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Corporate governance has a positive link to corporate performance.

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Introduction

Internationally, over the past few years, much emphasis has been placed on the importance of corporate governance. In a recent study Moxey (2002) argued that there is a growing consensus that corporate governance has a positive link to corporate performance. Countries with high standards of corporate governance practices are more likely to attract international capital. If corporate governance had been deeply flawed, the current level of national productivity could not be achieved. Generally speaking, large incorporated businesses are usually owned by one group of people (the owners or shareholders) whilst being run by another group of people (the management or the directors). This separation of ownership from management creates an issue of trust, called Agency problem. The management has to be trusted to run the company in the interest of the shareholders and other stakeholders. If information were available to all stakeholders in the same form at the same time, corporate governance would not be an issue at all. With the same information as managers, shareholders and creditors would not worry about the management wasting their money on useless projects; suppliers would not worry about the customer not fulfilling its part of a supply agreement; and customers would not worry about a supplier firm not delivering the goods or services agreed. However, in the real world of imperfect information, each agent will use whatever informational advantage they may have. ...read more.

Middle

Firstly, it is a law of nature that, if the terms of one's theory cannot be defined, then there may be a problem with the theory. Stakeholder theory has this fundamental obstacle: no one can seem to agree on a definition for the term " stakeholder". Even assuming that scholars are capable of reaching agreement on the actual definition of " stakeholder," there is another obstacle to the application of stakeholder theory: no one seems certain exactly how the theory should work. As Sternberg (1998) said, " the meaning of the term 'stakeholder' has itself changed significantly over time. Like the criterion of being a stakeholder, the main uses of stakeholder theory have also altered radically"(Sternberg, 1998 pp.94-95). Secondly, directors and managers of business corporations have to make a myriad of decision everyday. Each decision, however, is governed by the organisation's fundamental purpose: to maximise shareholder value for the owners. But in a stakeholder world, a corporation could easily become accountable to almost anyone or everyone: as is well known, an organisation that is accountable to all easily becomes accountable to no one. "Multiple accountability can only function if everyone involved accepts a clear common purpose. But that is what stakeholder theory conspicuously rejects." ( Sternberg, 1998, pp.98) Thirdly, apart from the definitional and operational ambiguities and problems in stakeholder theory, there remains the problem that the concept contradicts the property law. ...read more.

Conclusion

True, they may have an interest in how corporations affect them, but to have a stake in something is to care about its prospects, as one might when investing in a firm. Whether the "good" the stakeholder group wants is provided by this or that corporation doesn't matter to them; whether the "bad" it complains of is alleviated by this or that corporation also doesn't matter. Whether a given corporation is succeeding in the market is of no concern to these groups because they have made no commitment to it. In an age of competition from a widening variety of sources, expanding markets, and increased diversity in employment populations, businesses may feel they are being hit from all sides. The term "stakeholder" seems to capture the feeling of having to concern oneself with multiple points of impact. However, the only true stakeholders are shareholders. Good corporate governance means running the corporation in such a way that the interests of the shareholders are protected while ensuring that the other stakeholders' requirements are fulfilled as far as possible. The social obligations of the firm are limited to make good on contracts, obey the law and adhere to ordinary moral expectations (Windsor, 1998). Stakeholder theory can be "a useful label for all those individual and group which have to be taken into account" (Sternberg, 1998, pp.107). However, it can't be considered as a modal of good corporate governance because of its imprecision in definition and execution and its disregard for property rights. ...read more.

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