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Corporate governance

Executive summary

This essay is trying to assess whether institutional investors play any role in the corporate governance of organizations. Discussions concerning the role of the investors in corporate governance has been done while considering the different corporate governance systems that include Anglo-American corporate governance model and European corporate governance model. The characteristics of the European corporate governance and Anglo-American corporate governance model are explored to make corporate governance understood better at the international level. Corporate governance practices and theories have been explained aiming at shading more light concerning how organizational practices that have been evolving to accommodate the changes in the corporate model in the recent business management practices. The recent business, government, organizational and industry examples of corporate governance practices are explored in the process of assessing the role played by investors in corporate governance of organizations. Lastly, recommendations are provided concerning how organizations can improve corporate governance practices.

Table of Contents

2Executive summary


4Corporate governance

5International perspective of corporate governance

8Corporate governance systems

12Corporate governance theory and practices

16Roles of institutional investors





Cooperate Governance refers to the rules, processes and the practices which are used to direct and control the operations of a company. Corporate governance exists in situations where managers are given the responsibilities of managing funds of investors (Berle, 2012). The investors expected the managers to manage their funds according to their interests but not their interests where the managers are expected to work towards maximizing the wealth of the investors. The implementation of the corporate governance is geared towards ensuring that there is proper management of the funds that are invested. The financiers of business do ensure that corporate governance is properly implemented to ensure that they monitor the managerial practices of the management and ensure that the management is accountable in the way they make investment decisions (Warnock, 2006). The managers of a company are responsible for ensuring that they take strategies that are necessary for the process of ensuring that the businesses they manage are successful. Corporate governance tries to separate the ownership and management of the organizations where the standards and the rules in the management of the invested funds are stipulated. Therefore, the managers then act as the agents while the investors as the principal where the investors have vested the responsibility of managing the fund on the hand of managers to ensure that their funds are managed in a way that can guarantee wealth maximizations.

The modern business models do allow rapid development of corporate governance models leading to differing models in the corporate governance. The differences can be associated with the changes that have been taking place in the managing of organizations with increased engagement of the stakeholders (Bush, 2005). The implementation process of the new models of corporate governance does change from one region to the other due to the changes concerning nature and functioning of business in the different regions. As a result, there has been a trend that has been taking place in the corporate governance due the many transformations that have been taking place in the management of the organization. For instance, the trends in the corporate governance can be associated with the changes in the roles of the board of directors who have been given the responsibility to ensure proper monitoring with the management of the investors’ funds. The board of directors is expected by shareholders to ensure that the managerial practices of the managers are designed to ensure that their wealth is maximized (Jensen, 2009). As a result, the trends in corporate governance is making the board of directors more responsible in ensuring that the managers are responsible in the way they manage the invested funds.

Corporate governance

Board of directors does play a critical role in the process of ensuring that the funds of the investors are properly managed through controlling the management practices of the managers (Masulis, 2007). The changes that have been taking place in the corporate governance are making the board of directors the bridge between the shareholders and the management team responsible for ensuring that the funds of the shareholders are managed in the right way. The shareholder has the right to ask for explanations from the board of directors for any failure of the management team to maximize their wealth. The role of the board of directors in the process of managing the way the funds of investors are being managed in an organization. As a result, the composition and functions of the director in organizations are changing in pursuit of enhancing their powers over the managers who do manage the funds of the investors. Despite the changes in corporate culture in different organizations, the board of directors has been considered crucial in the process of connecting human capital in an organization with the various stakeholders in an organization. The corporate governance does rely on the board of directors for the implementation hence directors in any organization are considered responsible for the success of corporate governance (Modigliani, 2008). For instance, the shareholders of an organization do put the blame of the director in case the managers fail in maximizing their wealth as they are expected to communicate the progress of the company. The board of directors is normally appointed by the shareholder as the controllers of the management activities to ensure that the managers operate in a way that meets the interests of the shareholders. However, the characteristics of the board of directors are said to vary depending on the size of the company and the region. Also, other factors like the company functioning, whether the company is listed or not and the industry the company operates affects the characteristic of the board of directors.

International perspective of corporate governance

Companies in different nations are run, directed and controlled differently. The way the rules are set, the processes and the practices are determined by the company’s environment. For example, the values of the society where the company is situated, affect affects tremendously the governance systems. The corporate governance must be in line with the cultural values of the people of a country it is dealing with. The governance system must take care of the culture and the values of the people in the country it is operating (Clarke, 2004). The governance system is also shaped by the level of the reliability of the accounting standards of a country. The system which is to be used must take care of the set accounting standards. The governance is also shaped by the level of the enforcement of the set regulations by the legal systems and the effectiveness of the capital markets. Corporate governance systems are diverse because these factors combine in different ways in different countries. The governance systems applied depend on how these factors combine.

Corporate governance entails managing the relationships existing between the company and the corporate stakeholders. In America, corporate governance emerged because of democratic philosophy and economic evolution. The corporate governance practices are said to change from one nation to the other (Crawford, 2007). For example, the Anglo-American model and the European corporate governance model are different. The differences between the America and Europe corporate governance model can be concerning the role played by the investors. In Europe, the number of the investors who make important investment decisions is small. The decisions made by the few investors are usually aligned with only the interests of the investors who are responsible for making the decisions. On the other hand, US ensured that there are multiple perspectives and opinions of the investors aiming at considering them in the management of organizations (Johnson, 2009). However, the corporate strategy formulated cannot be fully implemented without the agreement of the management and the investors.

Corporate governance uses the capital market as the base of the control of the corporation, where the resources for the current investment of the corporate is gotten from. In this system of corporate governance, there is a lot of dominance in the company which usually have independent shareholders. In this case, the manager is responsible to the board of directors and the shareholders. The relationship between the shareholders and the manager is always official (Sifuna, 2012). On the other hand, the shareholders and the directors are mainly concerned with the activities of the corporate which bring profit and the amount of dividend they are supposed to receive. It is a system which is used to supervise the corporate and control its operations. It is mainly used in Canada, United States, Australia and the United Kingdom. The supervision is done mainly by the investors. It is majorly concerned with the achievement of the company and the security of the members of the corporate. This mode of corporate governance does not have a key interest in the development of the business in the long run.

In countries like the United States, the ownership rights and the control rights are dominated by the activities of the financial markets. In this model of corporate governance, the capital for the operation of the company is raised on large capital markets which are characterized by liquidity nature (Bowen, 2004). The executives usually have high incentives which are determined by the performance if the corporate. The Board of Directors is the one who does the supervision of the corporate internally. The directors are concerned with the monitoring of the corporate management for better results to be achieved. This kind of system is very keen to attain the objectives of the shareholders. The success of the corporate is measured by the price of the share and the dividend.

In the countries where this system of corporate governance is practiced, there is usually upcoming of financial markets and very strong restrictions on the banking sector. Legislation has not been favouring the banking sector. In recent years this has changed with notable development (Brickley, et al. 2006). This has come forth as a result of new regulations which have been put in place as a result of new trends in the economy.

Corporate governance systems

The corporate governance system of the Anglo-American nations, do provide sufficient support to the company management. This makes the management of the companies operating in these countries practicing Anglo-American system; their role is limited only to short-run management of the company. The Anglo-American corporate governance system does ensure that there is frequent communication to the stakeholders keeping the stakeholders updated concerning the running of the organization (Cadbury, 2010). The management using the Anglo-American system of corporate governance ensure that the outcome of the implementation strategies is communicated within a duration of around one to two years. The Anglo-American corporate governance model, management of organizations do rely on capital markets and do seek to take over capital market threats.

The European model takes around five years to implement the corporate strategies and communicate the outcomes. The shareholders are said to have more powers in the process of making decisions than the powers that the managers have in the process of making decisions concerning the operations of the organizations they manage (Simeon & Lang, 2000). The European model is characterized by holding and controlling structures of corporate governance where the shareholders are given an extensive authority. The increased concentration of ownership on the shareholders do result in the development of complications especially when financial resources are said to play a crucial role in the management of the organizations. Equity suppliers in the European model of corporate governance are said to be deficient due to the increased concentration of ownership.

The European model of corporate governance does highlight the points pertaining the roles of capital markets. Capital markets do play a crucial role in corporate governance as the capital market do have effects on the corporate strategies of companies (Colley, 2007). The European corporate governance model does give primary relevance of the capital markets to the stakeholders.

The motivation of the employees is considered important in the process of improving the organizational performance. In European corporate governance model, labour is considered crucial and is involved in the decision-making process making employees more motivated than in the Anglo-American corporate governance model. The motivation of the workforce makes the employee committed to ensuring that they are determined to ensure that they work towards improving the organizational performance. The active participation of employees in the decision making tend to limit the level of supervision the board does exercise its authority (Crawford, 2007). The effects of the active participation of the employees in organizations under the European model can be seen by the development of human resources management policies in organizations. The Labour force is considered important stakeholder in the management of an organization where engaging the employees is crucial to the success of an organization. The employees are said to be the determinant of the success of an organization as their contribution to the organizational progress is high valued. As a result, ensuring that the employee is motived in an organization is considered to be very crucial (Denis and McConnell, 2003). The quality of the decisions of the board of directors is determined by the level of engagement of the stakeholders, where ensuring that their opinions are considered can assist in enhancing the quality of decisions made.

The failure of the board of director to involve the stakeholders in the management of organizations can result in conflicting interests that might lead to poor performance of the organization. As a result, employees as one of the stakeholders need to be properly engaged for the organizations to ensure that it has the necessary strategies in place that can guarantee organizational success. Failing to engage the employees can result in resistance to most of the strategies formulated in the organization leading to failure in the implementation process of the strategies (Dignam and Lowry, 2006). The resistance can be attributed to the failure of ensuring that the employees are aware of the reasons for change and the effects of the strategies on the overall performance. The employees might resist the change as they fear the unknown outcome of the implemented strategies hence engaging the labour force of an organization is important. Industrial relations in Europe are considered important than in America where the industry relations are geared towards ensuring workplace satisfaction that does motivate the employees. The employees are said to be highly productive in the workplace that does motivate hence ensuring that the wealth of the shareholders is maximized.

In the European system of corporate governance, the shareholders have a common interest in the company. The shareholders also take part in the management control. In this system, the managers are answerable to a broad range of stakeholders unlike in the Anglo-American model where the manager is answerable to the Board of Directors and shareholders only. In Italy, the corporation ideology started in the times of Emperor Trajan. There were institutions which used to be the legal entities or systems of different types of trade. The members of the institutions enjoyed reliefs and tax benefits. The main agenda of these institutions was to help the entrepreneurs. There were two levels of the corporation, the fascist and Catholic. The corporates which were inspired by the Catholic started in 1891 up to the early 21st century (Douma and Hein 2013). The corporates which were inspired by the fascist started in 1920, and it developed to 1940. Its principle of governance was tabled in 1927, in the Charter of Labour. They developed immensely, bringing together various types of entrepreneurs of the country and different workers. In the year 1939, an important step was made of the establishment of Chamber fascia. There came a new concept in 1980. The management of companies and markets has been put on the public. Social and economic factors led to the generation of various structures of control management and distribution, each one of them according to the market and with special features. The control and ownership of the listed corporates are to a large extend concentrated. In this case, the shareholders have the chance to participate in the process of the management of the company.

On the other hand, in the German system of governance, the corporate is the composition of different groups with the sole aim of coordination of objectives of the national interest. Historically, the banking sector in German has made a notable impact in the field of corporate decisions. Most of the corporates in German look for financial help from banks as only four companies has the right to do public transactions. There is a lot of attention in the protection of the creditors which goes to the extent of protecting the firms from being dominated by the banks.

Banks control only the actions of the members of the bank; this is done to control the decision-making process and voting in a company. The governance system is usually dual, in the sense that the workers are given the right to access information and also participate in various activities of the corporate and industrial rights. In this kind of Continental European system of corporate governance, there is executive board and supervisory council (Frank and Daniel, 2010). The executive board is concerned with the management of the company. They effectively manage the operations of the corporate under the control or being guided by the supervisory council. The supervisory council confirms most decisions by the executive board. This kind of corporate governance structure is usually a mechanism for monitoring and control of the management.

Corporate governance theory and practices

Some of the practices of corporate governance are ensuring that the stakeholder is engaged in varies issues related to management of organizations. For instance, the investors are involved in making decisions affecting the operations of the organization in various ways. The management of organizations that give corporate governance priority does ensure that the investors are kept aware of the various decisions taken by the management that are related to investments. This is usually achieved through improved communications to the investors and engaging them in giving their opinions concerning the investment decisions (Eccles & Youmans, 2015). Also, corporate governance ensures that the employees are involved in the decision-making process in organizations. They are given the opportunity to give their opinions concerning how better the organization can be managed. The management has then to ensure that the interests of the employees are considered in the process of making the decisions ha do affect their operation.

Corporate governance has been given priority in operations of organizations as the investors’ funds are managed in a better way. The management of organizations does ensure that the reputation of the organization is improved due to the ability of the organizations to consider the various interests of the stakeholders. Corporate governance adds the value of investors as it makes management is committed to ensuring that the wealth of the shareholders is maximized. Besides, through corporate governance, the labour force is motivated as they employees are highly involved in issues of running the organization making them motivated and committed to achieving organizational success. The corporate governance practices have been improving to ensure that the organizations are managed in a better way, and the power of management is controlled. The changing of the practices associated with corporate governance in organizations has been geared towards ensuring that the management of organizations is made responsible for the investors’ funds. In ensuring that there is an improvement in corporate governance, independence of the directors has been considered crucial in ensuring good governance (Clarke, 2004). The independence of the directors assists in making decisions for improving organizational performance without any interference that can compromise the quality of the management strategies adopted in the organization.

The corporate governance practices are aimed at maximizing the effectiveness and efficiency of business operations. This has been achieved through coming up with strategies for ensuring good governance where the committee structures have been changed to ensure enhancement in performance of organizations. The transparency between organizations and the stakeholders has been enhanced to ensure that any potential conflict of interests is eliminated. Transparency has been increased through improvements in disclosures of financial information and other information that is vital to the investors. Investors rely on the financial information provided in the process of making decisions concerning investments. Therefore, the investors expect the management of organizations to provide financial information that is fair and represents the true financial position of the organization. Organizations that do give corporate governance priority are likely to ensure that financial reporting is improved to ensure that the various stakeholders who are interested in the financial information can be in a position to access the company information (Tricker, 2009). Corporate governance ensures that there enough internal controls to ensure that the funds of the shareholders are properly managed. The independence of the auditors is guaranteed in the organizations that do embrace corporate governance as they aim at ensuring that there is the fair representation of the financial information of the organization. Many organizations do strengthen their internal controls by ensuring the expansion of the scope and independence of the auditors. Shareholders of organizations expect the management to make sure that there is proper management of the possible financial risks facing organizations.

Good corporate governance is recommended for a company to run smoothly taking care of all the stakeholders’ interest. These stakeholders include the customers, management, suppliers, shareholders, financiers, community, and the government. For good governance, the interests of all these stakeholders need to be considered. The institutional investor is an entity or organization that invests money on behalf of the people who own it or the members. These include commercial banks, Pension funds, Insurance companies, endowment funds and mutual funds among others (Sun, 2009). There these institutional investors have a very significance role to play in corporate governance to make sure that there is good governance and companies thrive well in their business operations. For a company to run smoothly, there needs to be a proper financial management. It is the role of these institutional investors to monitor the financial usage and keep the governing authority on toes to account, for every money used. This will help to keep away money theft and will ensure that the investors’ funds are properly managed. The institutional investors have the mandate to make sure that the rules and regulations set are adhered to without compromise.

Roles of institutional investors

The institutional investors are said to be a complex and heterogeneous group that do not represent a physical person but legal entities. The changes in the business models have led to various categories associated with the institutional investors. The level of engagement, degree, quality and character of the institutional investors largely depends on the business model adopted. The institutional investors do include investment funds such as insurance companies and mutual funds. Also, institutional investors can include private equity, exchange traded funds, pension funds and hedge funds. The managers of financial assets have added the institutional investors as a special class because of the increased growth in outsourcing in the financial markets. There has been growth in the importance of the institutional investors in the capital investments. For instance, by the year 2011, institutional investors have held more than $34 trillion as public equity (Skau, 2002). Institutional investors have increasingly contributed to the development of businesses due to the increase in financial instruments they contribute in the financial market. In corporate governance, ownership engagement has been considered as important in effective allocation of capital hence institutional investor can play a crucial role in corporate governance. This is because of the large amounts of capital they contribute in many organizations hence they are engaged in the process of managing their funds. For instance, as part of stakeholders the institutional investors expect the directors to ensure that their wealth is maximized through ensuring sound financial management practices and monitoring the managerial practices of the managers.

Therefore, institutional investors play a role in corporate governance as they are engaged in the management affairs of an organization. The institutional investor is said to be willing and can serve in organizations as engaged and informed owners of capital.


Corporate governance is a significant aspect of the management of organizations and businesses. It has specialized mechanisms for regulating risks that are associated with corporate activities geared towards avoiding the corporate scandals and disasters. Many organizations have realized the role of corporate governance in their success and creating a good public image hence they have embraced corporate governance. Corporate governance is a flexible and sophisticated concept that does address the fundamental purposes of organizations (Sun, 2009). For instance, it can apply to any organization despite the structure or the size. The corporate governance principles cane applicable to social enterprises, cooperatives, small businesses and public services organizations.

Corporate governance does recognize the rights of shareholder and other stakeholders who can affect the functioning of the organizations. It ensures that the various stakeholders are engaged giving them an opportunity to give their opinions concerning the affairs of the organization. Institutional investors do for part of the stakeholders of companies where they provide the necessary capital for running organizations. As a result, the institutional investors are likely to play a role in corporate governance as they are engaged in the process of making investment decisions.


Board of directors of companies needs to demonstrate technical and educative expertise in the management of the affairs of organizations. The directors need to have sufficient knowledge concerning their responsibilities. For instance, the director needs to ensure independence in the process of discharging their obligations. They should ensure that the funds of the shareholders are properly managed in the organization. That can involve ensuring that the necessary strategies for managing the activities of managers to ensure that they work towards maximizing the wealth of the shareholders.

The management of organization needs to make sure that there is proper communication to the stakeholders where they should ensure proper disclosures of the public documents. The public relations department in the organization should ensure that the necessary information to stakeholders (Tricker, 2009). This is crucial in the process of creating good relations with the stakeholders hence assisting in the management of the organizations. Besides, the various interests of the stakeholders need to be considered in the decision-making process of the organizations where they need to be actively engaged in affairs of the organization. This can play a major role in the process of ensuring that possible conflicts in the organizational management are eliminated.

In the Anglo-American system of corporate governance, management should work keenly on the long-term business development. This is because, as mentioned here above, there is little or no attention to long-term business development. To strengthen the working relationship, the relationship between the manager and the shareholders should be long term and should be beyond the office. In the Anglo-American system also, there should be a supervisory council composed of experts in the specific sectors, to supervise the management on behalf of the investors (Skau, 2002). This is because not all the investors will have the skills and knowledge for corporate monitoring and control.

On the other hand, in the Continental European system of corporate governance, the managers should be reporting to the board of directors only. The board of directors should be now be passing the report to the supervisory council and vice versa. Management of the company should be left to the three. The oversight committee should be made up of the other stakeholders.


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