A literature review of corporate governance

Literature Review

Corporate governance refers to the processes, structures and information used for directing and overseeing the management of an institution (Duncan and Cameron, 2005). A good corporate governance framework establishes the mechanism for achieving accountability between the board, senior management and shareholders, while protecting the interests of relevant stakeholders and they also set structure through which the division of power in the organization is determined (Duncan and

Cameron, 2005). Donaldson and Davis (2003) averred that corporate governance is a system by which corporate entity is directed. It relates to the functioning of the board of the company and the conduct of the business internally and externally. Theoretically, the control of a company is divided into two namely: the board of directors and the shareholders through the annual general meeting.

Unlike in small private companies, the board of directors in a public company tend to exercise more of a supervisory role, and individual responsibility and management are usually delegated downward to individual professional executive directors (such as a finance director or a marketing director) who deal with particular areas of the company’s affairs (McNamara, 2009). Governance is therefore considered as that organ of small or big organizations or even the large society, which is charged with the

responsibility of controlling resources of all types, within the spheres of its influences, and also having power to rule over the human and material resources of the organization or community (Ogundele, 2005). The governing of a business organization is vested in the headship of such enterprise usually the board of directors that formulate policies, to guide the behaviour of the members of the organization and relevant associates of the organization. The objective of corporate governance is to achieve corporate excellence and enhance shareholders’ value, while not neglecting the need to balance the interests of all stakeholders (Chukwudire, 2005). Tricker, (1994) associated corporate governance with managing the organization in the interest of the shareholders. This implies the agency in the context of the separation of ownership and management in corporations. Dress and Lumpkin (2002) noted that modern corporation has the feature of the separation of ownership and management.

But there is a separation between those that own the corporation and those that manage, control, and direct it. It is from those who own the corporation that the boards of directors are elected during the annual general meeting. Duncan and Cameron, (2005) asserted that shareholders at the company’s Annual General Meeting legally appoint the directors. Hence, the directors individually and the board collectively should be responsible and answerable to the shareholders for their activities and practice.

Furthermore, the directors should be willing to act as stewards of the corporation’s assets and consequently work to maintain and enhance the value. Frank and Graeme, (2005) asserted that corporate governance is seen as a set of processes, rules to be complied with, rather than the desired outcome of directors, that is the authority exercised with probity and unquestionable integrity over the corporations’ affair. This means that the corporation has nurtured an opportunity for management to act more in its own interest rather than the shareholders’ interest and this is the genesis of Modern Corporation in the Companies’ Act of 1844. It was not accidental that the 1844 Companies Act required annual accounts and reports which must be audited which will better protect the interest of shareholders.

Effective stewardship relies on justice, trust of the owners in, and in the probity of the stewards (Frank and Graeme, 2005). However, when the managers are not the owners, agency problems drag firm performance in as much as the managers as the decision makers are not the residual claimants of wealth and as such, these managers may have a tendency to act for their own interests (Fama 1980).