THE EFFECT OF CORPORATE GOVERNANCE ON THE PERFORMANCE OF AN ORGANIZATION
CHAPTER ONE
INTRODUCTION
Background of the Study
In recent years, Commercial Supremacy has become crucial in many developing economies. A convenient corporate governance structure in an organization leads to an amazing number of benefits to the organization as sought by shareholders; corporate managers&executive directors (McGee, 2008). Countries with strong corporate governance structures attract funds easily. Firms that guarantee investor rights and have proven corporate governance practices like timely and adequate corporate disclosure and sound board practices attract both domestic and international investors than those which do not. Special attention is targeted towards the effects of corporate governance on firm performance.
The reason is that the performance of a firm can be affected by corporate governance especially in scenarios where there exists a struggle of curiosity flanked by the stockholders and the managementor between the minority and controlling shareholders. Managers are always entrusted with a lot of power as they characterize the welfares of the board associates and controlling shareholders.The power of controlling shareholders however depends on their capability to manipulate board decisions through majority voting and other ways of expressing opinion. Increase in the voting ratio to cash flow rights increases the distortionary policies (Melissa, 2012).
Several theories have emerged expounding on corporate governance. The agency theory advanced by Means & Berlie (1932) characterizes the association between the agent and the principal to be that of mistrust and competing interests. Conversely, the Stewardship theory replaces mistrust with goal congruence. It suggests that managers’ need for achievement and success can only be realized when the organization performs well. The Stakeholders theory (Clarkson, 1994) recognizes existence of other stakeholders including suppliers, customers, other organizations, employees and the community. The Resource dependence theory (Pfeffer, 1972) introduces organization’s accessibility to resources in addition to separation of ownership. Information resource and strategic linkages with other organizations through the Board are considered to be critical resources for a firm’s good performance..
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