The Impacts of Corporate Governance on Management Monitoring - Literature review Example

The literature review on the impacts of corporate governance on management monitoring Student’s Name: Institutional Affiliation: Instructor’s Name: Date: Many firms globally have faced financial scandals linked to accounting and other frauds blamed on top managerial team and these have brought into public discussion whether the companies are managed on the best interests of the company stakeholders such as workers and the shareholders and the community at large. Research done recently indicates that managers may possess too much power making decisions that favours their interests leaving the shareholders out resulting in confusion on accountability. The essay attempt to discuss on the fast-growing theoretical and empirical literature on the corporate governance challenges. This will give out survey on consensus among researchers on the differences which arose between the shareholders and the managers. Body Bainbridge, (2008) defines corporate governance by stating that corporate governance deals with the procedure in which the shareholders benefits from the profits raised within the firm they invest in. The definition suggests that there if conflict on controlling the firm’s wealth by the insiders and the outsiders. According to Dahya et al, (2003) in accordance with the demands of the code, they stated the essentiality of the ability of the managerial committee to its capability to accomplish its stated duties. The four main types of behavioural roles undertaken by the supervisory board depend with their independence as well as the capacity of the board members. These include: friendly adviser; honoured guests; independent watchdog; and censored watchdog. The minority shareholders may not receive the required information in cases where the managerial panel undertakes the function of censored watchdog, thrilled guest or friendly investors. Hence, the activity of the sovereign watchdog needs that the supervisory board members have the needed experience and expertise to act independently. The board advisory members with enough knowledge and experience in the management team must be given a clear chance to bring up the corporate performance. This capacity can clearly be demonstrated by those with full freedom from the board of governance. Cooperate governance varies from one country to another. As per the Chinese culture, it is required that majority of the supervisory board members rest on the three categories instead of carrying out the role of the independent watchdog. Unlike in west, the supervisory board in China comprises political class and is small in nature; none functional trade unions and labour unions as well as the allies of the major shareholders (Bainbridge, 2008). In some countries in west like Germany, the board of directors are given the mandate to elect members of the supervisory board. This system ensures that most of the directors are insiders giving little opportunity the outsiders hence, makes them work closely resulting in lack of independence to the mother firm (Xiao et al, 2004). On top of carrying out the mandate of appointing the supervisory board members, the members also play a role in determining their compensation. This is a clear indication that there is limited independence from the executive team (Wang, 2007). Hence, because of the supremacy of corporate board directors and the leading managers, many managerial boards in East unlike in west are well censored watchdogs that don’t have an authority to speak against the administration controlled by majority shareholders (Taylor, 2008). The supervisory board may also have problems building concrete decisions because of limited access to the company information due to lack of capacity (Wang, 2007). To add on top, the supervisory board is not in any way involved in the selection of directors, neither is they given authority to discipline directors and managers (Lin, 2004). Research done in western countries indicates that western nations adopt one-tier board system. The primary aim of this system is to reduce the agency costs; this was reached by introduction of mandatory unitary board whose main mechanism was to restrain the managerial powers for the shareholders to maximize their interests. Unlike in the Eastern states, the structure of corporate governance in common law states like United States and United Kingdom consists three main organs: board of directors, shareholders’ meetings and management (Bainbridge, 2008). The law states that the board shall monitor or oversee the management of the company on behalf of the shareholders. Fair supervision and independence is the core component of this system. As research indicates, the conflicting roles of the board in the British and American companies are managed by giving powers majority of the independent directors to the board as they are assumed to monitor management independently than the executive directors. As per the past literature review, the third characteristic of the western nations is the role of the shareholders. Research indicates that shareholders may rely on the courts of law to ensure that directors carry out their duties properly. However, past research indicates that there are some inbuilt drawbacks that make this system effectiveness low in minimizing agency cost. A good example is the instances where the board fail to fulfil its fiduciary duties and hence, may not be capable of monitoring the management independently; the law does not protect the shareholders in the market from incompetent management; the true value of long term value of the company is not reflected in the securities of the market (Luan & Tang, 2007). The Chinese board unlike that of Germany does not have mandate to appoint and dismiss the executive board of directors. The monitoring function of the managerial board is not allocated the required resources and powers to oversee the board. In contrast with the American system, the majority are also not given powers to provide the management control depending on their numbers in Chinese listed companies. Yuan & Ron (2011) argued that the essential feature of giving maximum protection and attention to the minority shareholders is to give them an opportunity to understand how the firm runs and the transactions taking place. They also argue that though it is important for both the supervisory board and the shareholders to oversee the party disclosures in the firm, the disclosure might also be very sensitive to all the board members joining the business. According to Bratton, (2002) more authority should be given to the supervisory board, which sits on top of the boards of the listed companies. Nonetheless, past experience indicates that this type of supervision is ineffective in that it is often unclear whose interests are being represented by the supervisory board. Most of the time, the managerial board duplicates the authority of the board itself but without the needed corresponding responsibilities. It is a fact that the presence of a supervisory board may give the fantasy of some checks and balances in the listed corporation when they do not exist. The agency theory states that the corporate financiers should look for corporate governance so that they monitor mechanisms that can give them total assurance that their funds are in safe hands and cannot be squandered in useless projects (Bratton, 2002). The type of ownership structure is an essential aspect that shapes the corporate governance system. The most important aspect of corporate ownership is its concentration or dispersion in that the quantity of attentiveness determines the amount of power that will rest on corporate control (Yuan & Ron, 2011). In line with other literature on corporate governance, the above reviewers are of the fact that the ownership should be dispersed. Hence, they focus on managing misunderstandings between shareholders and the managers which is a subset of agency problems. Their arguments have ignored the impact brought up by the differences in ownership structure that have on incentives to monitor and control the management of the company (Lin, 2004). In contrast to the views of Dahya, (2003), most of the big corporations are unable at times to differentiate from the control the ownership because majority of the people believe in independent managers than the insiders, because the managers are professionals (Bratton, 2002). From this point of view, distribution of power within the firm is determined by the degree of concentration of the firms ownership because of the votes needed when electing managers. Hence, the concentration and structure of shareholdings are two distinct elements that may edge the function of corporate control (Loos, 2006). According to (Lin, 2004), the concentrated ownership of firms may reduce the freedom of the management team in making some essential decisions and during take of risks and, hence, benefit of opportunities. The high pressure that can be exerted on managers in cases where ownership is concentrated can greatly affect the corporate governance policies and incentives. (Loos, 2006). Hence, while on the other hand inclusivity and high power concentration improves monitoring and equity among the management team, they may also take advantage of the other shareholders thus their powers must be restrained (Dahya, 2003). High ownership concentration gives shareholders and manager’s motivation and opportunities to engage in expropriation from minority shareholders (Bratton, 2002). It is this mandate that gives the shareholders powers to return their capital previously invested in such situations. This is a clear indication that the ownership structure of any firm is the most essential factor in determining the corporate governance. Consistent with the conclusion of (Luan and Tang, 2007), (Lin, 2004), (Loos, 2006) and (Bratton, 2002), a review of experiential studies of the connection between tenure structure and firm performance does not give a clear picture. A good case is where (Yuan & Ron, 2011), using a taster of 613 large US firms and using return on equity as an indicator, failed to find the connection between the leading companies and those in the bottom. This failure proofs that the firms concentration and performance at time does not relate. Bainbridge, (2008) carried out experiment to examine the connection between the firm performance and the insider ownership as represented by Tobin’s on 410 Fortune 500 companies for 2000. The outcomes of the experiment indicated that Tobin’s Q increases when insider ownership is below 10% or above 30%, but falls between these two levels. The outcome of the researches conducted showed that there is clear connection existing between firms with large shareholding and their performance. The outcomes also confirm the fact that the institutional investors can monitor the firms better compared to individual shareholders. This is a clear indication from the experiment that the behaviours of the shareholders change either positively or negatively depending with their involvement in management. The action of the shareholders in management depends with their perception on how their capital is managed and their involvement in monitoring. The recent data given by research carried out by (Mitchell, 2001) to investigate the degree of state ownership and ownership concentration on firm feat used 1000 companies listed in Shanghais stock exchange (Macauley, 2001) find state ownership having negative influence on company performance, and also feeble signal of a negative outcome of high possession concentration generally. This indicates that high concentration on ownership results in high power and control from shareholders, which in turn decreases monitoring by other shareholders. The firm performance can be decreased when there are majority shareholders who may seize the interests of marginal shareholders for their own benefits (Wang, 2007). Conclusions To conclude, residual agency costs (Luan, and Tang, 2007) are essential and mechanisms for controlling the dimension of these agency costs are available and they are made up of internal and external devices. As per the past researches, due to important theoretical and practical margins, external disciplining devices which include takeover threat, mutual monitoring by managers, the managerial labour market, competition in product factor markets and reputations cannot independently solve the corporate governance challenges, though they can be essential in some particular circumstances. The companies therefore should adopt harmonizing internal disciplining devices in order to minimize their total agency costs. Some of these internal devices are the composition of the board of directors, large shareholders, and insider ownership and financial policies. The marginal benefits and costs are likely to vary across firms hence; firms may choose different mixes of monitoring mechanisms as per their own specific characteristics. It was also observed that the managers can alter their roles in the firms by controlling voting rights. References Bainbridge, S. M. (2008). The new corporate governance in theory and practice. Oxford University Press, New York. http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&A N=330 426. Bratton, W. (2002) Enron and the Dark Side of Shareholder Value, Tulane Law Review, 76, 1275–1361. Dahya, J. (2003). The usefulness of the supervisory board report in China. Corporate governance: an international review, 11 (4), 308–321. Lin, T. (2004). Corporate governance in China: recent developments, key problems, and solutions. Journal of accounting and corporate governance, 1, 1–23. Loos, N. (2006). Value creation in leveraged buyouts analysis of factors driving private equity investment performance. Springer E-Books. Wiesbaden, Deutscher Universitäts-Verlag. http://public.eblib.com/choice/publicfullrecord.aspx?p=750130. Luan, C and Tang, J. (2007). Where is independent director efficacy? Corporate governance: an international review, 15 (4), 636–643. Macauley, P. (2001). The literature review of the Role and Effectiveness of Non-Executive Directors. Deakin University, Geelong, Victoria, Australia. Mitchell, L. (2001). Corporate Irresponsibility: America’s Newest Export. New Haven, CT: Yale University Press. Taylor, D. (2008). Related-party disclosures in the two-tier board system in China: influences of ownership structure and board composition. 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