneration committees and nomination committee within the company and in turn this may affect to have proper internal and external audits that may give independent opinion of the financial statements as whole. Within all of the corporate governance mechanisms, this will provide proper facts about the actual financial performance and position of the company rather than providing just figures. This will improve Share holders and general public confidence on listed companies and in turn increase the demand of share and share price of the company as whole. Hence, it’s more important to establish more accurate and effective corporate governance systems within the company in order to have long lasting existence.


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