Benefits of Practicing Good Corporate Governance

Corporate Governance is now being increasingly practiced by companies across the globe due to
the number of benefits it offers. Practicing corporate governance is beneficial for a company and
its stakeholders as well for the economy as a whole. A few benefits of corporate governance are
mentioned below.

Excellent Management
If a company is practicing corporate governance, people not linked to the firm will also be able
to assess its governance. This is because the most fundamental principle of corporate
governance is transparency and the principles of disclosure. Every step taken by company
authorities, having control over the companys management, is in the best interests of the
company and its stakeholders. This has a positive impact on the community and may reflect
upon the market valuation of the firm and hence, its share price.

High Level of Transparency

Companies that follow a set of best practices are encouraged to be highly transparent about their
business. This helps them attain the trust of the community and its stakeholders and eases the
task of raising capital, when needed. As the business is easy to assess and evaluate due to its
high level of transparency, many investors and financial institutions prefer funding these
companies than those that are not following the core principles of corporate governance.

Stakeholder Benefits
Under corporate governance, a firm tends to act in the best interest of the firm and its
stakeholders. This will ensure greater success as the goal of the company managers will now be
aligned with the goals of the company. The result of this will be greater profits and faster growth
which will benefit the company and all the stakeholders.

Reputation and Recognition

The practice of good corporate governance followed by firms will allow them to gain the trust of
the investors, the customers and the community at large. This will have a positive impact on the
companys reputation and it will be recognized as a fair and transparent company. This image
will help the company prosper in the long run and achieve its goals more quickly.

Reduces Wastage
Good practices of corporate governance help companies become more efficient in their business.
Employees that are trained to follow ethical business practices will avoid excess wastage of
company resources will tend to utilize all resources optimally.

Reduce Risks, Mismanagement and Corruption

A company can reduce the amount of risks in their business as well as any attempts of
corruption and mismanagement by following the practices of good governance. Due to the
amount of transparency necessary in companies that follow the principles of good governance,
many individuals intending to misuse their position and power will be unable to do so. This will
reduce the overall incidences of negative acts in the company and help it achieve success and a
positive image in the community.

Economic Benefit
A company following good corporate governance will be able to achieve the trust of the
community and hence, success in the long run. A firms good reputation will ensure a good flow
of capital by attracting foreign investors in the economy and will benefit the economic situation
of the nation.

Disadvantages
Ownership-Management Separation
The officers and directors who run the day-to-day affairs of a corporation and make most of its
policy decisions are not necessarily shareholders. This can become a problem in large, publicly
traded corporations. If no shareholder holds a controlling interest in the corporation, and most
shareholders vote by proxy, the corporation's assets are controlled by the board of directors and
the officers. The separation of ownership and management can lead to a conflict of interest
between management's duty to maximize shareholder value and its interest in maximizing its
own income. A CEO, for example, might be paid a large bonus even as the corporation
approaches bankruptcy.
Illegal Insider Trading
The term "corporate insiders" refers to corporate officers, directors and employees because they
may have access to confidential, non-public information about the corporation that might affect
the value of its shares. Corporate insiders are not strictly prohibited from trading corporate shares
but must report these trades to the Securities and Exchange Commission. Illegal insider trading
occurs when a shareholder, while in possession of confidential information relevant to the future
value of his shares, sells shares to a buyer without access to this information. Illegal insider

trading can also be committed by a shareholder not directly affiliated with the corporation, such
as an outside auditor, a government regulator or a relative of a corporate insider. Because access
to confidential corporate information can be widely dispersed, laws against insider trading can be
difficult to enforce.
Misleading Financial Statements
There are many ways to present factually accurate information on a financial statement in a
manner that is misleading to investors -- by, for example, selling property from a parent company
to a subsidiary to maximize parent company revenues. It is also possible to present factually
incorrect information that is difficult to detect by establishing complex networks of subsidiaries
and cross-shareholdings.
Costs of Regulation
The abuse of corporate governance has triggered the enactment of a large body of state and
federal laws designed to prevent such abuses from recurring. Compliance with these laws can be
burdensome and expensive for corporations. For example, the Securities and Exchange Act of
1933 requires companies seeking to list on a stock exchange to make such extensive disclosures
to potential investors that compliance can cost hundreds of thousands of dollars. More recently,
the Sarbanes-Oxley Act of 2002 requires corporations to establish extensive systems of internal
controls to ensure that their financial statements are both factually accurate and non-misleading.
1.Lack of independence

The independent non-executive director can improve the company's corporate

governance system is basically relied on his nature of "independence. But in
practice, the independent non-executive director may not actually independence.
Although there have requirement that the independent non-executive director of the
company must not be or have been connected to a director, the chief executive or
substantial shareholders, the directors would like to select whose would co-operate
with them as the independent non-executive director.

Even though they cannot select the connected person, e.g. their relatives or
business partners as the independent not-executive directors, they can find their
friends or someone who has the same view (e.g. marketing strategy) with them as
the independent non-executive director, instead of finding some who are really
independent and helpful in making the right decision. It would be easy to say that
they are not connected with each other. It is especially easy to occur in case the
directors are also the substantial shareholders, because the substantial
shareholders (as the same time the directors of the company) have the voting right
in appointing the non-executive directors, just like the family based companies in
Hong Kong.

If the independent non executive director being appointed is not 'independent'

enough, they may not be able to protect the interests of all shareholders. They may

only agree with the directors and the substantial shareholders and may not be able
to provide independent and objective judgment and advice to the board of director.
For example, the independent non-executive director are usually the members of
the audit committee, if they are not independent enough, they may not be able to
provide objective opinion or review on the financial reporting process, internal
controls and the audit function. Moreover, they may also take part in determining
the directors' remuneration, if they are connected with the directors, they may
consent to the unreasonable high directors' remuneration without any inquiry.
2.Holding of the shareholding interest

The independent non-executive director may hold some shares of the company,
subject to the requirement, must not be more that 1% of the total issued share of
the company. That means he or she is also the minority shareholder of the company.
So this time, instead of having the same view as the directors and the substantial
shareholders, he may just concern about the interest of the minority shareholders
as he is also one of them. Since on of the roles of the independent non-executive
director is to ensure that the interests of all shareholders, and not only the interests
of a particular group, are indeed taken into account by the board of directors, if he
just concerns about the interest of the minority shareholders, it may not be good to
all shareholders and the company. In fact, the independent non-executive director
should try to balance the interest between the majority and minority shareholders
but not only to protect the interest of one particular group.
3.Limited availability beyond regular board meetings

In most of the companies, the non-executive directors are on the part time basis.
According to the Listing Rules, their remuneration cannot be fixed high enough that
allow them to rely in their livelihood;. As the benefits given to the non-executive
directors are low, but they have to bear the same liability as the executive director,
they may not have incentive to work hard and do not devote to spend their time to
attend all the meetings. Hence, the non-executive directors just attend the
meetings that they are interested in or attend the full board meeting. And in overall,
the non executive directors only attend 3-4 meeting each year.

With the low attendance of regular board meetings, the non-executive directors
cannot check the acts of the directors. And also, they cannot ensure the issues are
subjected to dispassionate consideration by the board without attend the board
meetings. Therefore, even the listed companies are required by law to have at least
2 non-executive directors, it cannot improve a company's corporate governance
system with their limited availability. The non-executive directors cannot check what
the executive directors had done and it provides opportunity for the directors to
override all the decisions in the board meeting.
4.Limited knowledge about the company's internal affairs

As mentioned about, the non-executive directors seldom participate in the board

meetings. Also they cannot personally involve in the operation of the company.
Therefore, they do not understand the operation and the policies of the company.
Hence, even the non-executive directors participated in one or two of the board
meetings, they could not give any opinion regarding to the unusual or inappropriate
parts.
5.Few numbers of non-executive directors

Another problem is related to the number of non-executive directors. In case the

company has two independent non-executive directors, which satisfied the
minimum requirement that the company should have, but those non-executive
directors may not have great influence on the board, as there are only two person
present in the meeting, the executive directors may still do thing on their own
without hearing non-executive directors' opinion. Thus, non-executive directors have
little power to affect the board decision, and thus they cannot improve the
company's corporate governance system.

Due to the reasons mentioned about, in real case, it is not necessary true that the
independent non-executive director must always improve a company's corporate
governance system. It may be only a myth. Whether the independent non-executive
director can improve a company's corporate governance system depends on his
independence, qualities, integrity, experience and many other conditions.

Loizos Heracleous (2001) point out that recent research on the importance of
selected 'best practices' in corporate governance, which has generally failed to find
convincing connections between these practices and organizational performance.
There are four possibilities reason for against, firstly, the best practices are indeed
irrelevant to performance, secondly, the operationalisation of theoretical concepts
has low face validity, thirdly, that studies are too narrow, aiming to relate board
attributes directly to organizational performance and ignoring other systemic factor
and lastly, the possibility that different types of organizations require different
practices in corporate governance. The correlation between a firm's corporate
governance attributes and its value is weak (Black, 2001)

Niamh Brennan (2006) according to the research before would like attempts to find
a relationship between boards of director and firm performance. Academic
community is reluctant to conclude that there is no relationship between firm
performance and boards of directors. Prior research attempts to relate firm
performance and corporate governance, with little convincing evidence found to
date (Larcker et al., 2004), although more recent work considerably expands the

governance factor examined, it has only been able to find relationship with a
minority of those factors (Bebchuk et al., 2004: Brown and Caylor, 2004)