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Corporate Governanc.Corporate governance has succeeded in attracting a good deal of public interest because of its apparent importance for the economic health of corporations and society in general. The development of increased interest in corporate governance reflects higher expectations by the investment community for greater effort by listed public companies to develop their own structures and procedures to ensure effective management and appropriate standards of corporate behavior.However, the concept of corporate governance is poorly defined because it potentially covers a large number of distinct economic phenomenons. For example, Mathiesen (00) considered corporate governance a field in economics that investigated how to secure or motivate efficient management of corporations by the use of incentive mechanisms, such as contracts, organizational designs and legislation. And an article in financial times (17) said ¡°corporate governance----which can be defined narrowly as the relationship of a company to its shareholders or, more broadly, as its relationship to society.¡± Turnball (17) considered corporate governance including all the influences affecting the institutional processes, including those for appointing the controllers and / or regulators, involved in organizing the production and sale of goods and services. OECD has a more detailed definition in April 1 ¡°corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.¡.Corporate governance rules mainly govern the relationship between the company as a corporate entity and each member, the member to each other and the company and each of the officers. The company needs rules for its internal management, usually these internal management rules provide for such matters as the appointment of officer, the power and authority of officers, and the holding of meetings, and the issue and transfer of shares. The purpose of corporate governance mechanisms is monitoring and controlling the management of corporations so as to result in more effective management and to enhance shareholder value (Lipton and Herzberg 001). Corporate governance is the set of procedures, rules, systems put into place to ensure that the company can come to life, make decisions and generally do things; it set out who will make decisions on behalf of the company----this may be----all the owners in a general meeting or ----the owners representatives----directors; and there are controls over these decision makers. A company needs rules for its internal management. Usually these internal management rules provide for such matter as the appointment of officers, the power and authority of officers, the holding of meetings, and the issue and transfer of shares. The sources of corporate governance rules including the mandatory provisions of the corporations Act which cannot be excluded; the replaceable rules which are sections of the Act that become the companies constitution unless replaced, and ¡°a constitution¡± which the promoters may decide they want their own constitution
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Corporate governance is concerned with two conflicting ideas. One is giving the board and management power to drive the company forward, the other is achieving this in an effective and accountable way. If these conflicting ideas do not match, then corporate governance will not be effective. For the extreme situation, the company will be out of control.In the past two year, five of the ten largest bankruptcies happened in US history such as Enron, WorldCom, GlobalCrossing, Tyco, and Adelphia, and some famous Australian companies such as OneTel, HIH, Harris Scarfe and Ansett collapsed too. In these corporations, boards of directors didn¡¯t govern because all essential governance happens before the board meets. The law mandates directors must act in the best interests of the corporation and its shareholders, which courts interpret to mean maximum share price. So as long as share price remains high, directors feel confident. Yet it was precisely the hyper-inflation of share price that destroyed them. For example, energy giant Enron, collapsed under piles of hidden debt and some unusually risky major investments.The major lesson from the falling down of these big companies is that rules of corporate governance do not adequately protect the interests of the general shareholder against the increasingly divergent interests of corporate managers. In other words, the agency problems from the separation of ownership and control have not yet been adequately solved and may have recently increased. Thus, public and investor faith in the integrity of the business community has been severely shaken in the past years. This effect has already led to increased demands for regulation of accounting, auditing, and corporate governance, and some important corrective actions are underway.There have been some greatest changes of governance in America. As observed in the Economist the two key sets of reforms are those in last summer¡¯s Sarbanes-Oxley act, now being turned into rules by the Securities and Exchange Commission (SEC), and those proposed by the New York Stock Exchange (NYSE), which are also being scrutinized by the SEC.The Sarbanes-Oxley Act of 00 is a lengthy and comprehensive measure that is designed to improve the quality and transparency of financial reporting, independent audits, and accounting services for public companies by creating a Public Company Accounting Oversight Board overseen by SEC to enforce professional standards, ethics, and competence for the accounting profession; strengthen the independence of firms that audit public companies; increase corporate responsibility and financial disclosure; stiffer fines and criminal penalties for fraud, misrepresentation, and destruction of documents; protect the objectivity and independence of securities analysts.Other development in resolving the problem of corporate governance in USA also including the Business Roundtable released its Principles of Corporate Governance, a set of guiding principles intended to assist corporate management and boards of directors in their individual efforts to implement corporate governance best practices.In Australia, corporate governance has become the focus of unprecedented attention. The spotlight has been firmly directed at improving corporate stewardship, disclosure and internal controls. On 18 September 00, the Federal Government¡¯s Commonwealth Corporate Law Economic Reform Program (CLERP) took another step towards reforming corporate governance standards in Australia with the release of Issue Paper No. Corporate Disclosure. CLERP renews the focus on some of the leading and most sensitive issues in Australia¡¯s corporate governance debate. The Government has provided the framework and underlying principles from which it intends to strengthen the corporate governance performance of Australian companies. The reforms strengthen and clarify the roles and obligations of key corporate governance players----company boards, audit committees, management, shareholders, external auditors and regulators. Besides, The Australian Security Exchange (ASX)¡¯s Corporate Governance Council has already worked on corporate governance and audit committee best practice standards and principles to suit the Australian environment. The Council will review, and where necessary suggest input into, published guidance recommendations for Corporate Governance practice in Australia, also having regard where relevant to international models; assist ASX in building understanding about best practice on the part of listed companies including, where appropriate, formulating suggestions as to any necessary amendments to Listing Rules and guidance notes; recommend to regulators and government where legislative amendment may be necessary; provide information related to corporate governance to investors and the wider community; and regularly review compliance with best practice. Now the companies may need to prepare for 7 key areas of change aimed at strengthening audit committees, improving external auditor management, greater shareholder participation and access, stronger continuous disclosure penalties, protecting corporate whistleblowers, and assessing corporate governance performance.Recently, the collapse of the big companies and ¡°failure¡± of corporate governance have raised questions. The controversial problem is how to limit the bad companies that abuse the gifts of ¡°limited liability¡± and the ¡°separate entity principal¡± to avoid important responsibilities and liabilities. Some prefer external regulation and penalties and some would rather choose internal regulation through corporate governance. This essay will focus upon this problem.The recognition that a corporation is a separate legal entity in its own right is the foundation of modern corporate law. A corollary principle is that the shareholders of the corporation are only liable for corporate obligations to the extent of their investment.According to Puig (000), by establishing that corporations are separate legal entities, Salomon¡¯s case has allowed companies to become powerful business entities. But this has created a double-edged sword, with both good and bad elements.The principles give even apparently honest incorporators the benefit of limited liability in circumstances in which it is not necessary in order to encourage them to initiate or carry on their trade or business. First, limited liability reduces the need to monitor management and other shareholders. Secondly, limited liability and free transfer of shares with which it is arguably linked facilitate the market for control. This acts as an incentive to management to perform efficiently. Thirdly, limited liability, in adding to the marketability of shares improves the information fed to the market place by the increased volume of transaction. Fourthly, limited liability allows shareholders to diversify their holdings. Fifthly, it facilitates optimal investment decisions since a positive attitude to risk taking will ensue.However, if the principles applied inflexibly, the principles can shield parties unreasonably, to the detriment of persons dealing with companies. First, limited liability attracts small traders to the corporate form not because it represents an effective device with which to raise capital, but because it gives them access to an avenue via which to escape the ¡°tyranny of unlimited liability¡±. Secondly, when coupled with the consequent attribute of limited liability, the principles provide an ideal vehicle for fraud. Because of its malleability and facility for protecting directors and members against the claims of creditors, the corporate form has been responsible for the development of many different forms of fraudulent or anti-social activity. What is colloquially known as the ¡°$ company¡± is one notable example of corporate fraud.Modernizing company law and stricter regulations is a good way to protect shareholders. Frequently when companies fail and a disqualification order is made, directors have contributed to the collapse by their negligence, misconduct or misappropriation of company assets. Rogue directors will often ensure that there are insufficient assets to pay the costs of the liquidation and therefore frustrate recovery action. The liquidator might turn to the creditors for a fighting fund but they would often be reluctant to risk further good money after bad. By stricter regulations and penalties, the directors who abuse limited liability for their own personal benefit and at the expense of creditors who supported the company will be deterred and punished. But by the contemporary company law, it makes no difference between the responsible risk taker who works hard but is unsuccessful and those individuals who deliberately set out to cheat their creditors or abuse limited liability. For example, the falling down of Enron has made a lot of shareholders lose their investment and the employees lose their pension, but until now, no one in the company has been put into the jail.President of USA George Bush signed the Sarbanes-Oxley Act into law with the hope that it would put an end mounting corporate scandals and accounting misdeeds in the country. Included in the act are new rules regarding the structure and role of the audit committee and increases in penalties for corporate wrongdoing. Some experts (Niskanen, 00) believe that the most important policy lesson from the collapse of Enron is that the change in private rules should be complemented by repealing or reversing those laws, regulations, and court decisions that now restrict successful tender offers. The probable results would be a reduction in executive compensation, less pressure to cook the books, an improved allocation of capital, and an increase in the rate of return to the general shareholders.The company law in this area can be improved, but it need careful consideration given to how to deal with responsible risk takers----- those entrepreneurs who have ideas, put in a lot of their own money, work hard, but then fail. On the other hand, Reynolds (00) believed that there will be adverse effects from the new rules----the most serious effect will be to discourage risk. Certification amounts to promising the impossible indisputable accounting. That invites disputes and regulatory harassment, which invites lawsuits. As a result, executives will naturally become ultra-cautious, even timid. Bold new ventures will be shunned, just to play it safe. By penalizing risk, certification threatens chronic economic paralysis. This whole game is mainly a political gift to trial lawyers who chase sick companies the way ambulance chasers go after sick people. This whole game is mainly a political gift to trial lawyers who chase sick companies the way ambulance chasers go after sick people. CEOs and CFOs have just become an inviting new target for class-action suits. This added risk of litigation scared the stock market for weeks because it must shrink future profits by inflating the cost of insurance and compensation. Companies will have to pay much more for insurance to cover the risk that their executives might be sued. And a fat new risk premium must likewise be added to executive pay. Troubled companies, being most vulnerable to lawsuits, will have to pay premium salaries for the talent required to turn things around. Certification applies only to companies that sell shares to the public. We can expect more of the promising new companies to stay private, which means potential shareholders will miss out.At the same time, we have to be careful, not to look to a significant expansion of regulation as the solution to problems of abusing the principles of limited liability and separate entity. As Federal Reserve Chairman Alan Greenspan said at the New York University in March 00, ¡°Regulation has, over the year, proven only partially successful in dissuading individuals from playing with the rules of accounting.¡.Internal regulation through corporate governance should be paid attention to. The uselessness of corporate governance in some extent has some social and economic reasons.The most recent experiences with the bankruptcy of Enron, and, preceding that, several lesser such incidents suggest that the governance of the corporations has strayed from our perceptions of how it is supposed to work. By law, shareholders own our corporations and, ideally, corporate managers should be working on behalf of shareholders to allocate business resources to their optimum use. But as the economy has grown, and our business units have become ever larger, in fact shareholder control has diminished ownership has become more dispersed and few choices of boards of directors or chief executive officers. The vast majority of corporate share ownership is for investment, not to achieve operating control of a company. Thus, it has increasingly fallen to corporate officers, especially the chief executive officer, to guide the business, hopefully in what he or she perceives to be in the best interests of shareholders. Indeed, the boards of directors appointed by shareholders are in the overwhelming majority of cases chosen from the slate proposed by the CEO. The CEO sets the business strategy of the organization and strongly influences the choice of the accounting practices that measure the ongoing degree of success or failure of that strategy. Outside auditors are generally chosen by the CEO or by an audit committee of CEO-chosen directors. Shareholders usually perfunctorily affirm such choices. To be sure, a CEO can maintain control over corporate governance only so long as companies are not demonstrably in difficulty. When companies do run into trouble, the carte blanche granted CEOs by shareholders is withdrawn. Existing shareholders, or successful hostile bidders for the corporation, usually then displace the board of directors and the CEO. Such changes in corporate leadership have been relatively rare but, more often than not, have contributed to a more effective allocation of corporate capital. For the most part, despite providing limited incentives for board members to safeguard shareholder interest, this paradigm has worked well.Corporate governance is not old-fashioned, but it really needs reform. Lots of economists have given their opinions on it. Kelly (00) commented with proposals getting to the heart of the matter. First, ensure auditors really audit by making them fully independent. Instead of having companies be the ¡°bosses¡± of their own auditors----selecting and paying the firms they want to work with----a Corporate Accountability Commission could assign auditors and pay them from fees assessed on companies. Second, bar law-breaking companies from government contracts. Companies with far worse records than Enron and Arthur Andersen are still feed at the government trough in massive amounts. If they face threat of contract suspension, ethics would become a genuine bottom-line concern----which is the only way to make ethics real to these folks. Third, create a broad duty of loyalty in law to the public good. Today a corporate duty of loyalty is due only to shareholders, not to any other stakeholders, and Enron behaved accordingly----using tricks to drive electricity prices up 00 percent in California and thus fuel a spike in the company¡¯s share price. Such piracy against the public good would be outlawed under a state Code for Corporate Citizenship. Finally, find truly knowledgeable directors employees. As directors, employees would be concerned with the long term and not next quarter. Through reforming, corporate governance will be one of the best ways to prevent the bad management of companies to escape from liabilities.There is another saying that limited liability and separate entity should only be available to large public corporations and not to private companies which idea this essay do not agree.First, % of companies on the Register are small private companies, and only 1% of companies are public companies. Limited liability can promote market efficiency through promoting the liquidity and efficient operation of securities markets. If just large public companies can have the advantage of limited liability, then the end result will be that the economy suffers from the difficulty of raising investment capital.Secondly, in terms of company law and principles of fiduciary duty, there is no fundamental distinction between publicly-held and privately-owned companies. Breach of fiduciary duty means the holding of something in trust for another¡±. The fiduciary duties of directors and other officers including act bona find (in good faith) in the best interest of the company; to exercise powers for their proper purpose; to retain their discretionary powers; and to avoid conflicts of interest..With the effective corporate governance and law, private companies and public companies all cannot abuse the principles of limited liability and separate entity. Jolles (00) suggested that the new corporate governance regime and the new standards of behaviour of directors and officers will apply not only to publicly traded companies, and that private companies should understand both the spirit and rationale behind the recent changes and adapt their practices accordingly. As corporate law begins to reflect the important changes in expectations for company boards and managements, including changes that will inevitably affect application of the business judgment rule, privately held companies would be wise to adjust their corporate governance policies and procedures. In conclusion, a market economy requires a structure of formal rules----a law of contracts, bankruptcy statutes, a code of shareholder rights. But rules cannot substitute for character. In virtually all transactions, whether with customers or with colleagues, we rely on the word of those with whom we do business. In fact the corporate governance reforms need the support from the law, but tougher criminal penalties aimed at punishing a few ¡°bad apples¡± will not be enough; the fundamental problems are systemic in nature. Thus, external regulation and penalties and internal regulation through corporate governance are all important to prevent bad behaviours of the management of companies. Moreover, not only large secure public corporation but also private companies are all suitable for limited liability which will help the economy booms, if successful corporate governance and relative law prevent the directors abuse the principles of limited liability and separate entity. Reference Lis.What is Corporate Governance, the encyclopedia about corporate governance available a.http//www.encycogov.com/ accessed 11.01.0.Shleifer, Vishny, P. 17, The Journal of Financial Times, p. 7.Shann Turnbull, P. 17, Corporate Governance Its scope, concerns & theories, Graduate School of Management Macquarie Universit.Phillip Lipton and Abe Herzberg, P. 001, Understanding Company Law, p. .¡°The Way We govern Now¡±, The Economist, P. Jan th, 00.Gonzalo Villalta Puig, P. 000, A Two-Edged Sword Salomon and the Separate Legal Entit.William A. Niskanen, P. 00, A Preliminary Perspective on the Major Policy Lessons from the Collapse of Enro.Alan Reynolds, P. 00, ¡°Expect Adverse Effects from new rules¡±, USA Today, August 15, 0.Remarks by Chairman Alan Greenspan, available a.http//usinfo.state.gov/topical/econ/mlc/00701.htm accessed 0.01.0.Ira. H. Jolles, 00, ¡°Corporate Governance Reforms for Privately-held companies¡.Marjorie Kelly, P. 00, Four Ideas For Reforming Corporate Governance After Enron, Business Ethics magazin.Sandra Berns and Paula Baron, P. 18, Company Law and Governance, Oxford University Pres.
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