Corporate Governance and the Private Sector

Subject: Corporate Governance
Pages: 9
Words: 2534
Reading time:
9 min
Study level: PhD

Introduction

A corporate is a public or private organisation which uses human and other resources to engage in some activities so as to meet some objectives or targets. Corporations are mainly concerned with large scale businesses, or large outputs of results. Many corporations are owned in terms of shareholding. This means that the corporations are divided into shares of ownership; in which different shareholders own different percentages of the corporations. Corporations may also be owned by governments in partnership with individuals. Corporations are relevant in both public and private sector. In the public sector, corporations help the government in implementing its policies which touch on general public welfare. In the private sector, corporations engage themselves in doing business which may be profit or non-profit oriented. Since corporations involve a lot of activities, there is need for them to be properly controlled, managed and directed in order to ensure proper coordination of the activities for the corporations and for their full realization of objectives. This is what is referred to as corporate governance. In this assignment, I will discuss corporate governance and its relevance to the private sector.

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Discussion

Corporate governance refers to the manner in which corporations are managed, controlled and or directed. Corporates are governed through policies, processes, rules, laws, and customs which are formulated and agreed up on by the shareholders and stakeholders of corporates. In some cases, corporates are governed through rules and regulations formed and passed by the government. For example, in the United States of America, corporates are governed through the Sarbanes-Oxley Act (SOX) of 2002, which was formed as an enhancement of the Securities and Exchange Commission (SEC) to enable it address corporate governance issues adequately (Waring, 2006). SOX was formed mainly to protect shareholders from corrupt practices in the corporates, which caused customers or shareholders lose their shares and securities through corrupt deals by the corporates’ management and administration.

Most corporations are owned by shareholders, with the government having very few or no shares. The shareholders invest their capital and other financial resources in the corporates through buying of shares and securities, which they trade for a profit. The shareholders subscribe to the corporates on regular basis for the maintenance and operation of the corporates, so that their shares and securities are well protected through proper corporate governance.

Since investors invest a lot of their resources in corporates, most of which operate in the private sector, there is need to put in place elaborate and excellent systems of governing the corporates, so that they run effectively, efficiently, legally and transparently. This guards the shareholders from malicious individuals, who may register some corporations with a sole objective of defrauding their customers of their shares, money or securities. Many pyramid schemes which defraud customers and shareholders of their money do so due to the lack of proper corporate governance.

The governance of corporates takes the form of their registration with the relevant government authorities, their auditing to establish the nature of their capital and its source, their activities and philosophies informing their operations and their capacity to manage and take good care of their customers or shareholders. The governance process therefore involves the harmonisation of the internal corporate policies, rules and regulations with the ones for the governments or the relevant government authorities. The government in this case acts as a watch dog for the shareholders, to guard them against instances of fraud or corruption by the corporate management which may make the shareholders lose their shares or funds.

One factor which influences corporate governance practices in the private sector is the customer base and the capital for any corporate. Some corporates have large customer base and capital while others have small number of customer base and capital. The ones which have large customer base are more likely to be closely monitored and audited by the government due to the interest of the government in protecting shareholders from corrupt deals. Such corporates may be required to comply with strict guidelines or requirements in their operations. Some others may even be managed partly by the government, depending on the nature of business and the number of clientele they serve. The ones with small customer base may be largely governed from within, meaning that they govern themselves based on their own rules, regulations and principles.

Another factor which may influence corporate governance practices is the capital market regulation of business in a particular country. In some countries, the capital market clearly sets out the types of corporations which may fall under capital market authorities and which ones may not. For example, some corporations which deal with banking and loaning facilities may fall under the capital market authorities due to their contribution to the economy of a country. They are also governed under the capital markets so as to prevent them from engaging in money laundering activities, which can greatly affect the economy of a country.

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The other factor which can influence governance of corporates is the organisational structure of the corporates. Different corporates have different organisational structures depending on the nature of their operations. Each organisational structure therefore determines how the corporate is managed and governed, based on the chain of command, which influences how decisions are made, and how many people are involved in the decision making process for the corporates.

The private and public sectors are characterised by different objectives and different players or actors. While the public sector is majorly concerned with enhancing public good, and public interest, the private sector is mainly concerned with personal, private and individual good and interest.The public sector is mainly composed of government corporations, which are owned and completely managed by the government. The government pursues its agenda on public welfare through the governed owned corporations. Public sector may also include government ministries or departments, which are responsible for specific aspects of the general public welfare like health and agricultural sectors. The private sector on the other hand mainly involves the pursuit of business gains, through investments and various forms of transactions, by private firms and individuals. The difference between the two is that the public sector is not driven by the motive of making profits or accumulating capital like the private sector, which is mainly concerned with accumulation of capital and huge investments.

Since the two sectors are framed purely on different objectives and ideologies, with one (public sector) being formed mainly to push for the public good and the other (private) being formed mainly to pursue profits, their governance may not be the same because the actors are driven by different motives and objectives. Corporate governance guidelines developed for the private sector are mainly tailored towards protecting the investors or the shareholders from losing their investments to the corporates through dubious governance activities. The guidelines for private sector corporate governance clearly demonstrate the requirements to be complied with by private institutions like banks, which are set as per some standards for investment in a particular country. For example, corporates dealing with loaning facilities, may be required to make public some information on their registration status, documents about how much funds they possess as capital, who are the shareholders and their prices for initial public offerings in case they are listed under the capital markets. They may also be required to submit to the government quarterly and annual reports regarding their operations and their profits, which is also supposed to be provided to the shareholders, so that they may know how their corporation is performing, how stable it is and their fate as shareholders in that corporate in future.

The guidelines for private sector may not be adapted for public sector because of the differences in the grounds under which the guidelines are made. Take for example the public health sector, which lies under public sector. The sector is governed through government legislations and laws, which contain some policies regarding health care provision for citizens of a particular country. The guiding principle in this case is not making of profits, though it may be the case sometimes, but the provision of affordable and adequate health services to the citizens of the country. It therefore follows that the guidelines apply by default, meaning that they are integrated with the government’s programs and services on health care provision. Even though there may be private health providers which to some extend operate on a business basis, they are obliged to comply with the guidelines for the entire health sector, so as to make them attract more people to access their services. It makes no sense for them to charge extra ordinary amounts of money for their services, while many government health facilities charge less, for the same service. It would also make no business sense for them to provide low quality health services as compared to the public health sector, simply because they will not get customers for their services. The guidelines for corporate governance for a private firm may be completely inapplicable to a public sector like the health sector. This is due to the fact that the private sector is motivated by making profits, and extra ordinary ones for that matter, regardless of whether they care about their customers or shareholders or not. The guidelines may also not be applicable because of the customer base differences for both the private and public sectors. While the public sector serves the general public, the private sector mainly serves a small section of the public or a particular social class within a given community, and therefore the interest of the individual supersedes that of the general public.

Even though the guidelines for the private sector may be applicable to the public sector, they may not be adequate because the public sector takes care of a large population of people, who need massive supply of goods or services, with clear and friendly terms and conditions on eligibility and accessibility.

Private sector is characterised by operations which are independent from the government’s control or directions. The private sector is wide, and may involve profit and non-profit agencies, institutions and or companies. The institutions, companies or organisations may vary in size, customer base and scope of business. Many private sectors may be involved in offering services which are offered by the public sector. For example, there are private and public schools and hospitals as well as transport means.

The private sector, as I mentioned earlier is driven by the motive of making profits. Although some non-governmental organisations may not be driven by the business motive, they operate in a manner which minimises usage of resources, so that they can realise the maximum benefits, using minimum resources. One of the most common entities in the private sector is the investment sector, which involves customers investing in the corporates through purchase of shares, which are traded in the capital markets of a country. The business operates purely on the principles of capitalism, in which a person purchases the number of shares depending on his or her financial ability. Those with huge financial resources therefore own large percentage of shares in different corporates like banks.

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Since the investment sector involves investing of individual’s financial resources in a corporate, there is a need for sound corporate governance practices. This is because lack of sound corporate governance practices may lead to massive corruption, defrauding of shareholders of their shares and securities or the manipulation of prices for the shares by the corporates, which culminate in stealing of money belonging to shareholders.

The 1990 to 2002 corporate collapse in the world was attributed to poor corporate governance, which enabled corruption to thrive in many corporates. In the United States for example, corporates like American airlines and Adelphia (Chew, 2009) collapsed due to official corruption in the corporates, which saw shareholders lose massive financial resources due to poor corporate governance which enabled the corporates squander resources for the shareholders. This made the government of US enact the SOX, so as to streamline corporate governance and protect shareholders from massive loses of their investments (Waring, 2006). In Britain, the Robert Maxwell funds scandal and the collapse of the BCCI bank in 1990s triggered the need for the reorganisation of the corporate governance frame work in UK (Financial Report Council, 2006). This saw the business community come up with what was referred to as “Cadbury report” which gave several recommendations regarding the way corporates should be organised. One of the recommendations which was outstanding and seen as a specific response to the corporates collapsing was the one touching on the relationship between chairpersons and the chief executives of corporates and the roles and responsibilities of non-executive directors of organisations (Financial Report Council, 2006).

Sound corporate governance practices are therefore very important in the investment sector because it enables the corporations not only function well, but also makes the shareholders increase their confidence in them, thereby increasing their business scope due to increase of shareholders. Sound corporate governance practices can help in improving the performance of investment firms and or corporates by ensuring that they follow the correct procedures in their undertakings. When there is a good corporate governance frame work, each corporate will try as much as possible to comply, so as to be able to attract customers and investors. Sound corporate governance practices also makes the corporates have good administrative structures, which enable them function efficiently and effectively by focusing on how best to serve their shareholders and customers. The practices may also make corporates come up with highly qualified personnel, who may improve the services offered in terms of quality and quantity, and minimise corruption, which may damage the reputation of the corporates, thereby losing shareholders and customers.

Conclusion

In conclusion, corporate governance is a very important aspect in the administration, directing and control of the operations of corporates in both public and private sectors. In the public sector, public corporations are governed by the government while in the private sector; they are governed through internal rules and regulations of the corporations as well as through government regulations. The importance of corporate governance in the private sector is to safe guard investors form fraudulent deals in the corporates, which can make them lose their financial resources through financial scandals like the ones which happened in the US and UK during the major corporate collapse of 1990 to 2002. The guidelines for governing corporates in the private sector may not be adapted in corporates in the public sector because of the different nature of operations for both sectors. While the private sector operates under the business principle, the public sector operates under the principle of service provision for the betterment of the lives of the general public, with minimal or no self or individual gain or profit. When corporates are managed and governed well in the private sector, the shareholders increase their confidence in them, thereby investing more of their resources in the corporates. The reverse is true when there is no good corporate governance, and the main loser is the investor. For corporates in the private sector to perform better business wise, it is good for them to have in place sound corporate governance guidelines, and or comply with those set out by the government.

Reference List

Chew, D.H.(2009). US Corporate Governance. New York: Columbia University Press.

Financial Report Council (2006).The UK Approach to Corporate Governance. Web.

Waring, K. (2006). Effective corporate governance frame works: Encouraging Enterprise and Market Confidence. Web.

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