Observance_of_Good_Corporate_Gorvance_and_Avoidance_of_Corruption_on_an_Enterprise_Effectiveness

Contents INTRODUCTION 2 CORPORATE GOVERNANCE AND ORGANISATIONAL EFFECTIVENESS 3 CORRUPTION AND THE FIRM’S PERFOMANCE 5 CONCLUTION 6 REFERENCES 7 INTRODUCTION Corporate governance, as defined by the Bank of Zambia (BOZ) is the process and structure used to direct and manage the business and affairs of an institution with the objective of ensuring its safety and soundness and enhancing shareholder value. Drury et al. (2006) define corruption "as the abuse of public office for private gain," whether pecuniary or in terms of status. The gain may accrue to an individual or a group, or to those closely associated with such an individual or group. Wu, (2005) gives us an explanation of the linkage between corporate governance and corruption as being especially relevant in the context of developing countries. For instance, many developing countries have embarked on various forms of market-oriented reforms to modernize their economies, and the privatization of state owned enterprises has often been a centerpiece of such reforms. Privatization, however, presents special challenges for both the public sector governance and corporate governance in developing countries. Poor corporate governance also breeds corruption (Wu, 2005). Hence, in some transition economies, weak corporate governance has facilitated corrupt officials in looting the already impoverished states during the process of privatization (Black, Kraakman, and Tarassova, 2000). In recent years, corporate governance has received increased attention because of high-profile scandals involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers. This has made the development of good corporate governance an integral part of an effective corporate governance regime which includes provisions for civil or criminal prosecution of individuals who conduct unethical or illegal acts in the name of the enterprise. Consequently, Corporate governance has emerged as a major policy concern for many developing countries following the already mentioned financial crisis in Asia, Russia, and Latin America,(Wu 2005). Corporate governance structures that specify the distribution of rights and responsibilities among different participants in the corporation such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders have been formulated and they specify the rules and procedures for making decisions in corporate affairs. Therefore, the objective of this paper will be to discuss the effects of good corporate governance mechanisms on the firm’s efficiency and to see how avoidance of corruption can impact on the firm’s effectiveness. In this paper, we investigate whether and to what extent the aforementioned distinctive characteristics of good governance mechanisms and avoidance of corruption affect productive efficiency. From the above analysis, the paper will present its conclusions. CORPORATE GOVERNANCE AND ORGANISATIONAL EFFECTIVENESS Corporate governance is a set of mechanisms, both institutional and market based, designed to mitigate agency problems that arise from the separation of ownership and control in a company, protect the interests of all stakeholders, improve firm performance, and ensure that investors get an adequate return on their investment (Shleifer and Vishny, 1997; La Porta et al, 2000). Zattoni (2008) defines corporate governance as a set of complementary mechanisms built on one another and aimed at protecting investors’ rights and reducing managerial opportunism. Good and sound corporate governance encourages the efficient use of resources and provides for accountability for the stewardship of those resources (Mensah et al 2003). Transparency International (2008) explains that good corporate governance serves as a framework to secure investor confidence, enhance access to capital markets, promote growth and strengthen economies. By providing for clear ‘rules of the game’ and ‘checks and balances’, good corporate governance systems help to lower company costs (for capital and production) and increase economic output. Such characteristics make corporate governance necessary, beneficial and useful for all sectors and types of companies whether they are multinationals, state-owned enterprises, domestic firms, small businesses or family-owned operations. Although corporate governance frameworks differ from country to country based on the legal, regulatory and institutional environment, they have a common aim, i.e. to define clearly the rights, responsibilities and behaviors that are required of a company’s owners (the ‘principals’) and managers (the ‘agents’) for the business to operate successfully. The governance mechanisms can be classified into internal monitoring mechanisms including ownership structure, board characteristics, outside supervision and executive compensation, and external monitoring mechanisms such as legal system, active takeover market and production market competition (Huson et al., 2001; Denis and McConnell, 2003). In most institutions, the board members care more about carrying out the wishes of the government, such as avoiding worker layoffs and maintaining some level of worker social security than about the concerns of shareholders. At the same time, it is important to note that effective control rights are assigned to management, which generally has a very small, or even nonexistent ownership stake in the firm, but have the shareholders’ interests in mind. This distinctive shareholding structure creates conflict of interest not only between management (insiders) and outside investors but also between large shareholders and minority investors. Furthermore, conflicts arise between politicians and firms (Shleifer and Vishny, 1994), as a result, internal governance mechanisms, such as the number of outside directors on the board and the number of outside supervisors on the supervisory committee, may influence the firm’s performance and efficiency Corporate governance can also create safeguards against corruption and mismanagement, while promoting fundamental values of a market economy in a democratic society. These democratic values include accountability, transparency, rule of law, fairness, responsibility and property rights (Mensah et al 2003). Corporate governance typically addresses measures to manage and reduce financial and operational risks by building the integrity, transparency and accountability of a company’s management toward different actors at varying levels within a company. Good corporate governance provides the structure through which corporations set and pursue their objectives, while reflecting the context of the social, regulatory and market environment. Hence it can be said that good corporate governance is a mechanism for monitoring the actions, policies and decisions of corporations. CORRUPTION AND THE FIRM’S PERFOMANCE Corruption has been a nuisance for socio-economic and political growth and has been the cause and consequence of structural decay bequeathed by decades of rent-seeking politics of the post-colonial state in most developing countries like Zambia. It has defied years of economic and political reforms and has continued to grow and undermine efforts to improve the living standards of people and to foster democratic governance. Many agree that there are two sides to corruption: the giver (supply-side) and the taker (demand-side). While demand-side corruption is associated with government officials, supply-side corruption typically originates from the business sector. Supply-side corruption is driven by rent-seeking entrepreneurs seeking to exploit political and other influences to their benefit, (Mensah et al (2003). Wu,(2005) document that Policy makers around the world are now more concerned with corporate governance as poor corporate governance breeds corruption. Corruption has been defined as the misuse of public office for private gain (Rose-Ackerman 1978). As stated earlier, corruption has both the demand and supply sides. While much attention to the global anticorruption campaign has been directed toward the demand side of corruption, that is, the corrupt government officials, the supply side of corruption is just as important, and the role of the corporations as the main contributors of bribe payment should not be underestimated. Good corporate governance provides rules, such as accountability, transparency, and fairness that may have profound impacts on the motives and constraints of both the bribe takers and bribe payers involved in corrupt practices. Mensah et al (2003) explain that a lack of or weak governance system provides a good environment for corruption to thrive. Transparency International’s Bribe Payers Index shows that companies from some of the leading exporting nations in the world are among the most likely to pay bribes in foreign countries to gain unfair advantages over their competitors (Transparency International, 2001). As a result, in an era of globalization, bad corporate governance may facilitate the exporting of bribery practices across the borders, and may therefore undermine the effectiveness of the global anticorruption campaign. Bribery can take place in a wide spectrum of business activities over which some government officials hold discretionary powers. For example, firms may bribe public officials to avoid or reduce tax, to secure public procurement contracts, to bypass laws and regulations, or to block the entry of potential competitors. On the surface bribery seems to be cost effective for the firms because bribe payment is often a fraction of the monetary value of the services rendered by the corrupt officials. The reason to bribe becomes even more compelling when public officials hold the power to punish the firms for not paying the bribe (e.g., revoking the business license). The seemingly justifiable bribery practices (for economic gains or for survival) have several hidden costs for the owners or shareholders of the firms that might be overlooked, or at least underestimated. First, bribery exposes the firms to substantial legal and financial risks in the future. Firms involved in bribery will bear the risks of legal actions against them if the bribery acts are caught. Corporate managers who are convicted of bribery are often prosecuted under criminal laws and may face fines but also jail sentences. There are substantial financial risks involved as well. Governments may decide to nullify contracts that have been initiated or influenced by bribery, or to blacklist the firms for future government projects, (Wu, 2005). Lee and Ng,(2002), in their study found that the level of corruption has a negative impact on shareholder value of a firm. Secondly, firms opening their doors for corruption may find it difficult to resist demands for bribery payments in the future (Rose-Ackerman, 1999). Hence firms with a reputation for bribing their way out are more likely to receive demands for higher bribe payment by corrupt officials, sometimes for services that are normally free. CONCLUSION Transparency International (TI) considers strong corporate governance systems a vital component of company efforts to reinforce the right incentives and practices and to address the corrupt practices they confront. As empirical evidence has shown, without good corporate governance systems in place, the overall impact of anti-corruption initiatives is reduced and also the growth of companies. A better understanding of the linkage between corporate governance and corruption is of paramount importance and a more balanced approach to corruption fight. While empirical studies on the causes of corruption have significantly advanced our understanding of the demand side of corruption, that is, of the motives and constraints facing public officials in corrupt practices, critical questions regarding the supply side of corruption remain unanswered. Globalization also poses both opportunities and challenges to corporate governance reforms in developing countries. On one hand, globalization can accelerate the convergence of good corporate governance to international standards (Khanna, Kogan, and Palepu, 2001); on the other hand, however, globalization can also increase competition for a large number of inefficient domestic firms, and thus may create high pressure for them to bribe in order to survive. For an established firm, its reputation amounts to a significant component of its overall market value and bribery practices expose the firm to the risk of losing such value. In supporting these components of good corporate governance, companies must be able to establish some of the mechanisms needed to mitigate corruption risks and demonstrate their zero tolerance for abuses. The effective creation, implementation and review of such a framework will insure that corruption is no longer considered an acceptable cost of doing business. REFERENCES Bank of Zambia, (2006), CORPORATE GOVERNANCE GUIDELINES, report, 20, November. Black, Bernard, Reinier Kraakman, and Anna Tarassova. 2000. Russian Privatization and Corporate Governance: What Went Wrong' Stanford Law Review 52:1731–1808. Drury A. Cooper, Jonathan Krieckhaus, Michael Lusztig (2006) Corruption, Democracy, and Economic Growth International Political Science Review, Vol. 27, No. 2 (Apr., 2006), pp. 121-136. Denis, D.K., McConnell, J., 2003. International corporate governance. Journal of Financial and Quantitative Analysis 38, 1-36. Huson, M.R., Parrino, R., Starks, L.T., 2001. 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