Page 14 - DMGT503_DMGT301_CORPORATE GOVERNANCE AND ETHICS

Unit 1: Understanding Corporate Governance

The findings of (Solomon J. and Solomon A., 1999) endorsed many of the issues relating to the Notes
agenda for corporate governance reform in UK. For example, they show, that institutional
investors agreed strongly with the Hampel view that corporate governance is as important for
small companies as for larger ones. The results also indicated significant support from the
institutional investment community for the continuance of a voluntary environment for corporate
governance. The respondents’ agreement that there should be further reform in their investee
companies also added support to the ongoing reform process. Lastly, the institutional investors
perceived a role for themselves in corporate governance reform, as they agreed that the
institutional investment community should adopt a more activist stance.
Benefits of Corporate Governance

The initiation of the process of corporate governance in PEs is likely to result into a series of
important benefits. Firstly, the flip-flop about owning of the responsibility for low performance
would perhaps come to an end. The owners will be on enterprise board. Secondly, goal and role
clarity would improve. Enterprise would be mission – vision driven. Thirdly, opportunity for
top management to create a cultural transformation from government entities to corporate
entities, and from state-financed to self-sustaining ones.

1.1.6 Role of Corporate Governance

The role of effective corporate governance is of immense significance to the society as a whole.
It can be summarised as follows:
1. Corporate governance ensures the efficient use of resources.
2. It makes the resources flow to those sectors or entities where there is efficient production
of goods and services and the return is adequate enough to satisfy the demands of
stakeholders.
3. It provides for choosing the best managers to administer scarce resources.

4. It helps managers remain focused on improving performance and making sure that they
are replaced when they fail to do so.
5. It pressurises the organization to comply with the laws, regulations and expectations of
society.
6. It assists the supervisor in regulating the entire economic sector without partiality and
nepotism.
7. It increases the shareholders’ value, which attracts more investors. Thus, corporate
governance ensures easy access to capital.
8. As corporate governance leads to higher consumer satisfaction, it helps in increasing
market share and sales. It also reduces advertising and promotion costs.

9. Employees are more satisfied in organizations that follow corporate governance policies.
This reduces the employee turnover, which results in the reduction in the cost of human
resource management. Only a satisfied employee can create a satisfied customer.

10. Corporate governance reduces the procurement and inventory cost. It helps in maintaining
a good rapport with suppliers, which results in better and more economical inventory
management system.
11. Corporate governance helps in establishi7ng good rapport with distributors providing
not only better access to the market, but also reducing the cost of production.

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