Introduction
In recent years, considerable attention has been devoted to differences across countries in the institutional environments in which corporations operate, and the consequences of these institutional differences for corporate performance. One branch of this literature has been concerned with corporate governance structures. Under the broad heading of corporate governance, different concepts are usually included one is the identity and degree of concentration of ownership, another is the institutional structure by which owners monitor and control managers by means of boards of directors and the like, and lastly the institutional structure for disciplining and replacing managers as, for example, through proxy contests and/or takeovers ( 2003). A second branch of the literature focuses upon the broader legal environment in which corporations operate. Within this literature would come laws governing a shareholder’s access to various sorts of information about a company, a shareholder’s rights to sue the management for certain actions detrimental to the shareholder’s interests, and so on.
Although corporate governance structures are imbedded within the broader legal system of a country and thus are affected by it, the two sets of institutions are not synonymous, as we shall explain shortly. One distinction drawn within the corporate governance literature is between insider governance systems in which ownership stakes are concentrated and the major stakeholders are directly represented on the boards that monitor managers, and perhaps in management itself, and outsider governance systems in which ownership stakes are dispersed, and owners exercise indirect control on management by electing representatives to the monitoring boards, or perhaps by voting on specific proposals of management ( 2003).
Corporate governance has something to do with the standards of behavior and conduct expected from directors and other senior executives in directing and controlling the affairs of a company. It is the relationship among various participants in determining the direction and performance of corporations. The central concern of governance is to add value to as many organizational stakeholders as is practicable that by having appropriate standards of governance the long-term performance is raised and total shareholder return is enhanced. Some of the more notorious and spectacular examples of defective and damaging corporate governance in recent years in the UK include: the attempted takeover of the CWS; the crash of Barings Bank in 1995; the so-called dirty tricks campaign waged by British Airways against Virgin Airlines during 1993; the failure of the Bank of Credit and Commerce International (BCCI) in 1991; the underwriting irregularities at Lloyds of London; the collapse of Polly Peck in 1991 involving financial irregularities that were not revealed in the company’s accounts; and the loss of employee pension funds at Maxwell Communications Corporation which were only revealed when the company collapsed in 1991. In the US there has been the collapse of Drexel, Burnham, Lambert as a result of insider trading and fraud, the collapse of the savings and loan (S&L) industry and the attempts by Salomon Brothers’ to rig the US Treasury bill market are just a few examples (1999). The paper will discuss about limited liability and its relation to corporate governance. The paper will also discuss about the absence of offensive shareholder intervention as being detrimental to the public interest. The paper will then analyze the general trend of the international corporate governance.
Limited liability
Shareholders in companies limited by shares are liable to contribute only a limited amount to its assets. The minimum amount of the contribution is the par value of the shares that is the value ascribed to the shares in the company’s constitution but where shares are issued at a price higher than the par value then the required contribution is par value plus the premium. Limited liability does not follow automatically from the principle of separate legal personality. If it did, then unlimited companies in which the shareholders are liable to contribute to meet the company’s debts in full could not exist. Corporate personality means that the company, not its shareholders, is the person responsible for the debts of the business. The extent to which the company can require its shareholders to provide the finance to meet the liabilities of the business is a logically distinct issue. People who lend to companies also have limited liability: they, too, are liable to contribute no more than the principal amount that they agreed to lend. The basic distinction between the shareholder and the lender is that, whilst both contribute a fixed amount, only the shareholder hopes for capital gain in respect of the investment. Limited liability encourages entrepreneurial activity because it allows people to limit the risks involved in conducting business. This is the main function of limited liability in quasi-partnership type companies where raising share capital from persons other than the controllers of the business, or their families, is not normally a realistic option ( 1999).
The importance of this aspect of limited liability should not be over-stated because in a real-life situation it is likely to be whittled away by unlimited personal guarantees which some providers of debt finance to the business may demand from its controllers. To the extent that personal guarantees are given, contractual stipulation overrides the limited-liability position established by company law. Yet not all creditors of the business will be in a position to demand personal guarantees. Some will lack the necessary bargaining strength whilst others may have no opportunity to bargain because they are the victim of a tort committed by the company. The controllers can thus still derive some benefit from limited liability.
Limited liability facilitates passive investment or the investment on the basis that the investor will not play a part in management. Provided there is a prospect of an adequate return for the risks involved, an investor may be prepared to allow someone else to run a business using his money where there is a cap on the amount that he stands to lose if management fails. Without such a cap a prudent 90 investor might be disinclined to invest in shares at all or, at least, would expect a very high return to compensate for the risks involved. The investor might also want to monitor more closely the way in which the managers of the business conducted its affairs, and that would lead to additional costs ( 1999). Corporate governance makes sure that limited liability is implemented by the company and that the level of liability is maintained.
Absence of shareholder intervention and the public interest
Complaints are heard that shareholders fail to monitor managers. Managers build empires and pursue bad strategies without shareholder intervention until matters are so out of hand that the ultimate outcome is the violence of the hostile takeover or the bloodshed of a fired CEO or the instability of the leveraged buyout or the waste of a bankruptcy. Many 1980s takeovers targeted firms grown too large, which the takeover entrepreneurs then broke up. In other 1980s takeovers, empire-building firms sought to extend their grasp. Either way, persistent shareholder involvement could have led to intervention before bloodshed ( 1994).
In corporations the absence of offensive shareholder intervention is detrimental to the public interest, therefore it is necessary for the state to monitor and regulate corporation activity. There can be instances wherein shareholders can be uncaring or does not want to intervene in the affairs of the company. When this happens a company loses its guidance and the drive to achieve the goal minimizes. Another thing that can happen when there is no shareholder intervention is public interest detriments. The state should make sure that it will be the one to guide a company and check its every activity so that public interest in will not decrease.
Trends in the international corporate governance
In recent years major changes in corporate governance have been underway. Collaboration with stakeholders is now occurring as they gain power and because managers need their support. Institutional investors have become more involved in the management of large corporations, including ‘ethical investors’. Employee participation, often in the form of shareholding, has grown significantly, especially in the USA. Feminist moves are becoming more influential in business, thereby bringing cooperative, community-oriented values into management practice. Other social constituencies have gained influence in recent years: relationship marketing to build trust and commitment with customers in long-term relationships; partnership agreements with suppliers and government; voluntary moves to protect the environment; and so on ( 2001). Corporate governance is becoming more of cooperation between management and the employees wherein both are giving something so that the goal of corporate governance will be achieved. Corporate governance is also becoming group oriented than individual oriented. Managers are starting to realize that they can’t solely manage a firm; they need the assistance of employees and in certain instances the shareholders of the company. Managers need the ideas of other persons so that operation will run smoothly.
References
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