1.

ROLE

OF

CORPORATE

GOVERNANCE

IN

ACCOUNTABILITY &VALUE

ENHANCEMENT AND ITS RELATIONSHIP WITH FIRM S PERFORMANCE :

Accountability & Value enhancement role

The recent spate of corporate collapses (such as HIH and Harris Scarfe in Australia) has drawn attention to corporate governance failures in preventing or forewarning these corporate events.A good corporate governance structures are focused at encouraging companies to create value and provide accountability and control systems commensurate with the risks involved (ASX 2003, p. 3). We examine the aaccountability and value enhancement roles of governance mechanisms in financial reporting because ensuring integrity in financial reporting is an integral part of international best practices. As the Council points out, audit-related governance structures include direct overview of financial reporting by the audit committee and processes to ensure the independence and competence of the external auditor. However, besides relying solely on such audit-related governance structures, the Council also reiterates that the ultimate responsibility of safeguarding the integrity of financial reporting remains with the board of directors (ASX, 2003, p. 29). The audit committees role is to act as a bridge between the independent external auditors and the board, avoiding the possibility of powerful executive directors ,such as the CEO and CFO, becoming too close to the auditors and resolve the issues before they reach the board .The governance structures related to board independence and active and independent audit committees are negatively associated with absolute and income-increasing abnormal accruals, respectively. Our evidence also suggests that the association between governance structures and abnormal accruals is not symmetrical between income-increasing and income-decreasing abnormal accruals. I have been found that the components of abnormal accruals explained by audit- (board-) related governance structures are positively associated with 1 year (2 year) ahead future cash flows. This suggests that audit-related governance structures are value enhancing over the shorter term, whereas board-related governance structures are value enhancing over a longer term. We extend Davidson et al . (2005) by examining a multiplayer setting, differentiating among governance structures that have a direct and an indirect role in the financial reporting process, and examining the value enhancement role of the governance structures. The board independence concept of board-related governance structures is negatively

associated with absolute abnormal accruals, whereas the audit committee aspect of audit-related governance structures has an incremental and negative association with income-increasing abnormal accruals. This is consistent with prior literatures interpretation that effective governance structures lead to lower levels of abnormal accruals. Our evidence also shows that the association between governance structures and abnormal accruals is not symmetrical between income-increasing and income-decreasing abnormal accruals. We find such association exists only among firms with positive abnormal accruals, which suggests more governance efforts are expended on financial reporting processes in firms with positive abnormal accruals. We also find evidence consistent with the value enhancement role of governance structures in the financial reporting context using future cash flows as our performance measure. Interestingly, we find that audit-related governance structures are value enhancing in the shorter term (1 year ahead performance), whereas longer-term value enhancement is derived from board-related governance structures (2 year ahead performance).
Corporate governance on firm performance:

There are three various ways of interpreting the superior return performance of companies with strong shareholder rights. First, these results could be sample-period specific; hence companies with strong shareholder rights during the current decade of 2000s may not have exhibited superior return performance the risk-adjustment might not have been done properly; in other words, the governance factor might be correlated with some unobservable risk factor(s). Third, the relation between corporate governance and performance might be endogenous raising doubts about the causality explanation. Efforts to improve corporate governance should focus on stockownership of board members since it is positively related to both future operating performance, and to the probability of disciplinary management turnover in poorly performing firms. Proponents of board independence should note with caution the negative relation between board independence and future operating performance. Hence, if the purpose of board independence is to improve performance, then such efforts might be misguided.

Corporate Ownership Structure, Corporate Governance, Firm Performance, and Capital Structure

Some governance features will be motivated by incentive-based economic models of managerial behavior. These models fall in two categories such as the agency models and the adverse selection models a divergence in the interests of managers and shareholders causes managers to take actions that are costly to shareholders. Adverse selection models are motivated by the hypothesis of differential ability that cannot be observed by shareholders. Governance is affected by the same unobservable features of managerial behavior or ability that are linked to ownership and performance. Both the GIM and BCF measures of good governance are negatively related to the probability of disciplinary turnover for poorly performing firms. This suggests that better governed firms as measured by the GIM and BCF indices are less likely to experience disciplinary management turnover in spite of their poor performance. Finally, when the CEO is also the Chairman, he is more likely to experience disciplinary turnover given poor firm performance. In several instances our inferences regarding the performance-governance relationship do depend on whether or not one takes into account the endogenous nature of the relationship between governance and performance we believe it is important to rely on inferences after controlling for the endogeneity between governance and performance.

2.OWNERSHIP PATTERN IN
ECONOMIES:

LARGE PUBLICALLY TRADED FIRMS IN DIFFERENT

The article focuses on how common widely held firms are in different countries as opposed to firms that have significant owners. How often do bank control companies a big issue in corporate finance in the light of the extensive discussion of German corporate governance model. How do these owners maintain their Power? Do they use shares with superior voting rights that enable them to exercise control with only limited ownership of capital or do they create cross ownership patterns to reduce the threat to their control or do they create pyramid or chain structures for separating ownership of capital and control .Finally the differences between countries in their ownership patterns. Widely held corporations are more common in countries with good legal control of minority shareholders have less fear of being expropriated themselves in the event that they ever lose

control through a takeover or market accumulation of shares by a raider, and so might be cutting their voting rights by selling shares to raise fund or to diversify. In contrast in countries with poor protection of minority shareholder, losing control involuntarily and thus becoming a minority shareholder may be such a costly proposition in terms of surrendering the private benefits of control that the controlling shareholders would do to everything to keep control. They would hold more voting rights themselves and would have less interest in selling shares in the market. So the relationship on ownership concentration in terms of voting rights rather than cash flows is assessed between the minority and the principal shareholders. The research on the ownership pattern was done through collecting empirical data on the variables relating to ownership pattern from large companies from 27 countries. The Ownership pattern in Microsoft (USA),Barrick Gold(Canada),Hutchison Whampoa Ltd(Hong Kong),Toyota Motor(Japan),Samsung Electronics(South Korea),Daimler Benz(Germany),ABB AB(Sweden),Fiat Spa (Italy),Electrabel SA(Belgium) are collected and analyzed in this research paper to find the result for assessing the ownership pattern in different countries related to voting rights. These companies in the research paper have been following different corporate structures as stated by Bob Tricker. The Microsoft is a family owned firm and hence does not have any cross holding share so it does not have Pyramid structure of corporate governance. But Barricks ownership structure follows pyramid structure which is a most straight forward form for a group of companies. Hutchison is also family controlled company through pyramid structure. The Toyota Motor from Japan follows the Cross holding of share: Kieretsu and Chabebols structure as which is one of the network type structures which is typical to have financial institution as a part of the network. Samsung from Korea has chain structures as the name suggest they are group of companies in an ownership chain. The Dalimer Benz had the largest shareholder Deutsche bank holding majority shares so we can classify their governance structure under the Block holders and Universal ownership structure. In case of Swedens ABB they have concentrated ownership with the Wallenberg Group has pyramid structure of governance and even in Fiat (Italy) and Electrabel SA (Belgium) the same ownership structure is followed for governance of the company. Apart from the classification of the ownership structures in the above stated companies the research was done on comparing the countries with good shareholder protection and bad shareholder protection. These companies from 27 countries were divided into six types such as widely held, family controlled, state controlled, controlled by

widely held financial institution, controlled by widely held corporations ,or miscellaneous. It was found that widely held firms are more common on countries with good shareholder protection and on contrary the countries where shareholder was poor they had family controlled or state owned. The Japanese ownership seems to be closer to countries with good shareholder protection like USA and UK than to the continental Europe model. While looking at how the firms are owned widely held firms appear to be relatively uncommon, unless we look at specific countries, or focus on very restrictive measures of control and very large firms. In contrast, Family control if very common. Families often have control rights over firms noticeably in excess cash flow rights through pyramids and typically manage the firms they control. Based on the analysis it can be concluded that the most family or state owned firms i.e. controlling shareholders control and manage the firm through pyramid structures. The controlling share holders are ideally placed to monitor the management and in-fact the top management is usually a part of the controlling family but at the same time they have the power to expropriate the minority shareholders as well as the interest in so doing. The question of how the agency conflict between the controlling and the minority shareholders can be reduced is also raised by the analysis. The obvious strategy is to improve the legal environment so as to make expropriation of the minority shareholders more difficult.

3.SHAREHOLDERS GOVERNANCE:

AND

STAKEHOLDERS

PERSPECTIVE

IN

CORPORATE

Two alternative concepts of the corporation and of its governance:

The corporation belongs to stockholders and must be run in their interest. The corporation must be run in the interest of shareholders, creating value on their behalf. Thus the role of management should be to maximize the market value of the company. This is in accordance, in particular, with the interest of minority shareholders, which should be adequately protected.The corporation must be run in the interest of stakeholders. As the interest of stakeholders is different and contradictory, a compromise between the pursuit of the various interests should be found. This compromise could be trusted to managers (Berle and Means view), to politicians, to an

articulated management board, where the different instances may be represented, leading through their interaction and compromise to the specification of the overall interest of the company. In the view of stakeholders the vision of the social responsibility of the firm may also be included, whereby society as a whole is a stakeholder.These different conceptions have their counterpart in different aspects of corporate law, from the composition and election rules of directors, to the publicity of societal documents, up to the determination of the rules that determine the framework of corporate life, concerning fusions and mergers, takeovers, and the legal framework of capital markets. Of the two conceptions the first one is dominant, especially in the AngloSaxon environment. According to Freeman and Phillips (2002), the central idea is that an organizations success depends on how well it manages the relationships with key groups such as creditors, employees, customers, suppliers, communities, and others that can affect the realization of its purpose. The managers job is to maintain the support of all of these groups, balancing their interests, while making the organization a place where stakeholder interests can be maximized over time (Steven M. Mintz)
Shareholder interest & Shareholder value and accounting:

The shareholder interest lies in the maximization of corporate profit. But shareholders have different time horizons, subjective discount rates and propensities to risk. Moreover the strategy of corporate management has possibilities to change, even dramatically: for instance a company can change its behavior deciding to maximize accounting profits in the short run at the cost of their future reduction (goodwill can be cashed in and run down by increasing prices to a level higher than it would be optimal in a long run perspective). Furthermore, future profits are uncertain.The shareholder value doctrine has a counterpart in the evolution of corporate accounting, towards the measurement of the shareholder value produced by corporate management, and the determination of the fundamental capability of a company to create value (this means, in the end, to be profitable). The idea is to achieve transparency of the fundamental data of the company, aligned to the interest of investors.
The alternative view, of the firm as a community of stakeholders, and the Nirvana fallacy:

In the financial markets many cases of foul play and instability, stock market roller coasters, and bubbles deflating suddenly, to the dismay of mass of savers. After all, why should corporations be managed in the exclusive interest of shareholders, who are simply security owners? Opponents of the shareholder value concept point at various externalities imposed by profit maximizing choices on other stakeholders: on the welfare of management and workers who have invested their human capital as well as off-work related capital (housing, spouse employment, schools, social relationships, etc.) in the employment relationship; on suppliers and customers who also have sunk investments in the relationship and foregone alternative opportunities; on communities who suffer from the closure of a plant; and so forth. The negative concepts of market and shareholder value oriented corporate governance are quite open and well known. But this does not mean that an alternative system of corporate management founded on stakeholders interest could lead to better results, without considering in depth its possible overall consequences.
Employees as stakeholders, workers interest, and the fallacy of composition

Let us in particular consider the interest of those very special stakeholders, the employees. To think that from the pursuit of employees interest of any given firm the pursuit of workers interest in general follows is an example of the fallacy of composition. One may also note that in the prescriptions of the labour code employees interests are taken into consideration and protected. It is not at all obvious that an additional defense in the area of capital governance would be suitable and useful Control by empowered employee representatives could contribute to hold in check the possible tendencies to opportunistic and self-dealing behavior by top managers and control shareholders. Employee representation in governance bodies could also improve the quality of accounting documents, with positive consequences, among others, for fiscal transparency. It could bring about a better climate of industrial relations.

REFERENCE:
Chilosi, Alberto and Damiani, Mirella,Stakeholders vs. shareholders in corporate governance, MPRA Paper No. 2334, posted 07. November 2007 Bob Tricker, Corporate governance Principles, Policies and Practices, Oxford University Press, 2009 Corporate governance and firm performance. By: Bhagat, Sanjai; Bolton, Brian. Journal of Corporate Finance, Jun2008, Vol. 14 Issue 3, p257-273, 17p Accountability and value enhancement roles of corporate governance. By: Koh, Ping-Sheng; Laplante, Stacie Kelley; Tong, Yen H.. Accounting & Finance, Jun2007, Vol. 47 Issue 2, p305333, Disclosure and the cost of capital: what do we know? By: Botosan, Christine A.. Accounting & Business Research, 2006 Special Issue, Vol. 36, p31-40, 10p; (AN 23860580) Corporate Ownership Around the World. By: La Porta, Rafael; Lopez-de-Silanes, Florencio; Shleifer, Andrei. Journal of Finance, Apr99, Vol. 54 Issue 2, p471-517, 47p