Importance of Corporate Governance

Institution-building for a market economy

Within a market economy, the private corporations raise their funds form investors, combining these funds with other inputs, for instance land, labor to conduct a business with an aim of making profits. The superior performance and the vital role played by the private sector corporations in economic growth has been a powerful motivator for a widespread system of privatization in various developed and developing nations (Hirschey, John & Makhija, 2004). Towards the development of these countries in terms of a competitive and efficient corporate sector, privatization is an indispensable action.

A system of good corporate governance ensures that a corporate institution pursues its fundamental profit seeking objective with maximum efficiency, both in form of social and private welfare. The experience from transition economies indicate that transfer of corporate ownership to the private hands is a sufficient measure in ensuring development of a robust corporate sector.

Lastly, effective corporate governance ensures that spillover effect in the entire system is curb. Opaque and unaccountable corporations are more likely to undermine the effectiveness of government and rule of law, creating a vicious circle of bribery, corruption and mismanagement both in private and public sectors. Development of good corporate governance is therefore key to public institution-building ingredient for an accountable and transparent society (Kim & Nofsinger, 2007).

Efficiency in capital allocation

There is a narrow gap between corporate governance and corporate finance and investment. The financial institutions and the public provide finances to corporations in expectation of lucrative financial returns. Good framework of corporate governance is vital to the development of equity markets in transition and developing economies, just like any other economy. First, when shares do not result to desirable financial returns, no investor will opt to put his money in such investment. Secondly, in a case where the value of the shares could not be evaluate accordingly because of unaccountable and opaque management of a corporation it is not easy to expect active trading of the corporation’s shares. In a nutshell, existence of enough companies which provide reasonable returns due to accountable management results to the growth of the entire market and the whole corporate sector benefiting from lower cost of capital (Monks & Minow, 2014).

Foreign Investment promotion

Due to the scarcity experienced in the domestic savings, transition and development economies need to raise funds from foreign nations. Establishment of a proper corporate governance becomes an increasingly important ingredient in this context, as the foreign investors tend to exercise a greater importance in the selection of their investments.

The few decades have experienced drastic changes in the international financial markets. Enormous amounts of capital are transferred from one country to another daily. Huge investment funds and other forms of money management vehicles have been initiated and have greatly assisted in the expansion of securities markets.

The growth in foreign investment trend is hugely an irreversible phenomenon. This is because the excessive savings witnessed in countries with advanced markets seek investment opportunities in nations which lack sufficient domestic savings (Monks & Minow, 2014). The large scale institutional investors emphasize on corporate governance as they have long-term investment perspective to fit the long maturities of their liabilities.

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