Corporate Governance

 

Introduction

Cuervo-Cazurra et al. (2014, p.928) describes corporate governance as the set of rules and laws laid down and employed by a company upon which it runs and operates on. These rules are constructed by the board of the company. Corporate governance aims at protecting all the shareholders of the company equally. When the board system of a company sets out to establish these rules, it must put into consideration all its shareholders. The corporate governance includes the structure of the company. It contains the aims, mission, and vision of a company.

For an organization to be declared a company, these rules ought to be passed through the government for confirmation. The government has a standard set of rules which each organization must meet so that they can be declared a company. These rules not only govern the internal affairs of the company, but also the external affairs.

The board of directors plays a very important role in the determination of the corporate governance of a company. The board consists of the biggest shareholders who influence the decision-making in the company. They are the greatest contributors of the company, financially. When laying down these laws, they must put into consideration every member of the company. These include the community, clients, managers, government and the shareholders themselves. Other than these people, a company has special members such as the company lawyer and advisors. These rules also need to take into consideration the existence of these parties.

While compiling these laws, the board needs to exercise fairness and justice. They should not make the laws to favor them but treat every member equally. When the board creates rules favoring them, most members are likely to withdraw from the company due to unfair treatment.

This discussion will take a look at corporate governance in various companies. It will discuss how the government and the constitution as a whole influence corporate governance in any company. Also, it will discuss factors that contribute to good and bad governance. It will elaborate the role of the various shareholders in various governance. To conclude, it will outline the various advantages and disadvantages of corporate governance.

 

Literature Review

Karolyi & Liao (2017, p.368) describe State Owned Enterprise or Entity (SOE) as an enterprise that is formed by the government so as to carry out particular commercial tasks by on behalf of the government. Such enterprises are either owned by the government partially or fully. However, the government is in charge of the activities that are carried out. SOEs are common all over the world. Bruton, et al. (2014, p. 95) says that such enterprises occupy 10% of the world’s businesses. Mortgage companies such as Freddie Mac and Fannie Mae are examples of SOEs in the United States. Such organizations are common in several countries including New Zealand, China, and South Africa among several other countries (Yu, 2013, p.179). Since they are owned by the government, they are required to follow certain standard guidelines in their daily operations and management.

State Owned Entities are created following a government act Bruton, et al. (2014, p. 98). In some instances, the SOEs are created from government agencies via a process called corporatization. Some of these SOEs are mainly created to assist in business rather than make a profit. At the same time, they do not make losses Yu (2013, p. ) gives an example of the Chinese economy. From his research, the SOEs make great losses when not properly managed. The purpose of such SOEs is to help the economy grow and increase business Cuervo-Cazurra, et al. (2014, p. 936). For those SOEs that make a profit, the profit is shared among the shareholders depending on the percentage they own in the company. Most of the SOEs are meant to assist the people rather than generate revenue for the government.

Berkman, Cole & Fu (2012, p.761) uses the Chinese government to give examples of State Owned Enterprises and their Ownership. In their opinion, China is one of the most successful countries in terms of SOEs. Yu (2013, p.169) agrees with them. He goes forward to give an account of these Enterprises in China. He gives detailed illustrations that helps one get a better understanding and their importance to the economy of a country.

Methodology

To get a better glimpse of State Owned Entities and their importance to the society, we gathered information from various resources. This was the most reliable method of acquiring information as it is difficult to move from country to country. Reading through various articles and books, one is able to discover the meaning of an SOE. The articles have different information depending on the author and where they base their work. Most of these authors use China as an example, to portray the effects SOEs have on the economy of a country. Yu (2013, p.163) has specifically chosen China to assist the reader to gain knowledge in the area. He has illustrated the weaknesses and strengths this type of enterprises has. Also, he has attempted to give the importance of such companies in a country’s economy.

Different authors attempt to view this topic from different perspectives. To help their readers, Yang & Modell (2015, p.10) conducted a case study which helped them looked into the SOEs in China. In the case study, he looks at the performance, outcomes, profits and losses and stock movement in the entities. This information is easy to grasp rather than actually going out to the field to gather. Also, using this secondary method of gathering information conserves time and saves on energy. It also helps one get accurate information. However, the information may be different from history and business changes every now and then. As such, using very old sources, may not be very efficient. As such, one is recommended to use the most recent journals and books to gather information.

Characteristics of State Owned Enterprises

Just like any other business, the state-owned entities have various characteristics. The fact that they are owned by the government does not make them more important or less important than other businesses. In this section, we shall, therefore, study the various characteristic of SOEs.

The first and most important aspect of SOEs is that they are owned by the government. The government owns 51% or more shares in any SOE. This makes them the biggest shareholders. As such, the government controls the business carried out in any State Owned Entity. The other shareholders also take part in decision making.

Any State Owned Entity has the ability to enter and take part in the business. Once its existence has been approved by an act of government or corporatization, it can take part in the required business. The business may however not be able to attract profits for the shareholders. Most of these entities are only established to boost business.

Just like any other business, SOEs do recruit and lay off workers. The SOEs provide employment to members of the society.  The government creates such entities to provide employment to its citizens thereby reduce unemployment. This way, it helps boost the economy.

The State Owned Entities operate just like any other business in the market. They make purchases and sales. They have a company lawyer, advisors and members of staff. They also have a set of laws meant to govern them. Also, they have a set structure on how to operate when to operate and what type of merchandise to deal with.

The most important aspect of an SOE is that it generates income for the government (Wang et al. 2014, p.340). Most of these businesses are created with the aim of creating jobs as well as build the economy. As such, they generate income. However, some of these companies are not able to generate income as they do not make profits nor losses.

Results and Discussion

The most important aspect of an SOE is that it generates income for the government (Wang et al. 2014, p.340). Most of these businesses are created with the aim of creating jobs as well as build the economy. As such, they generate income. However, some of these companies are not able to generate income as they do not make profits nor losses.

The government must respect the presence of the board of governors. They must not interfere with their duties (Wang et al. 2014, p.340). The main purpose of the board is to control and supervise the daily activities of the companies. They ensure that the rules are followed to the latter by all members of the company. Also, they are answerable to the owners of the company. In case anything goes wrong, they must bear the responsibility and respond accordingly. They should not practice the blame game.

There is a clear distinction between the legislation and ownership of the company. If one owns a company, it does not necessarily mean that they have the required knowledge to manage the daily proceedings of the company (Yang, & Modell, 2015, p.20). The board of the company should comprise of people with necessary qualifications and knowledge to handle the company. If the members of the board do not have the required knowledge for leadership and management, they are highly likely to make the wrong decisions and fail the company in the long run. The members of the board must be ready to serve without bias. They should not make a decision favoring some of the shareholders. They should practice equity among all the shareholders and member of the staff

The board must always adhere to the corporate governance laws of the company. In an instance where they need to modify some of the laws, they need to exercise a lot of wisdom and exercise equality (Yang, & Modell, 2015, p.20). They must make known to all members of the company any changes they ought to make. Otherwise, they would be practicing bad governance.

Members of the board must not serve the interests of any shareholder. They must do what is best for the company and not an individual. Making decisions require a lot of wisdom and knowledge in management. Any poor decision made bring the company one step closer to failure.

Like stated earlier, each company must have its own corporate governance, which is agreed upon by the shareholders (Liang, Ren, & Sun,2014, p.229). Later on, the government confirms the governance and ensure it matches the required standards. However, for a State Owned Entity, the case is a bit different. The government is the greatest shareholder in such companies and as such is in charge of setting down on the rules. This means that all SOEs have standard rules. The difference only comes in the type of enterprise the entity is involved in. since most of the countries have a number of state-owned corporations, some of them thought that it would be better to unite and come up with a bigger entity. The Organization for Economic Corporation and Development was then born. The aim of this organization was to assist these countries to do business together. As a result, the corporation laid down rules that ought to be followed by all the State Owned Entities. This section will take a look these guidelines.

State Owned Entities are mainly created to serve the community and not the government. They are meant to provide employment to the members of the society. One of the duties of the government is to create employment for its citizens. Creating these SOEs is one sure way of dealing with this issue. The guidelines provided in the corporate governance states that the companies should employ members of the community and not outsiders.

The government should develop a policy on which the ownership is based upon. In some instances, the government is not the sole shareholder of the SOE (Liang, Ren, & Sun,2014, p.229). As such, there should be rules governing how each of the shareholders manages and gets shares of the company.  The role of each shareholder should be clearly defined in the corporate governance of the company. No shareholder should oversteps their roles.

Since SOEs are either owned partially or wholly by the government, the rules and regulations need to be disclosed to the public (Karolyi, & Liao, 2017, p. 376). This way, the public will know when funds are being misused. Also, they will be aware of their rights in the company. The public is allowed to contribute their opinions in the SOE.

As an owner, the government has a right to set rules and regulations for the company. Since they own most shares they are allowed to set the standards for operation. However, this does not allow them to be dictators. They should set reasonable rules such that every shareholder is comfortable (Karolyi, & Liao, 2017, p. 378). The government should allow every member of the board to practice and exercise their responsibilities accordingly. It should not interfere with any decision making that is out of its jurisdiction. This way, it will be practicing proper governance.

As a shareholder, the government should take responsibility for every action which happens in the company. They exercise authority as shareholders and ensure everything goes well. They must ensure no funds are embezzled and all activities are carried out as planned. In the case of a misconduct by any member, they must take the appropriate action without favoritism.

The government should not just be a shareholder by name. It should exercise its duties accordingly. Since it owns the majority of the shares, it should play its role as an active owner. It should be aware of all the activities taking place in the company. Also, it should be aware of the other shareholders. The government should ensure that the company operates on the set code of standards without compromising (Berkman, Cole & Fu, 2012, p.110).In case the company starts to fail, the government should be willing to privatize it so as to ensure it does not close down. Privatizing the company means the government sells its share to the private who have the skills to revive the company.

There should be a distinct separation between ownership by the government and other functions of the government. The business should not be affected in any way by any political factor. The government needs to own these companies just like any other individual. It should treat the staff with equality and avoid any sort of discrimination.

State Owned Entities should participate in selling and buying of stocks just like any other company. They should have particular times of the year when they allow members of the public to participate in the buying and selling of their shares (Berkman, Cole & Fu, 2012, p.112). Purchasing the shares should be open to all people in fairness. They should not discriminate on who acquires the shares, rather, they should do the act in transparency and openness. Also, they need to ensure that they file and pay their taxes on a regular basis. Being a government entity does not exempt them from paying taxes.

The corporate governance laws must ensure that there is proper communication within the company (Berkman, Cole & Fu, 2012, p.110). The shareholders must have a good communication with other staff members and members of the community. Any challenge facing the company should be attended to with reasoning and wisdom. Whenever any member has a concern, they should feel free to air it to the rest of the company. The issue must not be disregarded without being solved.

Advantages and Disadvantages

State Owned entities play a great role in contributing to the country’s revenue. The profits turned in by the company are shared equally among the shareholders. Even though the main aim of these companies is not to make a profit, they will turn a profit or loss at the end of the business day just like any other business. The activities of the company determine whether the company will turn a profit or a loss.

State Owned Entities help provide the members of the community with employment. This helps reduce idleness, consequently increasing the security of the country. People engage in criminal activities if they are idle and are not able to meet their daily needs.

One big disadvantage of state-owned companies is the risk of mismanagement. The government may sometimes attempt to meddle in affairs of management. Most government officials do not have the required skills of management. In doing this, they are likely to cause failure of the company.

Conclusion

State Owned Entities are very essential in every country. Their main aim is to provide the citizens with employment.  These entities, may or may not make profits. Either way, they contribute revenue to the central government. The number of shares owned by the government may vary from one entity to another. There is no specified amount of shares the government must own. It is advisable for any SOE to have private investors. These investors help contribute funds to the company in case of any difficulty. The government is in charge of paying the members of the staff and board members. Also, it is highly advisable that the members of the board be a group of intellect minds who have no shares in the company. This ensures that they do not make decisions favoring any shareholder. Most of the countries have State Owned Entities. However, there are some countries that fully rely on private investors. As long as the government and other shareholders exercise responsibility, the company will be successful and provide employment to several of its citizens. The entities will also play a great role in contributing to the revenue of the country.

References

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