A critique: Corporate governance definition dilemma and the major causes for calls to improve corporate governance

Abstract

This paper has two major objectives; the first objective is to shed light on the dilemma concerning the debate on corporate governance definition, whereas the second objective is to identify the major causes for calls to improve corporate governance. The last three decades has witnessed exponential increase in corporate governance awareness, corporate governance regulations, and a drive for improved corporate governance in addition to an interesting debate on the definition of corporate governance.

Concerning the debate on the definition of corporate governance the extant literature revealed that there is significant disagreement among researchers on a single definition for corporate governance. On one extreme some corporate governance definitions are considered too narrow due to their limited focus on protection of shareholders’ wealth while disregarding the interest of other stakeholders. On the other some have been criticized for being too board as a result focusing on too many stakeholders without paying attention to the sole reason for the firm existence which is the maximization of shareholders wealth.

The authors view corporate governance as a set of mechanisms aimed at mitigating the negative impact of agency conflict. This view focuses on resolving the main issue of corporate governance, which is the conflict of the interests between owners of the firm and executive management. Therefore the authors strongly argue that mitigating this conflict of interest is of special benefit to the firm, the stakeholders’ and the economy as a whole and hence any definition for corporate governance should encompass the agency conflict.

In relation to the second objective based on the review of the relevant literature, five reasons have been identified as the major causes for calls to improve corporate governance. These causes are a) increase in firm size and complexity, b) separation of ownership and management, c) exponential growth of capital markets, d) increase in fraud cases and financial crises and, e) increased awareness of corporate governance impact on firm financial performance.

Keywords: Corporate Governance, firm size, market growth, fraud, separation of ownership