Corporate governance is a set of mechanisms for managing relationships among stakeholders. It reflects and enforces the company’s values. The mechanisms must consider the interest of stakeholders, enforce and reflect a firm’s ethical position (Hanson et al, 2011).
Effective governance aligns the manager’s decisions with stakeholder’s interests and assists in producing a competitive advantage. It produces ethical behaviors in formulating and implementing strategies designed to achieve strategic objectives, which in turn develops to meet stakeholder’s legitimate demands (Lecture, 2012).
Separation of ownership and managerial control allows stakeholders to buy stock which entitle them to income from the firm’s operations after paying expenses. This should produce returns for the firm’s owners (Hanson et al, 2011).
Agency relationship comes to being when one person hires another person for services of making decisions. It relates on implementation of strategies. The principal delegate’s decision making the responsibility to an agent (Mckeown & Max, 2012). This relationship involves incurring of agency costs. This is for putting in place corporate governance mechanisms to manage the relationship. Problems of agency relationship are that principals and agents have different interests; it is difficult to measure the behavior of the agent, there is a conflict of goals, divergence of views and managerial opportunism prevents maximization of shareholders wealth (Hanson et al, 2011).
Corporate mechanisms branches to internal and external governance. Internal governance mechanisms are: ownership concentration where shareholders have a strong incentive to monitor management, influences institutional owners, and share holders’ activism; role and duties of the board of directors, and provision of appropriate compensation to top management (Lecture, 2012). External governance mechanisms are: market for corporate control where individuals or firm takes undervalued corporations, and managerial tactics, which involves asset restructuring and financial structure of the firm. Effective governance mechanisms ensure serving the interests of all stakeholders (Hanson et al, 2011).
In conclusion, long term strategic success results in governing firms in ways that permit minimal satisfaction of capital market stakeholders.
Hanson et al, D. (2011). Strategic Management: Competitiveness and Globalisation. Cengage,
Australia: Pacific Rim.
Lecture, n. (2012). Strategic Management:. Power point. Personal commu8nication lecture notes.
Mckeown, & Max. (2012). The Strategy Book. FT Prentice Hall.
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