Corporate governance is the laws and standards that define the relationship between the management of a company on the one hand and shareholders and stakeholders or parties associated with the company (bondholders, workers, suppliers, creditors, consumers). Other stakeholders include workers (employees), customers and creditors (such as banks, bondholders), suppliers, regulators, and the entire community.
Governance is important for its disclosure and transparency. These are among the most important principles of corporate governance to enable shareholders to obtain the required information transparently and fairly. Therefore, listed companies in the financial market are required to develop their disclosure policies, procedures and supervisory systems in writing. Companies should also be accompanied by a report from the Board of Directors that includes a presentation of the company’s operations during the last financial year and the factors influencing its business that assist the investor in assessing the company’s assets, liabilities and financial position. Apply and not apply to companies issued by the Capital Market Authority with reasons for non-application.
What is Corporate Governance?
Since 1997, with the bursting of the Asian financial crisis, the world has taken a fresh look at corporate governance. The aforementioned financial crisis may be described as a crisis of confidence institutions and legislations governing business activity and business relations with the government. The many problems that were raised during the crisis included transactions of internal employees, relatives and friends, between business enterprises and between government, and access to large amounts of short-term debt without knowing the shareholders of these matters and hide these debts through methods and systems. Recent events also begin with a scandal of Enron and the ensuing series of corporate manipulation has clearly demonstrated the importance of corporate governance even in the usual financial markets (Moseley, 2008).
Corporate governance has gained greater importance for emerging democracies due to weakness of the legal system in which contract implementation and dispute resolution cannot be effectively implemented. As for the poor quality of information, it leads to the prevention of supervision and control of works to spread corruption and destruction. Following the sound principles of corporate governance creates precautions necessary against corruption and mismanagement, while promoting transparency in economic life and combat resistance of institutions to reform.
The financial crisis has led many to take a good practical view of how to use governance to prevent future financial crises. This is because corporate governance is not just a good moral thing, but corporate governance is useful for business enterprises. Therefore, companies should not wait for governments to impose certain standards of corporate governance only to the extent that they can wait until they are imposed by government’s good management practices that they should follow in their work (Smith, 2011).
For example, good corporate governance is the form of disclosure of information that can reduce the cost of an established capital. Corporate governance is a good assistance to attract foreign or domestic investment; help reduce capital flight, and the fight against corruption. And unless investors are able to secure their return on their investments, the funding will not flow to the facilities. Without financial flows it will not be possible to achieve the full potential of an enterprise’s growth. One of the major benefits that arise from improved corporate governance is the increased availability of finance and access to cheaper sources, which makes governance particularly important for developing countries (Goetz, 2013)
The Importance of Corporate Governance
The importance of corporate governance has increased significantly in recent times to achieve development and promote the economic well-being of peoples. This was highlighted by the Asian financial crisis of 1997-1998, the collapse and major scandals of major companies such as Enron Energy and the subsequent series of companies’ misrepresentations of their financial statements that did not reflect their actual reality, in collusion with major international companies Which led the Organization for Economic Cooperation and Development (OECD) to issue a set of rules for private corporate governance in 2004 and for the governance of state-owned enterprises in 2005.
On the economic front, the importance of sound corporate governance rules is growing. Winkler stressed the importance of corporate governance in achieving economic development and avoiding financial crises by establishing a number of performance standards, In the markets and the detection of cases of manipulation and financial and administrative corruption and mismanagement, leading to win the confidence of dealers in these markets, and work to stabilize and reduce the volatility of them, and thus achieve the desired economic progress (Winkler, 1998).
The Organization for Economic Co-operation and Development (OECD) sees governance as a factor in improving economic efficiency and economic growth, as well as enhancing investor confidence. Having an effective governance system in any company and in any economy in general helps to provide the degree of confidence necessary for the economy to work well. As a result, the cost of capital is low, and companies encourage more efficient use of resources, thus promoting economic growth. World Bank President goes further in his assessment of the importance of corporate governance. “Corporate governance is as important in the economy as the importance of country governance,” he says on the accounting and supervisory side, the importance of governance is reflected in the following (World Bank, 2016):
- Fighting financial and administrative corruption in companies and not allowing its existence or its return again.
- Ensure integrity, impartiality and integrity for all employees ranging from the board of directors and executives to the lowest level workers.
- Avoiding the presence of intentional errors or intentional deflection was intentional or unintentional continue or work to minimize it, using advanced regulatory systems.
- Maximize the use of accounting and internal control systems, and to achieve the effectiveness of spending and linking expenditure to production.
- To achieve sufficient disclosure and transparency in the financial statements.
- Ensuring maximum effectiveness for external auditors, ensuring that they are highly independent and not subject to any pressure from the Board of Directors or Executive Directors.
At the social level, the Center for Governance at the University of Technology in Sydney (UTS) says it is interested in balancing economic and social objectives. The corporate governance framework encourages the efficient use of resources and ensuring accountability for control, and aims at linking the interests of individuals, businesses and society at large. In the same vein, Robert et al. corporate governance is also important for people, as every country wants to thrive and grow companies within its borders to provide jobs or health services, satisfy needs not only to improve the standard of living but also to promote social cohesion (Robert, 2017.
Examples for Corporate Governance
Savola Group is a role model as a Saudi national company contributing to corporate governance and social responsibility in the Middle East and North Africa. The main features of the Group’s plan are to meet the requirements of corporate governance, “Savola Charters,” is a commitment to meet shareholders’ rights, customers, employees and all stakeholders, strengthen their relationship, take care of their interests, adhere to transparency and disclosure principles, and activate the role of the Board and Executive Management. This is to work on a continuous basis mechanisms to enhance the effectiveness of internal control and risk management. The plan also aims to comply with the Corporate Governance Regulations issued by the Capital Market Authority (CMA) as a top priority, as well as adopting the best international practices in the field of governance in order to enhance the institutional culture and implement the Group’s sound management rules. The plan also aims to ensure that the application of Islamic standards and values is taken into consideration in all Savola Group transactions.
Savola Group announced the launch of the “Integrity Line” initiative, which enables all stakeholders, including the executive management team, senior, permanent managers, staff, permanent and temporary and part-time, shareholders, trainers, clients, individuals, agency staff, consultants, suppliers, for any suspected practices of being immoral by using the integrity hot line.
The launch of the initiative is in line with the requirements of the Corporate Governance Regulations issued by the Capital Market Authority (CMA), which require that the company develop the policies or procedures followed by stakeholders in filing their complaints or reporting infringing practices. The Integrity Line is a confidential reporting system covering all Savola operations in the region and allows all stakeholders to report incidents and cases involving illegal practices, theft, fraud, corruption, waste or misconduct.
The Integrity Line is an independent and fully secure system, as the reported cases will be analyzed by independent specialists with experience in investigating such matters under the supervision of the Audit Committee and the Board of Directors.
The governance approach that was used by Savola is a living proof that the corporate has benefited financially, socially, and gaining great reputation because of the transparency and integrity that are the core of the governance followed.
Another example of a corporate that used the governance is Coca-Cola. The organization is committed to a corporate governance policy, is in the best interest of shareholders, enhances trust in its board of directors and supports consumer confidence building. The board of directors is elected by shareholders to take care of their interests, ensures the success of the company's business and supports its financial position in the long run. . The Board is the final decision maker of the company, except for matters that the shareholders reserve the right to decide. The Board also selects senior management, which is assigned to carry out the work of the company. The Board of Directors of Coca-Cola has set the general rules for corporate governance, with a view to unifying the frameworks in which this work is being pursued.
The Board of Directors of Coca-Cola has set the general rules for corporate governance, with a view to unifying the frameworks in which it operates. These rules include the functions of the Board, the functions of the President of the Company, the qualifications to be provided therein, the extent of his independence, the structure of the Board of Directors, the performance of the Chief Executive Officer and the mechanism of succession of directors. It is also the duty of the Board to ensure that the governance of the institutions and the general rules governing them are reviewed in order to keep pace with their development. The company is also active in the area of social responsibility, through its public policy and reputation board, which is composed of a number of managers and partners. The mission of the company is to identify the risks and opportunities faced by the company and the communities in which it operates. Coca-Cola has the so-called “Business Conduct Charter”, a binding guide for company employees, on the importance of integrity and integrity in everything they do. The Charter oversees the Ethics and Compliance Committee, monitors offenses, identifies consequences and plays a field role in education, consultation and evaluation in relation to the Code of Business Conduct and Compliance Matters (Coca Cola, 2017).
Associations looking for accomplishment in the aggressive market must exhibit engaging structures and procedures that include transparencies and governance. Shared administration is an authoritative advancement that manages the business experts’ basic leadership power over their positions, while at the same time stretching out their impact to managerial regions.
The task inspects how organization initiative and straightforwardness make compelling corporate administration, and offers some accommodating practices that incorporate a strategy for estimating the dimension of organization straightforwardness. Two examples are given to illustrate the benefits of applying the corporate governance on its success. It examines the relationship, elements, and communication among corporate administration, principle‐centered authority, and straightforwardness. Unmistakably the planned and far reaching usage of straightforward standard into all aspects of corporate administration will most successfully advance its individual, authoritative, and societal advantages.
- Coca Cola, Annual Review report, 2017, https://www.coca-colacompany.com/investors/corporate-governance
- Goetz, M. (2013, Jul). DATA GOVERNANCE will shine in the DATA ECONOMY. KM World, 22, 10-11.
- Moseley, M. (2008). Keys to data governance success – teamwork and an iterative approach. Today, 31(2), 22-24.
- Robert E. Hoskisson, Michael A. Hitt, Richard A. Johnson, and Wayne Grossman, Conflicting Voices: The Effects of Institutional Ownership Heterogeneity and Internal Governance on Corporate Innovation Strategies, Academy of Management Journal Vol. 45, No. 4, 2017
- Smith, G. (2011). Can your district survive a data disaster? School Business Affairs, 77(1), 15-17.
- Winkler, Adalbert (1998) : Financial Development, Economic Growth and Corporate Governance, Working Paper Series: Finance & Accounting, No. 12