Why is Cor­po­rate Gov­er­nance Im­por­tant for Or­ga­ni­za­tions or Com­pa­nies?

Enterprise - - Outlook -

The prin­ci­pal im­por­tance of this field of study lies in the fact that the in­ter­ests of a large num­ber of stake­hold­ers are at­tached to a company, but only a few have an op­por­tu­nity to pro­tect their in­ter­ests. The af­fairs of a company are of­ten run by a group of per­sons who may or may not pay ad­e­quate at­ten­tion to the in­ter­est of other stake­hold­ers. For ex­am­ple, in Pak­istan most com­pa­nies are owned by fam­i­lies. The man­age­ment of th­ese com­pa­nies is gen­er­ally in the hands of a group who own more than 50% of the is­sued share cap­i­tal and are there­fore able to dom­i­nate its board of direc­tors - and all its de­lib­er­a­tions. If th­ese com­pa­nies are not ob­li­gated, by force of law or cus­tom, to con­duct them­selves ac­cord­ing to the prin­ci­ples of good cor­po­rate gov­er­nance, the in­ter­ests of all stake­hold­ers and ul­ti­mately the en­tire econ­omy will be ad­versely af­fected.

Good cor­po­rate gov­er­nance sup­ports cap­i­tal mar­kets. A large num­ber of re­search stud­ies have shown that com­pa­nies that have bet­ter gov­er­nance are able to at­tract more and cheaper cap­i­tal both from share­hold­ers and lenders. It has also been demon­strated in var­i­ous parts of the world that there is a di­rect and pos­i­tive link be­tween the qual­ity of gov­er­nance of a company and its fi­nan­cial per­for­mance.

If com­pa­nies gen­er­ally ob­serve the prin­ci­ples of good gov­er­nance, the econ­omy as a whole ben­e­fits tremen­dously. Good gov­er­nance leads to bet­ter fi­nan­cial per­for­mance by the com­pa­nies, en­cour­ages in­vest­ment, fu­els growth, gen­er­ates em­ploy­ment, im­proves the qual­ity and range of prod­ucts, en­hances gov­ern­men­tal rev­enue and ul­ti­mately im­proves the qual­ity of life for the gen­eral pop­u­lace.

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