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Corporate governance for My Business in Asia

WHAT IS CORPORATE GOVERNANCE?
 
The Organization for Economic Co-operation & Development defined corporate governance in year 2004 as:
 
“Corporate governance involves a set of relationships between a Company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system, within an individual company and across and economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth”.
 
The main purpose of corporate governance is therefore to provide a system of policies and procedures that enable shareholders, as the investors of the company, to monitor those parties within a company who control the resources owned by investors.
 
The primary objective of good corporate governance is to contribute to improve corporate performance and accountability in creating long-term shareholder value.  The ultimate goal of corporate governance is to ensure that an organization is run in an efficient and sustainable manner. This requires a functioning board and management that can monitor and manage the existing and future risks of the organization.
 

  • The problem of separation of ownership and control
The problem of separation of ownership and control is attributable to the fact that the owners of the company are not involved in its management. In a private company the problem is not very serious since the major shareholders of the private company usually act as directors of the company. The problem of separation is more common for listed company.
 
  • Agency Theory
The problem of agency costs is located at the heart of agency theory and it is created by the paradox of separation and control. The different objectives of the owners (shareholders) and the management (directors) are said to be maximization of profit for the former and maximization of self-interest for the latter. The shareholders wish to maximize the shares’ value whereas the management seeks to obtain the high remuneration. Under this situation, agency costs may be created, for example the monitoring cost, bonding cost and inflated compensation for directors.

Directors Duties and Shareholders Agreements

Directors should clearly understand their duties for targeting good corporate governance. These may be the subject of legislation, case law, and applicable codes of conduct. The may also be governed by rules adopted voluntarily by the company, or set down by group policies, or also be the subject of restrictions in shareholders agreements.

Businesses in Asia should understand the local legislation applicable, and adopt suitable group good governance policies policies.

January 2016
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