Importance of Corporate Governance in the Globalised World

Corporate governance is a term which broadly refers to the rules, processes, or laws by which businesses are operated, regulated and controlled. Corporate governance encompasses internal factors, defined by the officers, stockholders or constitution of a corporation, as well as external factors such as consumer groups, clients and government regulations.

The rapidly expanding contours of globalization and the growing diversity of investor ownership structures, financial products and management methods together with the ongoing differences in how societies and economies are organized and managed, hinder the formulation of a generally accepted corporate governance system worldwide. Even so, international investors and expanding capital markets are gradually bringing about a degree of convergence. Flexibility, transparency and accountability, for example, are by now generally recognized as crucial corporate governance features. However, the political, economic, legal and social contexts still vary from country to country or region to region.

Good corporate governance contributes to the sustainable economic development by improving the performance and competitiveness of the companies and increasing their access to outside sources of capital. Good corporate governance increases a company’s access to all types of external finance: domestic and international, public and private. In addition, firms seeking to access finance from international sources must improve governance in order to meet more stringent listing requirements. Well governed companies receive higher market valuations than those that are poorly governed. Better governance structures and processes improve decision making within all types of companies and enhance their long-term prosperity.

Corporate governance moulds the development of a nation’s financial market as it provides the framework for harmony between investors and firms. It provides the speed, amount and method in which investors will receive adequate returns on their investments. Moreover, corporate governance styles and efficiency in management decision-making determine to a large degree the extent to which firms have access to outside financing.

Globalisation involves a rapid movement of the four elements of economy across the national borders. These are physical capital in terms of plant and machinery, financial capital as invested in capital markets, technology and labour. In a situation like this, when investment takes place from one country to another, the investor want to ensure that the management of the companies they invests in, are competent and professional, and also that these companies do not indulge in any unethical and illegal acts, which ultimately might harm their long-term interest and the enterprise itself.

Since the corporations are the major economic agents and their activities determine the level of output and growth of the economy and they have the freedom to act according to the often volatile market trends, they must conduct themselves in a manner that produces synergy for all other agents in the economy. This need would not have been more urgent than today, when the world is passing through a severe financial crisis, impacting and putting halts to the global economic output, and affecting almost every nation in one way or the other.

Of late, there has been increasing pressure from institutional investors and securities analysts for much greater disclosure of financial data and corporate strategy, plus improvements in shareholder value (e.g. buybacks, dividends) and the emergence of shareholder engagement and activism has put a greater stress on corporate governance of companies. As such, corporate governance needs to be re-formulated in resonance with emerging needs for greater engagement being sought from corporate sector in the sustainable development of a country. It has to be engineered towards larger involvement through effective and purposeful engagement by the corporate sector to create and environment, both within and outside their domain of work and ethics. New corporate governance strategies should be designed as partnerships for not only financial profits, but also social and environmental profits.