Contemporary corporate governance issues Essay Example | Topics and Well Written Essays - 1500 words

Contemporary corporate governance issues - Essay Example This paper evaluates whether businesses exist solely for the benefit of its owners (shareholders or not). It goes further to look at the agency theory and other related matters as well as the challenges related to it and the need for alternative views and systems in businesses in the present era. Some decades ago, businesses were basically set up to generate wealth for the owners. This was a capitalist model that ensured that investors got the highest possible returns from their investments. Other concerns were kept to the barest minimum. Parkinson (1994) rightly judged by the events around him, that the â€Å"process of supervision and control [management] intended to ensure that the company’s management acts in accordance with the interest of its shareholders [owners]† Twenty years ago, this was a very acceptable standpoint that most people in society would seldom argue against. Wood & Welker (2011) identify a group of shareholders who arose in the 1970s with the view of ‘disciplining’ directors and restoring control of the true ownership of the organization to its owners. This group of people is described by Johnson, Scholes & Whittingon (2008) as pristine capitalists. With this background, there were two major questions: What should a firm do for its connected parties like its workers and suppliers. Are they just a means (in the absence of machinery) for the creation of wealth for these pristine capitalists? Secondly, if all directors were controlled solely by shareholders, what happens to their freewill and what can they do about the needs of other legitimate people connected to the organization in question. So with this, there were a lot of debates and scandals that forced the business community to take the agency theory a step further and incorporate other important and legitimate needs that organizations needed to honor to the larger society and to its connected parties. Need for The Agency Theory The popular Salomon V Salomon case laid the precedence for the separation of ownership and businesses. This has given right to the formation of limited liability companies around the globe that are distinct from their owners. However, to ensure that an entity acts and operates effectively and efficiently, there is the need for organization to employ directors and managers who will manage the supervisory and routine activities of a business respectively. This has led to the need for shareholders and owners to stand aside and transfer the running of their organizations to competent people who can run the organization. These people, often known as directors or managers act as agents of the owners and they need to seek the best for the organization. In doing this, the owners of organizations have to follow the agency theory which ensures: 1. Identification of legal provisions of the contract between the owning companies and joint ventures in line with the rules of the agency theory (which will be discussed later). 2. Accountability to owners (Hutzschenreuther, 2009). Thus national laws as well as articles of associations for the incorporation of the business guards the conduct of managers and directors. This is because these directors, known in Latin as fiduca (which means ‘trust’) and carries connotations of trust, good faith and honesty (Rahaim, 2005). This means that directors and managers need to avoid â€Å"self dealing† or â€Å"conflict of interest†. The idea of self-dealing refers to a situation where directors use their influence or knowledge in an organization to further their needs.