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Section 4. Corporate law
DOI: http://dx.doi.org/10.20534/EJLPS-17-1-22-25
Gurbanov Rufat, Lecturer at the Qafqaz University E-mail: rufat-qurbanov@hotmail.com
A survey of the components of corporate governance
Abstract: A survey of the elements of corporate governance shows that it has expanded from its original start as a study of practices in American corporate life. The narrow focus on profit for shareholders who are defined as the only stakeholders has now given way to perspectives that are both theoretically and culturally diverse. New work has sought to go beyond agency theory that has dominated the study of Corporate Governance, and the emergence ofJapan, and then now China, has led to renewed interest in the cultural element of Corporate Governance. This has led to a lot of research that challenges the earlier assumptions in the subject. This article is a brief survey of the elements of corporate research.
Keywords: Corporate Governance, investor protection, cultural aspects of corporate governance.
1. Problems relevant to the research and However, Corporate Governance, in addition to purpose. The purpose of this article is to do a brief the boards of companies, has a lot of other factors.
survey of Corporate Governance and outline the emerging trends in this area. Corporate Governance has been defined as "the system by which companies are directed and controlled," [1]. In Corporate Governance, Capital is defined as the stakeholder group that holds property rights, such as shareholders, or people who have a stake in the success of the firm having invested in it by other means, as for example creditors. What differs is the way in which the stakeholders are approached in studies of Corporate Governance [2].
Bushman and Smith evaluate the role of Corporate Governance structures as follows:
1) to ensure that minority shareholders get the right information about the value offirms. They also are responsible that a company's managers and large shareholders do not exploit smaller shareholders;
2) to inspire managers to put the firm above any personal goals. Modigilani and Miller, in early work, defined firms as collections of investment projects that created cash flows. In this perspective, securities such as debt and equity are claims to these cash flows.
There are several institutions that push for proper Corporate Governance, and they include intermediaries that can have dramatic impact on the reputation of a particular firm, such as investment banks and audit firms, securities laws and regulators such as the Securities and Exchange Commission (SEC) in the United States, and also disclosure regimes that produce credible firm-specific information about publicly traded firms [3, P. 65].
However, currently most of the literature is based on American firms. At the core of this problem is that, based on American experience, many authors see the shareholders as the ONLY stakeholders. Thus, for example, agency theorists largely view capital as shareholders (principals) whose interests are merely functions of risk and returns. Comparisons focus on the degree of ownership concentration, where concentrated ownership leads to major influence on management while fragmentation tends to pacify shareholder voice. For example, Chauhan, et.al, (2016) investigates the effects of firm-level corporate governance practices in India arguing
that professional corporate governance discourages insider practices by controlling owners and that this improves future firm performance. Similar studies have been done on East Asian firms for example the study by Claessens et al (2000) on the separation of ownership and control for 2,980 corporations in nine East Asian countries. However, while equating shareholders to stakeholders not much attention is given to the fact that various types of capital (e. g., banks, pension funds, individuals, industrial companies, families, and so forth) have different identities, interests, time horizons, and strategies. To map this diversity [3] define three dimensions along which the relation of capital to the firm varies:
1) whether capital pursues financial or strategic interests
2) the degree of commitment or liquidity of capital's stakes,
3) the exercise of control through debt or equity
[3].
This is all the more important as corporate scandals repeatedly draw attention to the importance of good corporate governance.
The field is rapidly expanding. There are several aspects of Corporate Governance that are relatively unexplored. For example, the definition of board accountability, and the creation of such accountability are yet to be studied intensively. Other factors are the dominance of agency theory that is being increasingly challenged, the different ways of corporate governance that has a strong cultural connotation, and a move away from the study of American corporate governance which has influenced much of the research on Corporate Governance [4] has now become the norm in corporate research. There have been increasing calls for cross country comparisons of corporate governance rather than the narrow focus on corporate governance structures within a particular country [5]. This is an emerging field of corporate research as for example studies on how in firms from Indonesia, Korea, Malaysia, the Philippines, and Thailand, firm-level differences in variables related to corporate governance had a strong impact on firm performance during the East Asian financial crisis of 1997-1998 [6].
Scandals such as Enron and the collapse ofbanks such as Lehman Brothers show how weak corpo-
rate governance is while showing how important stake holder relations are [7]. Denis and McConnel (2009) talk about the "second generation of international corporate governance research" that looks at how differing legal systems can impact the structure and effectiveness of corporate governance. Jiaporn. et.al (2015) argue that that firms with more effective governance exhibit corporate strategies that are significantly less risky. Klapper and Love (2004) assert that firm-level corporate governance provisions matter more in countries with weak legal environments. In a similar manner, studies have looked at the role of government in relation to SME development in economies at different stages of market reform (Smallbone & Welter, 2001) or at the structure of large business corporations in Europe, mainly on the European continent [8].
2. Literature Survey. New research has tried to expand the horizons of current research. Roberts, McNulty and Stiles try to measure how effective Company Boards are by looking at the work and relationships of non-executive directors. They argue that one of the biggest gaps in the literature on corporate governance is that there is no clear understanding of the behavioral processes and effects of boards of directors.
Most of the extant work looks at board structure, composition and independence while ignoring the role of non executive directors. Roberts, McNulty and Stiles argue that what is equally or even more important is the actual conduct of the nonexecutive vis-à-vis the executive that determines board effectiveness. This goes against the dominant theoretical paradigms of agency and stewardship theory, and control versus collaboration models that have influenced the study of Corporate Governance. Hart O (1995) try to create a theoretical perspective for research into Corporate Governance.
They contend that the key element that is missing in the study of the subject is accountability as a central topic. They argue that this perspective is key to explaining the actual behavior of company boards and call for a move away from the dominant paradigm of agency theory in studying corporate governance. In other words, what is important is not the composition or structure of the board, but the way in which the board interacts with non executive
elements in a company. Thus they distinguish between the concept of accountability and the way in which accountability is actually created.
One of the aspects that have increasingly come under challenge is institutional theory. This approach sees corporate governance by seeing corporation as embedded in a set of formal and informal rules. There are also the individual ways in which corporation respond to various pressures. Therefore for example, the institutional perspective framework has been used to show how politics shapes shape corporate governance. Rubac and Jensen (1983) argue that the market for corporate control is like an arena where managerial teams compete for the rights to manage corporate resources.
For example, Fligstein (1990), using an institutional analysis argues that Chandler's portrayal of markets as exogenous and powerful determinants of organizational behavior, which, as technology advanced and markets expanded, led to firms and their managers becoming large and decentralized in order to take over market functions, which in turn optimized efficiency and profit. Fligstein, on the other hand, argues that the managers of the most powerful firms, motivated and constrained by economic, political, and legal circumstances, construct "conceptions of control" (ideologies about economic survival), which in turn drive managerial strategies [9].
His key argument is that it is the economic strategies of firms that drive the market rather than the other way around. In tune with institutional theory he brings up the concept of "organizational fields" to explain the diffusion of conceptions of control across organizations: organizational fields refer to the group of competitors, suppliers, customers, and others within which there is a high degree of interaction or comparison. [9].
When such conceptions of control lead to remarkable success in the most powerful firms in a given organizational field, other firms in that field are forced to adapt similar strategies in order to survive: thus these conceptions become increasingly prevalent and institutionalized within organizational fields.
Fligstein asserts that once institutionalized, a concept of control will dominate organizational strategy until some external shock to the system leads to a new conception of control. Such changing paradigms have
enormous impact as conceptions of control influence both which organizations compete and how they compete. This means that the conceptions of control are powerful models and tend to remain stable until there is a strong external stimulus [9].
Following this, as Whitley points out, it might be more profitable to structure corporate governance around economic logic, thus creating comparative institutional advantages for different business systems [10].
Huse acknowledges the work of Roberts, Mc-Nulty and Stiles shows that creating accountability is about bridging the gap between board role expectations and actual board task performance. Huse calls for a new terminology, the accumulation of knowledge and an accepted research agenda to study corporate governance [11].
At present, key theories deal with Corporate Governance can be classified into several categories, namely general theories such as contingency theory, that argues that there is no best design for corporate governance and that the context and actors are very important. Evolutionary perspectives argue that Corporate Governance emerges and learns through a series of experiences at the individual, group, organizational, and societal levels. The second sets of theories are board role theories of which the agency theory and resource dependence are the most important [11].
The work of Roberts, McNulty and Stiles's uses frames linked to board role expectations and thus also to define accountability. They study the nature of the interactions in Corporate Governance which include the study of trust and emotions and how actors respond to various pressures. They also look at how the evolution, existence and consequences of formal and informal structures and norms, including board leadership characteristics affect Corporate Governance. Huss (2005) introduces a third framework explaining the board decision-making culture, including cognitive conflicts, preparation and involvement, generosity and openness, creativity, critical questioning In this framework approach, a corporation is defined as sets of relationships and resources whose aim is to create value.
2. Conclusion. As this paper has shown there are various perspectives on Corporate Governance.
Earlier studies used theory such as agency and institutions to explain corporate governance, but such studies had inherent weaknesses that become more prominent as globalization takes place. Based on a narrow interpretation of corporate governance that saw shareholder profit as the only criteria of corporate governance, this model has been increasingly
challenged, most notably on the way that success is defined. Increasingly the evidence is that shareholders are not the only stakeholders. Thus, corporate governance is an emerging field, being challenged at both the theoretical and empirical level. Given the transnational nature of business today, new definitions will have to be coined.
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