Corporate governance is a system of checks and balances that secures that decision-makers in an organization refrain from engaging in fraudulent activities. This argumentative essay argues for the importance of corporate governance in today’s environment.
At the turn of the 21st century, numerous high-profile corporations collapsed due to fraudulent activities. These events led to the financial crisis of 2008, which destroyed economies and left millions unemployed. Interest in corporate governance grew as a result of these events. Different nations established their own corporate governance laws with the goal of regulating the actions of corporate officials. Nowadays, corporate governance is a requirement in most, if not all, nations. The consensus is that corporate governance is necessary to maintain checks and balances within organizations and, in turn, to protect economies and society in general from the potential adverse effects of illegal and fraudulent activities (Pargendler, 2016). This argumentative essay supports the prevailing belief that good corporate governance is important for every organization because it not only provides safeguards against fraud by limiting abuse of power but also by fostering corporate social responsibility and improving the organization’s reputation which allows it to attract investors. The paper is organized as follows: the author shall first define corporate governance, present the arguments for the importance of corporate governance, then present a counterargument, followed by the author’s rebuttal.
Definition of Corporate Governance
Corporate governance is a system of rules, practices, and processes put in place to ensure the proper designation of power and responsibilities among the board of directors, the management, and the owners of a business (Pargendler, 2016; Wilcox, Schneider and Bernal, 2012). It encompasses people—from the owner and board of directors to the rank-and-file employees--, process, performance, and purpose. Thus, corporate governance is a combination of external rules or laws as well as internal disciplines that ultimately serve as a framework for attaining business goals while maintaining fairness, accountability, transparency, and responsibility (Business Roundtable, 2016). Corporate governance is integral to the management and direction of an organization.
Furthermore, corporate governance is also crucial in trust-building with investors and clients for it helps avoid illegal activities and scandals. Good corporate governance demonstrates business integrity, and in doing so, long-term financial prosperity. Nowadays, business integrity is just as important as financial prosperity for investors of the 21st century (Wilcox, Schneider and Bernal, 2012). In simpler terms, bad things happen to an organization without good corporate governance. Cases in point are the emissions rigging of Volkswagen AG and the implosion of high-profile banks like Wells Fargo and Equifax.
Good corporate governance looks different for each organization, but the consensus among management experts is that this is important. The succeeding section will expound on the arguments supporting the importance of corporate governance.
Arguments on the Importance of Corporate Governance
Corporate governance encompasses regulations, codes, laws, and practices so it impacts every aspect of a corporation’s operations. It has positive impacts on the management of a company, its performance, as well as its impact on society.
Abuse Of Power
Illegal practices are often rooted in abuses of power by decision-makers who have the freedom to act on behalf of their company’s shareholders. Power without accountability results in a strong temptation to pursue illegal methods for which the company eventually suffers. Corporate governance involves setting up accountability mechanisms such that top-level directors or managers are held accountable for their actions with an established set of rules (Pargendler, 2016). These mechanisms not only ensure that the company stays compliant with laws and regulations, but also that corporate assets are not misused (Wilcox, Schneider and Bernal, 2012). Particularly, it ensures that all decisions are oriented toward the long-term growth of the organization and are made in the interests of the shareholders, not just a few individuals’ self-interest.
At the most basic level, good corporate governance facilitates better decision-making (Business Roundtable, 2016). In doing so, corporate governance protects the organization from unethical practices, such as misuse of corporate assets and cutting corners in operations resulting in non-compliance to regulations. These have a fundamental impact on the operations of a company. Firstly, the company’s operations become more cost-efficient as assets are utilized correctly. Secondly, although corporate governance inhibits the pursuit of self-interest and illegal practices, through clear rules and responsibilities, managers are empowered to make decisions toward the betterment of the organization.
Social Issues And Corporate Social Responsibility
Corporate social responsibility (CSR) is not limited to charitable actions or environment-friendly endeavors. At its core, CSR is about a corporation’s contribution to society. Corporate social responsibility became a fundamental aspect of corporations not simply because of activism, though it certainly started there, but also because corporations realized that CSR leads to sustainability. Good corporate governance takes into account the organization’s impact on society and the environment and enforces decision-makers to consider these in their decisions (Urban, 2019).
As history shows, the majority of the unethical practices that proliferate today were borne out of a desire to increase profit margins, which, however, are not sustainable. Good corporate governance recognizes that pursuing sustainable business practices is within the interests of the shareholders. Thus, it forces decision-makers to be responsible when selecting suppliers, more innovative in establishing sustainable supply chains, and so on (Wilcox, Schneider and Bernal, 2012). Moreover, good corporate governance ensures that CSR is not enforced on a superficial level, thereby also protecting society and the environment.
Adherence to good corporate governance evidently results in high-quality products and ethical and sustainable business practices, which results in improved business performance. Couple this with transparency—informing investors and the general public—of the organization’s practices and dedication to producing quality products proves to them that the organization exercises discipline and is not solely concerned with profits (Urban, 2019). In summary, it is a great way for businesses to increase its clientele base.
Furthermore, good corporate governance serves as a safeguard against scandals by ensuring that all employees comply with the organization’s rules, local and international laws, as well as industry standards. Scandals and fraud, such as Volkswagen’s engine-rigging scheme, erode trust in organizations, and it will take a long time and a lot of resources to restore trust. Good corporate governance policies serve as a type of assurance for the public that the organization is regulating its own people’s actions.
Reputation And Investors
Investors purchase shares of an organization with the goal of growing their assets. Naturally, shareholders seek to protect their investments from fraud, scandals, and various corporate crimes. Good corporate governance positions the organization as a more secure investment since it is less likely to be susceptible to system risks (Pargendler, 2016). Thus, corporations with well-established corporate governance policies tend to have a higher valuation.
Moreover, good corporate governance, with its other benefits of better performance, also enhances the organization’s reputation. A stellar reputation based on disciplined and ethical business and management principles and practices attracts investors who want a secure investment as well as those who want to support organizations that match their principles.
Corporate governance is a system of checks and balances that ensures organizations adhere to appropriate rules and practices in their endeavors to achieve business goals. Corporate governance protects all stakeholders of an organization, from the top-level executives to shareholders to rank-and-file employees to its clients and customers. By fostering corporate social responsibility, corporate governance also protects society from the potential detrimental impact of various unethical or illegal activities some unscrupulous individuals may do without it. Corporate governance also has numerous benefits for the organizations themselves as it protects them from fraud and scandals while also driving financial growth through better company performance and improved reputation. With its numerous benefits extending beyond the organizations, corporate governance is undoubtedly an important aspect of business management.
Counterarguments on the Importance of Corporate Governance
While most business practitioners agree that a system of checks and balances is necessary to control the actions of corporations, many have argued that corporate governance is not commensurate to the task. The main argument of opponents is that corporate governance is a weak system of checks and balances because it still primarily relies on the honesty and compliance of the board of directors (Urban, 2019). The same individuals that corporate governance attempts to discipline and regulate are essentially the same individuals who are expected to enforce it. Therefore, internal audits, on which the external mechanisms of corporate governance primarily rely, can be falsified. Despite its extensive rules and processes, those who do not want to comply can still find and exploit loopholes in the system. Thus, corporate governance is but an expensive system that only serves as additional bureaucracy in managing a business.
While it is true that current corporate governance policies and practices exhibit loopholes, and have been breached a few times in the last decade, it is not indicative that it is not important. This simply means that corporate governance needs to evolve and have stricter rules to ensure compliance. At the moment, corporate governance is the only safeguard available against illegal activities in a corporation. Until a better approach or system of checks and balances is established, the importance and usefulness of corporate governance for organizations remain paramount.
Corporate governance is ultimately a system of checks and balances to ensure that corporate decisions remain directed toward the interests of the shareholders rather than the personal interests of a few individuals. As explained in the argumentative essay, corporate governance has benefits for both the organization, the economy, and society at large. Although opponents write persuasive essays arguing that corporate governance is an ineffective system due to loopholes in its mechanisms, the author argues that it only strengthens the need for corporate governance. Indeed, a stronger corporate governance needs to be established in order to prevent fraudulent and illegal activities effectively. Corporate governance is a relatively new concept, having been established only at the beginning of the 21st century, so the laws, policies, and regulations are yet to be perfected. Regardless, it is clear that efforts toward the improvement of corporate governance mechanisms are important.
The importance of corporate governance is one of many great business topics for argumentative essays. Argumentative essays follow a strict format, in addition to requiring research and strong argumentation. CustomEssayMeister can help you in every step of the writing process for argumentative essays and many other types of essays.
Business Roundtable, 2016. Principles of corporate governance, [online] Harvard Law School Forum on Corporate Governance. Available at: < https://corpgov.law.harvard.edu/2016/09/08/principles-of-corporate-governance/>
Ewing, J., 2015. Volkswagen engine-rigging scheme said to have begun in 2008. The New York Times, [online] 4 October. Available at: <https://www.nytimes.com/2015/10/05/business/engine-shortfall-pushed-volkswagen-to-evade-emissions-testing.html>
Pargendler, M., 2016. The corporate governance obsession. Journal of Corporation Law, 42(2), 359-402.
Wilcox, J., Schneider, L. and Bernal, A., 2012. White paper: the importance of corporate governance in state-owned enterprises – SOEs. [pdf] CAF - Latin American Development Bank.
Urban, J., 2019. Corporate governance mechanisms: their strengths, weaknesses and complementarity. Innovative Economic Symposium 2018 - Milestones and Trends of World Economy, 61(2019). Available at: < https://www.shs-conferences.org/articles/shsconf/abs/2019/02/shsconf_ies2018_01028/shsconf_ies2018_01028.html>