Why is it important to enhance good corporate governance Essay

Submitted By aliyaaa70
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Pages: 3

Why is it important to enhance good corporate governance?

1.0 Introduction
The effectiveness of the Corporate Governance has become a global concern. According to the Institute of Chartered Accountants (2010), corporate governance “is commonly referred to as a system by which organizations are directed and controlled”. Companies, which are interested in attracting foreign capital, aware that compliance with the national companies of the generally accepted principles of corporate governance - one of the decisive factors in the competition in order to attract capital.

2.0 Efficient Operating
The activities of any company depends not only on the right strategy, competent leadership, the availability of valuable resources and markets. The successful development of any business is impossible without access to investment capital. It is very important to understand that investors will not invest much in companies without an effective system of management and control over its activities. Evidence for the level of expenditure can be found thus:
“Over 80 percent of investors say they would pay more for the shares of a well-governed company than for those of a poorly governed company with comparable financial performance. A well-governed company is defined as having a majority of outside directors on the board with no management ties; holding formal evaluations of directors; and being responsive to investor requests for information on governance issues” (McKinsey & Co., 2000, p.2)

2.1 Innovating system
Old systems of managing the companies provided poor quality explanations for investors, that is why enhancing corporate governance is more valuable now. Support for this claim can be found as follows:
“Corporate governance became important partly because the classic model of meeting shareholder expectations delivering declining relative results and also because the primacy of shareholders began to be challenged” (Davies, 2006, p.4)

2.2 Benefits from improving the Corporate Governance
A good corporate governance regime is central to the efficient use of capital; well-designed plan can improve many aspects, as is shown by the following extract:
“First, it promotes market confidence; helps to attract additional long-term capital, both domestic and foreign; and fosters market discipline through appropriate disclosure and transparency. Second, good corporate governance helps to ensure that corporations take into account the interests of a wide range of constituencies, particularly when the board recognizes that corporate social responsibility can mutually benefit the company and its operating environment” (Atacik and Jarvis, 2006, p.1)

2.3 Determining and managing risks
Improving good corporate governance will increase company image and improve the operation to meet the goal, it also can reduce the cost of capital and prevent the financial crisis. For investors, it can help to make a protection, control their interests properly and increase the organization transparency. Support for this information can be found as follows:

“When investors see their investments are at additional risk, they demand a higher return from that